2016 U.S. Master Tax Guide

Transcription

1 2016 U.S. Master Tax Guide Overview 1. Tax Legislation. Updated to reflect Bipartisan Budget Act of 2015 (P.L ). The first bullet point is revised to read as follows: The Bipartisan Budget Act of 2015 (P.L ) replaced the TEFRA partnership audit rules, as well the rules for electing large partnerships, with a single set of rules for auditing partnerships and their partners at the partnership level. Under the streamlined audit approach, the IRS would examine the partnership s items of income, gain, loss, deduction, credit and a partners distributive shares for a particular year of the partnership. Any adjustments would be taken into account by the partnership, not the individual partners, in the year that the audit or any judicial review is completed. The streamlined audit approach is generally effective for partnership tax years beginning after December 31, 2017, but a partnership may elect to apply it to any tax year beginning after November 2, 2015, the date of enactment. 5. Where to File Returns. Updated to reflect Notice The last subparagraph entitled Private Delivery Services (PDS) is revised to read as follows: Private Delivery Services (PDSs). Certain private delivery services designated by the IRS are available to meet the timely mailed as timely filing/paying rule for tax returns and payments (Rev. Proc </xref>, as modified by Notice , as modified by, and to the extent modified is superseded by, Notice ). The designated private delivery services as of April 11, 2016,, are: DHL Express: DHL Express 9:00, DHL Express 10:30, DHL Express 12:00, DHL Express Worldwide, DHL Express Envelope, DHL Import Express 10:30, DHL Import Express 12:00, and DHL Import Express Worldwide;

2 Federal Express (FedEx): FedEx First Overnight, FedEx Priority Overnight, FedEx Standard Overnight, FedEx 2 Day, FedEx International Next Flight Out, FedEx International Priority, FedEx International First, and FedEx International Economy; United Parcel Service (UPS): UPS Next Day Air Early AM, UPS Next Day Air, UPS Next Day Air Saver, UPS 2nd Day Air, UPS 2nd Day Air AM, UPS Worldwide Express Plus, and UPS Worldwide Express. The PDSs have special rules for determining the postmark date under Code Sec. 7502(f) (Notice , as modified by, and to the extent modified is superseded by, Notice Tax Rates 49. Employment Taxes. Updated to reflect the 2016 tier II Railroad Retirement Act tax rates. The last paragraph of the subparagraph entitled Railroad Retirement Tax is revised to read as follows: Tier II benefits are also available equivalent to a private pension plan and financed with employers and employees contributing a certain percentage of pay toward the system to finance benefits. For calendar year 2015, a tier II tax rate of 13.1 percent for employers and 4.9 percent for employees is imposed on annual compensation within a compensation base of $88,200. For calendar year 2016, the tier II tax rate of 13.1 percent for employers and 4.9 percent for employees is imposed on annual compensation within a compensation base of $88,200.

3 Chapter 1: Individuals 105. Forms in Use for The Comments are removed Individual Health Care Coverage Mandate. Updated to reflect Rev. Proc The sixth paragraph is revised to read as follows: A taxpayer s minimum required contribution for purposes of the unaffordable coverage exemption is either (1) the annual premium for self-only minimum essential coverage of an employer-sponsored plan, or (2) the annual premium of the single lowest cost bronze plan available in the individual market through a Health Benefit Exchange, reduced by the health care credit under Code Sec. 36B ( 1331) (Code Sec. 5000A(e)(1)(B)). For plan years beginning in 2014, this annual premium cannot exceed eight percent of a taxpayer s household income; for calendar years after 2014, the required contribution percentage is indexed to premium costs. For plan years beginning in 2015, the required contribution percentage is 8.05 percent (Rev. Proc ). For plan years beginning in 2016, the required contribution percentage is 8.13 percent (Rev. Proc ). For plan years beginning in 2017, the required contribution percentage is 8.16 percent (Rev. Proc ) Joint Return Liability for Taxes Two new paragraphs added at the end of the numbered paragraph and read as follows: Taxpayers filing bankruptcy petitions. The running of the statute of limitations on filing a Tax Court petition to determine the appropriate innocent spouse relief is suspended for a taxpayer who is prohibited from filing a petition due to the automatic stay provision under the bankruptcy law (Code Sec. 6015(e), as added by the Protecting Americans from Tax Hikes Act of 2015 (P.L )). The running of the statute of limitations is also suspended on filing a Tax Court petition to determine the appropriate relief available in collection cases (Code Sec. 6330(d)(1) and (d)(2), as amended by P.L ). Proper venue. Tax Court decisions rendered in cases involving the determination of innocent spouse relief under Code Sec and collection by lien under Code Sec or levy under Code Sec follow the general rile rule for appellate review (Code Sec. 7482(b)(1), as amended by P.L ).

4 Chapter 2: Corporations 219. Corporate Tax Rates. A new subparagraph entitle Certain Timber Gains is added at the end of the numbered paragraph and reads as follows: Certain Timber Gains. For a tax year beginning after December 31, 2015, a 23.8-percent alternative tax rate applies to corporations on the portion of a corporation s taxable income that consists of qualified timber gain (Code Sec. 1201(b), as amended by the Protecting Americans from Tax Hikes (PATH) Act of 2015 (P.L ). The tax is equal to the sum of (1) 23.8 percent of the least of qualified timber gain, net capital gain, or taxable income, plus (2) 35 percent of any excess of taxable income over the sum of the amounts for which a tax was determined under Code Sec. 1201(a)(1) and the 23.8-percent computation (Code Sec. 1201(b)(1), as amended by P.L ). Qualified timber gain is the net gain from the sale or exchange of timber described in Code Sec. 631(a) (cutting of standing timber) and Code Sec. 631(b) (disposal of timber with a retained economic interest or outright sale). The special rate applies only to timber that has been held for more than 15 years (Code Sec. 1201(b)(2), as amended by P.L ) Dividends from Foreign Corporations. The numbered paragraph is revised to read as follows: A domestic corporation is entitled to a 70-percent (80-percent in the case of 20-percentowned corporations ( 223)) deduction of the U.S.-source portion of dividends received from a foreign corporation that is at least 10 percent owned, by vote and value, by the domestic corporation (Code Sec. 245(a)). 32 The U.S.-source portion of a dividend is the amount that bears the same ratio to the dividend as undistributed U.S. earnings bear to total undistributed earnings. U.S. earnings include (i) income of the foreign corporation that is effectively connected with a U.S. trade or business and that is subject to U.S. income tax, or (ii) dividends received from 80-percent-or-moreowned (directly or indirectly) domestic corporations (Code Sec. 245(a)(5)). 32A For this purpose, dividends received from regulated investment companies (RICs) and real estate investment trusts (REITs) on or after December 18, 2015, are not treated as dividends received from domestic corporations (Code Sec. 245(a)(12), as added by the Protecting Americans from Tax Hikes Act of 2015 (P.L )). 32B

5 A 100-percent dividends-received deduction is allowed to a domestic corporation for dividends paid by a wholly owned foreign subsidiary out of its earnings and profits for the tax year (Code Sec. 245(b)). 33 All of the foreign subsidiary's gross income must be effectively connected with a U.S. trade or business. Debt-Financed Portfolio Stock. Any reduction in the dividends-received deduction resulting from the rules concerning debt-financed portfolio stock ( 223) must be computed before applying the above ratios. 32A FED 13,150; CCORP: 9,152.10; PTE 26, B FED 13,150; CCORP: 9,152.10; PTE 26, Chapter 3: S Corporations 317. Adjustments to Basis in S Corporation Stock. The subparagraph entitled Charitable Deductions is revised to read as follows: A shareholder's reduction of basis in S corporation stock by reason of a charitable contribution of property made by the corporation equals the shareholder's pro rata share of the adjusted basis of the contributed property (Code Sec. 1367(a)(2), as amended by the Protecting Americans from Tax Hikes (PATH) Act of 2015 (P.L )). For charitable contributions of property in tax years beginning after December 31, 2014, a shareholder's basis in S corporation stock is reduced by the shareholder's pro rata share of the contribution. The amount of the contribution is generally the fair market value of the property, subject to the gain limitations of Code Secs. 170(e) and 1367(a)(2)(B) Tax on Built-In Gains of S Corporation. The last subparagraph entitled Installment Sales is removed and the subparagraph entitled Recognition Period is revised to read as follows: The recognition period for net built-in gain is the five-year period beginning on the first day on which the corporation is an S corporation (Code Sec. 1374(d)(7), as amended by the Protecting Americans from Tax Hikes (PATH) Act of 2015 (P.L ); Reg (d)). 79 For example, if the first day of the recognition period is July 12, 2011, the last day of the recognition period is July 11, If the S corporation sells an asset within the recognition period under the

6 installment method ( 1801), all the payments received (whether within the recognition period or not) are treated as received in the tax year of the sale. The recognition period applies separately with respect to any asset acquired in a carryover basis transaction (Code Sec. 1374(d)(8)) Failure to File Penalties for S Corporations. Updated to reflect Rev. Proc The numbered paragraph is revised and reads as follows: An S corporation that fails to timely file Form 1120S ( 351) (or files an incomplete return) is liable for a penalty of $195 per shareholder, per month for a maximum of twelve months, unless reasonable cause is shown (Code Sec. 6699, as amended by the Stephen Beck, Jr., Achieve a Better Living Experience Act of 2014 (P.L ); Rev. Proc ). 95 For returns required to be filed after December 31, 2014, the $195 amount is adjusted annually for inflation but remains $195 for tax years beginning in 2015 and An S corporation may not contest the penalty assessment in the Tax Court but can pay the entire penalty and then sue for a refund. An S corporation may also be subject to penalties for failure to furnish Schedules K-1 to its shareholders (Code Sec. 6722, as amended by P.L ). 96 See 2823 for more details. Chapter 4: Partnerships 406. Partnership Return (Form 1065). Updated to reflect the Protecting Americans from Tax Hikes (PATH) Act of 2015 (P.L ) and Rev. Proc The third paragraph and the subparagraph entitled Schedule K-1s are revised to read as follows: A partnership that fails to timely file Form 1065 or files an incomplete return is liable for a penalty of $195 (for 2015 and 2016) per partner, per month or fraction of a month up to a maximum of twelve months, unless reasonable cause is shown (Code Sec. 6698, as amended by the Stephen Beck, Jr., Achieving a Better Life Experience Act of 2014 (P.L ); Rev. Proc ; Rev. Proc ). 22 Schedule K-1s. A partnership required to file Form 1065 for the tax year generally must furnish each partner with a Schedule K-1 on or before the due date for Form 1065 (Code Sec. 6031(b),

7 as amended by the Protecting Americans from Tax Hikes (PATH) Act of 2015 (P.L ); Temp. Reg (b)-1T(a); Rev. Proc ). 24 Schedule K-1 can be provided in an electronic format to partners, but the partnership must first obtain their consent. The partnership may be subject to penalties for failure to furnish Schedule K-1 to its partners ( 2823) Partnership Audits and Adjustments (Post-2017). Updated to reflect the Bipartisan Budget Act of 2015 (P.L ) and the Protecting Americans from Tax Hikes (PATH) Act of 2015 (P.L ) by revising the number paragraph to read as follows: Effective for returns filed for partnership tax years beginning after December 31, 2017, a single set of rules for auditing partnerships and their partners at the partnership level applies replacing the TEFRA audit rules ( 415), as well as the rules for electing large partnerships ( 482). A partnership can elect to apply the new rules to returns filed for partnership tax years beginning after November 2, 2015, and before January 1, 2018 (Act Sec of the Bipartisan Budget Act of 2015 (P.L ). Under the post-2017 audit rules, the IRS will examine a partnership s items of income, gain, loss, deduction, or credit, and any partners distributive shares of the items, for a particular year of the partnership (reviewed year). Any adjustments (including penalties) are taken into account by the partnership and not the individual partners in the year the audit or any judicial review is completed (adjustment year) (Code Sec. 6221, as added by P.L ). 30a Partnerships with 100 or fewer qualifying partners for whom a Schedule K-1 (Form 1065) is required to be provided may opt out of these rules and be audited under the rules applicable to individuals. A partner must generally treat on its income tax return a partnership item in a manner consistent with the treatment of that item on the partnership return (Code Sec. 6222, as added by P.L )). 30b Any underpayment of tax attributable to failure to meet the consistency requirement is treated as if the underpayment were due to a mathematical or clerical error. An additional tax will not be assessed for a failure to meet the consistency requirement if certain notification requirements are met. However, accuracy-related and fraud penalties may apply if the partner disregarded the requirement. A partnership must designate a person with substantial presence in the United States as the partnership representative (replacing the concept of tax-matter partner under the TEFRA rules) (Code Sec. 6223, as added by P.L ). 30c The representative has the sole authority to act on behalf of the partnership for purposes of the partnership audit rules and all partners are bound

8 by the representative s actions. The IRS may select a representative if none is selected by the partnership. Partnership Adjustments. In the event that the IRS adjusts any item of a partnership s income, gain, loss, deduction, or credit, or partners distributive shares of such items, the partnership must pay a imputed underpayment in the adjustment year based on the highest rate of tax in effect for the reviewed year (Code Secs and 6241(2), as added by P.L and amended by the Protecting Americans from Tax Hikes (PATH) Act of 2015 (P.L )). 30d The IRS may modify the imputed underpayment in certain situations (for example, amended returns of partners, tax-exempt partner). No deduction is permitted for the imputed underpayment (Code Sec. 6241(4), as added by P.L ). In addition, if a partnership ceases to exist before a partnership adjustment takes effect, the adjustment is taken into account by the former partners under IRS regulations (Code Sec. 6241(7), as added by P.L ). As an alternative to paying an imputed underpayment, a partnership may make an election within 45 days of the date of the notice of final partnership adjustment to not apply the adjustment at the partnership level, but rather at the partner level (Code Sec. 6226, as added by P.L and amended by P.L ). 30e If the election is made, the partnership must furnish to each partner for the reviewed year an adjusted Schedule K-1 indicating their share of the any adjustment to be used in filing an amended return. Penalties and additions to tax arising due to the adjustment continue to be determined at the partnership level. However, interest on an imputed underpayment passed through to a partner is computed at the partner level (Code Sec. 6233, as added by P.L ). 30f As under the pre-2018 audit rules, a partnership may file an administrative adjustment request (AAR) for one or more partnership items for the tax year (Code Sec. 6227, as added by P.L ). 30g Any administrative adjustment is taken into account in the year the request is made by the partnership, or the partnership and partners if the election to apply not to apply the adjustment at the partnership level is made. Administrative Procedures. The IRS is required to provide notice of proceedings and adjustments to the partnership and partnership representative (Code Sec. 6231, as added by P.L ). 30h Any imputed underpayment with respect any partnership adjustment is treated as if it were a tax imposed for assessment and collection purposes, subject to certain restrictions (Code Sec. 6232, as added by P.L ). 30i Within 90 days after the date on which a notice of final partnership adjustment is mailed, the partnership may petition for readjustment with the proper court (Code Secs and 6241(5), as added by P.L and amended by P.L ). 30j The statute of limitations for making adjustments for any partnership tax year is generally three years, but may be extended if there is a modification of

9 an imputed underpayment or a notice of proposed partnership adjustment issued by the IRS (Code Sec. 6235, as added by P.L and amended by P.L ). 30k 30a FED 37,950; PART: 60,700 30b FED 37,956; PART: 60,700 30c FED 37,962; PART: 60,700 30d FED 37,971, FED 38,032; PART: 60,702 30e FED 37,977; PART: 60,702 30f FED 38,004; PART: 60,702, PART: 60,704 30g FED 37,983; PART: 60,702 30h FED 37,992; PART: 60,704 30i FED 37,998; PART: 60,704 30j FED 38,010, FED 38,032; PART: 60,704 30k FED 38,021; PART: 60, Partnership Audits and Adjustments (Pre-2018). Updated to reflect the Bipartisan Budget Act of 2015 (P.L ) by removing the Comment, retitling the numbered paragraph, and revising the first three paragraphs to read as follows: Effective for returns filed for partnership tax years beginning before January 1, 2018, the determination of the tax treatment of partnership items is generally made at the partnership level in a single administrative partnership proceeding. The Tax Equity and Fiscal Responsibility Act of 1982 (P.L ) provides rules (TEFRA audit rules) governing proceedings that must be conducted at the partnership level for the assessment and collection of tax deficiencies or for tax refunds arising out of the partners' distributive shares of partnership items (Code Secs ). 31 See also 482 for special rules applicable to electing large partnerships with 100 or more partners. The TEFRA audit rules, as well as the electing large partnership rules, are repealed for returns filed for partnership tax years beginning after December 31, 2017 (Act Sec of the Bipartisan Budget Act of 2015 (P.L )). In their place, a single set of rules for partnership audits and adjustments at the partnership level will apply. A partnership may elect to apply the

10 new audit rules to returns filed for partnership tax years beginning after November 2, See 413 for a discussion of the post-2017 partnership audit rules. Under the pre-2018 TEFRA audit rules, notice of the beginning of administrative proceedings and the resulting final partnership administrative adjustment (FPAA) must be given to all partners whose names and addresses are furnished to the IRS, except those with less than a one-percent interest in partnerships that have more than 100 partners (Code Sec. 6223). 32 However, a group of partners having an aggregate profits interest of five percent or more may request notice to be mailed to a designated partner. Each partnership should have a tax matters partner who is to receive notice on behalf of small partners not entitled to notice and to keep all of the partners informed of all administrative and judicial proceedings at the partnership level (Code Sec. 6231). 33 The tax matters partner is either the general partner designated as such by the partnership or, in the absence of a designation, the general partner with the largest interest in partnership profits for the relevant tax year. Settlement agreements may be entered into between the tax matters partner and the IRS that bind the parties to the agreement and may extend to other partners who request to enter into consistent settlement agreements (Code Sec. 6224) Family Partnerships. Updated to reflect Bipartisan Budget Act of 2015 (P.L ). The first paragraph is revised to read as follows: The family partnership is a common device for splitting income among family members and having more income taxed in the lower tax brackets. A person is recognized as a partner for income tax purposes if he or she owns a capital interest in a partnership in which capital is a material income-producing factor, whether or not the partnership interest was acquired by gift from another person (Code Secs. 704(e) and 761(b), as amended by the Bipartisan Budget Act of 2015 (P.L ); Reg (e)). If capital is not a material income-producing factor, a partnership resulting from a gift of an interest might be disregarded as an invalid attempt to assign income Simplified Reporting for Electing Large Partnerships. Updated to reflect the Bipartisan Budget Act of 2015 (P.L ) by removing the Comment and revising the numbered paragraph to read as follows: A partnership with 100 or more members in the preceding tax year may elect large partnership status for returns filed for tax years beginning before January 1, 2018, and combine most items of partnership income, deduction, credit, and loss at the partnership level ( 484 and 485) and pass through net amounts to the partners (Code Secs ). Special

11 modifications apply to partnerships engaging in oil and gas activities, and to partnerships with residual interests in real estate mortgage investment conduits (REMICs). Service partnerships and commodity pools generally are unable to elect large partnership treatment. Electing large partnerships are subject to audit and procedural rules separate from the general TEFRA audit rules. The electing large partnership rules, as well as TEFRA audit rules, are repealed for returns filed for partnership tax years beginning after December 31, 2017, and a single set of rules will apply for partnership audits and adjustments (Act Sec of the Bipartisan Budget Act of 2015 (P.L )). A partnership may elect to apply the new rules for returns filed for tax years beginning after November 2, See 413 for a discussion of the post-2017 rules Deductions and Credits of Electing Large Partnerships. Updated to reflect the Bipartisan Budget Act of 2015 (P.L ) by removing the Comment and revising the numbered paragraph to read as follows: The taxable income of an electing large partnership ( 482) for returns filed for tax years beginning before January 1, 2018, is computed in the same manner as in the case of an individual, except that certain items are separately stated, and specified modifications apply (Code Sec. 773). For example, miscellaneous itemized deductions are not separately reported to the partners and in place of the two-percent floor, 70 percent of the itemized deductions are disallowed at the partnership level. The remaining 30 percent is allowed at the partnership level in determining the large partnership's taxable income and is not subject to the two-percent floor at the partner level. Tax credits other than the low-income housing credit, the rehabilitation credit, and the credit for producing fuel from nonconventional sources are reported as a single item. Credit recapture also is recognized at the partnership level. The electing large partnership rules are repealed for returns filed for partnership tax years beginning after December 31, 2017, and a single set of rules will apply for partnership audits and adjustments (Act Sec of the Bipartisan Budget Act of 2015 (P.L )). A partnership may elect to apply the new rules for returns filed for tax years beginning after November 2, See 413 for a discussion of the post-2017 rules Gains and Losses of Electing Large Partnerships. Updated to reflect the Bipartisan Budget Act of 2015 (P.L ) by removing the Comment and revising the numbered paragraph to read as follows: For electing large partnerships ( 482), the netting of capital gains and losses for returns filed for tax years beginning before January 1, 2018, occurs at the partnership level (Code Sec. 773).

12 Passive activity items are separated from capital gains stemming from partnership portfolio income. Each partner separately takes into account the partner's distributive shares of net capital gain or net capital loss for passive activity and portfolio items. Any partnership gains and losses under Code Sec ( 1747) are netted at the partnership level. Net gain is treated as long-term capital gain, and any net loss is treated as ordinary loss and consolidated with the partnership's other taxable income. The electing large partnership rules are repealed for returns filed for partnership tax years beginning after December 31, 2017, and a single set of rules will apply for partnership audits and adjustments (Act Sec of the Bipartisan Budget Act of 2015 (P.L )). A partnership may elect to apply the new rules for returns filed for tax years beginning after November 2, See 413 for a discussion of the post-2017 rules Audit Procedures for Electing Large Partnerships. Updated to reflect the Bipartisan Budget Act of 2015 (P.L ) by removing the Comment and revising the numbered paragraph to read as follows: The TEFRA audit rules normally applicable to partnerships for returns filed for partnership tax years beginning before January 1, 2018, do not apply to electing large partnerships ( 415). An electing large partnership, like other partnerships, appoints a representative to handle IRS matters (Code Sec. 6255(b)). Unlike under the TEFRA rules, however, the representative does not have to be a partner. In addition, only the partnership, and not the individual partners, receives notice of partnership adjustments (Code Sec. 6245(b)). Only the partnership has the right to appeal the adjustment (Code Sec. 6247(a)). After a partnership-level adjustment, prioryear partners and prior tax years generally are not affected. However, prior years can be affected if there has been a partnership dissolution or a finding that the shares of a distribution to partners were erroneous. Instead, the adjustments generally are passed through to current partners. The electing large partnership rules, as well as the TEFRA audit rules, are repealed for returns filed for partnership tax years beginning after December 31, 2017, and a single set of rules will apply for partnership audits and adjustments (Act Sec of the Bipartisan Budget Act of 2015 (P.L )). A partnership may elect to apply the new rules for returns filed for tax years beginning after November 2, See 413 for a discussion of the post-2017 rules.

13 Chapter 5: Trusts Estates 537. Charitable Deductions of Estates and Trusts Generally. Updated to reflect Rev. Proc The Comment is removed and the last paragraph is revised to read as follows: Both the trust and the trustee can be liable for a penalty of $10 per day (for 2015 and 2016), up to a maximum of $5,000 (for 2015 and 2016) for failure to timely file Form 1041-A (Code Sec. 6652(c)(2) and (7); Rev. Proc ; Rev. Proc ). 90 A split-interest trust that fails to file or to provide the required information on Form 5227 can be liable for a penalty of $20 per day (for 2015 and 2016), up to a maximum of $10,000 (for 2015 and 2016). If the splitinterest trust's gross income exceeds $253,500 for 2015 ($255,000 for 2016), the penalty is $100 per day (for 2015 and 2016), up to a maximum of $50,500 for 2015 ($51,000 for 2016). An additional penalty may be assessed against the person required to file the return if he or she knowingly fails to file it. Criminal penalties also apply for willful failure to file a return and filing a false or fraudulent return (Reg (d)) Charitable Remainder Trusts A new paragraph is inserted after the third paragraph and reads as follows: In the case of the early termination of a net income only charitable remainder unitrust (NICRUT) or a net income with make-up CRUT (NIMCRUT), the remainder interest is computed on the basis that an amount equal to five percent of the net fair market value of the trust assets (or a greater amount, if required by the trust instrument) is to be distributed each year, with any net income limit to be disregarded (Code Sec. 664(e), as amended by the Protecting Americans from Tax Hikes (PATH) Act of 2015 (P.L )). 167A This provision applies to terminations of trusts occurring after December 18, Chapter 6: Exempt Organizations 625. Annual Information Return. Updated for Rev. Proc The Comment is removed and the subparagraph entitled Penalties and following are revised to read as follows: Penalties. A penalty is imposed on each tax-exempt organization that fails to file an annual information return, files a late return without reasonable cause, or fails to file the information

14 return on dissolution or substantial contraction (Code Sec. 6652(c)(1) and (7); Rev. Proc ; Rev. Proc ). 46 The penalty is $20 per day (for 2015 and 2016), up to a maximum for one return of $10,000 (for 2015 and 2016) or five percent of the organization s gross receipts for the years, whichever is less. For organizations with gross receipts in excess of $1,015,500 for 2015 ($1,020,000 for 2016), the penalty increases to $100 per day (for 2015 and 2016), up to a maximum for any return of $50,500 for 2015 ($51,000 for 2016). An additional penalty of $10 a day for 2015 and 2016), up to a maximum $5,000 on any return (for 2015 and 2016) is imposed on any officer, trustee, employee, etc., who fails to file the return without reasonable cause after requested by the IRS. There is no monetary penalty on an organization that is required to file Form 990-N but fails to do so. If an organization fails to file an annual return for three consecutive years, its exempt status is automatically revoked (Code Sec. 6033(j)). 47 An organization whose tax-exempt status has been revoked because it did not file annual information returns for three consecutive years can apply for reinstatement of its status (Rev. Proc ; Rev. Proc ). 48 Failure to comply with the public disclosure requirements results in a penalty of $20 per day (for 2015 and 2016), with a maximum of $10,000 for any annual return (for 2015 and 2016) (Code Sec. 6652(c)(1)(C) and (D)). However, there is no maximum penalty for failure to disclose the organization's exemption application. The penalty for a willful failure to comply with the public disclosure requirements is $5,000 for each return or application (Code Sec. 6685) Unrelated Business Taxable Income Investment Income. The Comment is removed and the first paragraph of the subparagraph entitled Look-Through Rules is revised to read as follows: If an exempt organization receives or accrues a payment of interest, annuity, royalty or rent (but not a dividend) from an entity that it controls, then the payment is includible in the organization's UBTI to the extent it either reduces the net unrelated business income of the controlled entity or increases its net unrelated losses (Code Sec. 512(b)(13), as amended by the Protecting Americans from Tax Hikes (PATH) Act of 2015 (P.L )). 95 However, any payment made pursuant to a binding written contract in effect on August 17, 2006 (or renewal of such a contract) is included in UBTI only to the extent it exceeds the amount of the payment if it were made as if the parties were not related (i.e., arms-length transaction).

15 692. Other Tax-Exempt Organizations under Code Sec. 501(c). A new paragraph added after the third paragraph and reads as follows: Any Code Sec. 501(c)(4) organization, organized after December 18, 2015, is required to notify the IRS that it exists and is operating as a 501(c)(4) operation within 60 days of being established (Code Sec. 506(a), as added by the Protecting Americans from Tax Hikes (PATH) Act of 2015 (P.L )). If the organization fails to file the required notification within the 60- day (or extended) deadline, a penalty of $20 per day will be imposed for as many days as the failure continues, up to a maximum penalty of $5,000. Alternatively, the IRS may provide a written demand to an organization that is already violating this notification requirement and specify some reasonable future date as a deadline for this organization to submit the notice. The same $20 per day up to a maximum $5,000 penalty applies to managers if the organization fails to comply by the date specified in the demand letter (Code Sec. 6652(c)(4), as added by P.L ). With the first annual information return filed by the Code Sec. 501(c)(4) organization (whether on Form 990, Form 990-EZ or Form 990-N), the organization will be required to provide the IRS with such information as the IRS may deem necessary, as provided by regulation, to determine the organization s qualification for tax exempt status as a Code Sec. 501(c)(4) organization (Code Sec. 6033(f)(2), as added by P.L ). Chapter 7: Income 799. Tax Treatment of Recoveries. The subparagraph entitled Special Rules for Recovery of State Tax Refunds is revised to read as follows: For tax years beginning after December 31, 2003, taxpayers may elect to deduct state and local sales taxes instead of state and local income taxes ( 1021). If a taxpayer makes this choice, the maximum state and local tax refund amount that he or she may have to include in income in the year the refund is received is limited to the excess of the tax that the taxpayer chose to deduct for the prior tax year minus the tax he or she did not choose to deduct for the prior year (IRS Pub. 525).

16 755. Effect of Depreciation on Earnings and Profits. Updated to reflect the Protecting Americans from Tax Hikes (PATH) Act of 2015 (P.L ). The last paragraph is revised to read as follows: Also, in computing the earnings and profits of a corporation, any amount that can be deducted under certain provisions, listed later, can be deducted ratably over a period of five years, beginning with the year the amount is deductible under those provisions (Code Sec. 312(k)(3)(B), as amended by the Tax Increase Prevention Act of 2014 (P.L )). 134 This includes property that can be deducted under Code Sec. 179 ( 1208), or Code Sec. 179B for certain environmental expenses paid or incurred after December 31, 2002, but not later than December 31, 2009 ( 1285), or Code Sec. 179C for certain refinery property placed in service after August 8, 2005, but before January 1, 2014 ( 1285A), or Code Sec. 179D for certain energy-efficient property placed into service after December 31, 2005, but before January 1, 2017 ( 1286), or Code Sec. 179E for 50 percent of the cost of advanced mine safety equipment placed in service after December 20, 2006, but before January 1, 2017 ( 989A; 1237). 135 Chapter 8: Exclusions from Gross Income 855. Discharge of Debt. The Comment is removed and the first paragraph under the subparagraph entitled Qualified Principal Residence Debt is revised to read as follows: An individual may excluded from gross income is any amount of income from the discharge, in whole or in part, of qualified principal residence indebtedness which is discharged on or after January 1, 2007, but before January 1, 2017 (Code Sec. 108(a)(1)(E), as amended by the Protecting Americans from Tax Hikes (PATH) Act of 2015 (P.L )). 61 Updated to reflect Rev. Proc A new paragraph is added to the subparagraph entitled Student Loans which reads as follows: Effective for tax years beginning after January 1, 2015, Federal student loans discharged under either the Department of Education s Closed School or Defense of Repayment discharge processes do not have to include the discharged debt in gross income (Rev. Proc ). Nor will the IRS pursue these individuals for increases in tax resulting from discharge of these debts if in a prior year the individual received the benefit of claiming either an educational credit or

17 deduction. This guidance is in response to the large number of Federal loans being discharge by students or former student of schools owned by Corinthian Colleges, Inc Scholarships and Fellowship Grants. Updated to reflect the Protecting Americans from Tax Hikes (PATH) Act of 2015 (P.L ). The last paragraph is revised to read as follows: Under an exception, amounts received by degree candidates from the National Health Service Corps (NHSC) Scholarship Program, the Armed Forces Health Professions Scholarship and Financial Assistance Program or a comprehensive student work-learning-service program operated by a work college (both terms defined under section 448(e) of the Higher Education Act of 1965 (P.L )) for tuition, fees, books, supplies, and required equipment are excluded from the recipient's gross income even though there is a future service obligation connected to these qualified scholarships (Code Sec. 117(c)(2), as amended by the Protecting Americans from Tax Hikes Act of 2015 (P.L )). Amounts received by health care professionals under the NHSC Loan Repayment Program are excludable from gross income and employment taxes (Code Sec. 108(f)(4)). This provision also extends to loan repayments received under similar state programs qualified for funding under the Public Health Service Act and repayments under other state loan repayment or forgiveness programs that are intended to provide for increased availability of health care services in underserved or health professional shortage areas Qualified Tuition Programs (529 Plans). The subparagraphs entitled Qualified Educational Education Expenses (QHEE) and Distributions are revised to read as follows: Qualified Higher Education Expenses (QHEEs). For this purpose, QHEEs include tuition, fees, books, supplies, and equipment required by an educational institution for enrollment or attendance. For tax years beginning after December 31, 2014, QHEEs include amounts paid for computers and peripheral equipment, software, and internet access and related services if the items are to be used primarily by the beneficiary during any of the years the beneficiary is enrolled at an eligible educational institution. QHEEs also include the reasonable cost of room and board if the beneficiary is enrolled at least half-time (Code Sec. 529(e)(3), as amended by the Protecting Americans from Tax Hikes (PATH) Act of 2015 (P.L )). 78 Certain expenses of special needs beneficiaries may also be considered QHEEs. The amount of QHEEs must be reduced by the amount of any other tax free benefits received, such scholarship or fellowship grants excluded from gross income ( 865) or the education credits ( 1303).

18 Distributions. Any part of a distribution from a QTP representing the amount paid or contributed to the QTP is excludable from gross income to the extent that the distribution is used to pay for QHEEs. The designated beneficiary generally does not have to include in income any earnings distributed from a QTP, if the total distribution is less than or equal to adjusted qualified education expenses (Code Sec. 529(c)(3)). Distributions that exceed the beneficiary's QHEEs are generally taxed under the Code Sec. 72 annuity rules ( 817). The part of any distribution from a QTP that represents amounts paid or contributed to the account represents a return of the investment in the account. Any distribution from a QTP used to pay QHEEs that are later refunded to the designated beneficiary after December 31, 2014, is not taxed if the beneficiary recontributes the refunded amount to a QTP, generally within 60 days (Code Sec. 529(c)(3)(D), as added by P.L )). Distributions of program earnings in excess of the beneficiary's QHEEs are includable in income and subject to an additional 10-percent tax (Code Sec. 529(c)(6)) Qualified ABLE Accounts. The first paragraph is revised to read as follows: In tax years beginning after December 31, 2014, tax-favored savings accounts can be established under the Achieve a Better Living Experience (ABLE) program to encourage individuals and families to provide private funding to assist disabled individuals in maintaining a healthy, independent, and quality life style (Code Sec. 529A, as added by the Stephen Beck, Jr., Achieve a Better Living Experience Act of 2014 (P.L )). 81 ABLE programs are modeled along the lines of qualified tuition programs under Code Sec. 529 ( 869). A qualified ABLE program is established by a state, or agency or instrumentality of a state, under which a person may make contributions for the benefit of an eligible individual to an ABLE account established for the purpose of meeting the qualified disability expenses of the account s designated beneficiary (Code Sec. 529A(b)(1), as added by P.L ). The program must limit a designated beneficiary to one ABLE account. However, an ABLE account can be established for a beneficiary who is not a resident of the state maintaining the ABLE program (Code Sec. 529A(b)(1), as amended by the Protecting Americans from Tax Hikes (PATH) Act of 2015 P.L ) Other Excluded Income. A new subparagraph entitled Wrongfully Incarcerated Individuals is inserted after the subparagraph entitled Energy Conservation Subsidies and reads as follows:

19 Wrongfully Incarcerated Individuals. Amounts paid to a wrongfully incarcerated individual for civil damages, restitution, or other monetary awards including compensatory or statutory damages and restitution imposed in a criminal matter that relate to the individual s incarceration for the federal or state criminal offense for which he or she was convicted are excluded from gross income (Code Sec. 139F, as added by the Protecting Americans from Tax Hikes (PATH) Act of 2015 (P.L )). 94A A credit or refund claim based on this exclusion for a period before December 18, 2015 (the date of enactment), may be allowed or made even if it would otherwise be disallowed by operation of any law or rule of law, if the individual files the claim before the close of the one-year period beginning on that date (Act Sec. 304(d) of P.L ). 94A FED 7649ZA; INDIV: 33,550 Clean Coal Power Grants. An eligible noncorporate recipient can exclude from gross income certain grants, awards, or allowances received under the Clean Coal Power Initiative (Act Sec. 402 of the Energy Policy Act of 2005 (P.L )) in tax years beginning after December 31, 2011 (Act Sec. 343 of P.L ). Chapter 9: Business Expenses 903. Capital Expenditures. Updated to reflect Notice The first paragraph of the subparagraph entitled De Minimis Safe Harbor is revised to read as follows: A taxpayer who meets certain requirements may make an annual de minimis safe harbor expensing election on a timely filed income tax return (including extensions) (Reg (a)- 1(f)). 10 A taxpayer electing the safe harbor may not capitalize any amount paid in the tax year for the acquisition or production of a unit of tangible property nor treat as a material or supply an amount paid for tangible property if the amount paid for the property costs no more than a specified amount: up to $5,000 for a taxpayer with an applicable financial statement (AFS), and up to $500 for a taxpayer without an AFS. The $500 threshold is increased to $2,500, effective for tax years beginning on or after January 1, 2016 (Notice ). However, the uniform capitalization rules ( 990) may require a taxpayer to capitalize amounts that are deductible under the safe harbor as a direct and allocable indirect cost of property produced by the taxpayer (for example, amounts that improve property) or property acquired for resale.

20 Updated to reflect Rev. Proc The first two paragraphs under the subparagraph entitled Repair Regulations Effective Date and Accounting Method Changes are revised to read as follows: The IRS has issued final repair regulations relating to amounts paid to acquire, produce, or improve tangible property, which apply to tax years beginning on or after January 1, 2014 (T.D. 9636). The IRS previously issued comprehensive temporary regulations (T.D. 9564). A taxpayer could, but was not required to, apply either the temporary or final regulations to tax years beginning on or after January 1, 2012, and before January 1, Certain rules, however, apply only to amounts paid or incurred in tax years beginning on or after January 1, 2014 (or on or after January 1, 2012, if a taxpayer chose early application). Taxpayers who apply the final regulations may rely on Sec of Rev. Proc for automatic change of accounting method procedures to comply with the repair regulations, generally effective for changes filed on or after January 16, 2015 and before May 5, Effective for changes filed on or after May 5, 2016, for a year of change ending on or after September 30, 2015, Sec of Rev. Proc contains the relevant automatic change procedures for complying with the repair regulations. For earlier filed changes, see Appendix Sec of Rev. Proc , as modified by Rev. Proc and Rev. Proc The IRS does not require a small business taxpayer to file Form 3115 to comply with the final repair regulations for its first tax year beginning in 2014 (Rev. Proc ). The regulations are applied on a cut-off basis to amounts paid or incurred in tax years beginning on or after January 1, Therefore, no Code Sec. 481(a) adjustment ( 1531) is required. A small business taxpayer is a taxpayer with one or more separate and distinct trades or businesses that has either: 1. total assets of less than $10 million as of the first day of the tax year for which a change in method of accounting under the final tangible property regulations is effective or 2. average annual gross receipts of $10 million or less for the prior three tax years. A qualifying taxpayer chooses this relief if it does not file Form 3115 for its 2014 tax year. The relief applies to all accounting method changes required by Sec of Rev. Proc , as clarified and modified, and as modified superseded by Rev. Proc , to comply with the final repair regulations. A taxpayer choosing this relief, however, may not file an accounting method change for the 2014 tax year to make the late partial disposition election described in Sec of Rev. Proc , as clarified and modified, and as modified superseded by Rev. Proc , to claim losses on previously retired structural components ( 1239) and may not file an accounting method change described in Sec relating to permissible changes in identifying assets or portions of assets disposed of from multiple asset accounts and mass asset accounts and Sec and Sec relating to recognition of gain and loss on dispositions of

21 buildings and structural components or section 1245 property that are considered disposed of without making a partial disposition election. A taxpayer choosing this relief also does not receive audit protection for expenditures paid or incurred prior to the first tax year beginning on or after January 1, Updated to reflect Rev. Proc The first paragraph under the subparagraph entitled Remodel-Refresh Safe Harbor is revised to read as follows: A qualified taxpayer engaged in the trade or business of operating a retail establishment or a restaurant may adopt a safe harbor method of accounting under which 25 percent of qualified remodel/refresh costs are treated as capital expenditures under Code Sec. 263(a) and the uniform capitalization rules of Code Sec. 263A and 75 percent of such costs are currently deductible (Rev. Proc ; Sec of Rev. Proc ). This safe harbor may only be used by taxpayers with an applicable financial statement (AFS) as defined in Reg (a)-1(f). In order to apply the safe harbor, the building and improvements capitalized under the safe harbor must be placed in separate MACRS general asset accounts (GAAs). A late election to place the building in a GAA may be made in the tax year that the safe harbor is first used as part of the safe harbor accounting method change. Improvements that are depreciable under MACRS and made prior to the year that the safe harbor is first used generally must also be placed in a GAA by making a late election. A taxpayer may not make a partial disposition election ( 1239) to claim retirement losses on building components once this safe harbor is used. The safe harbor accounting method change is applied on a cut-off basis unless the taxpayer revokes any prior year partial disposition elections on an amended return filed within the limitations period for the tax year for which the election was made or files an accounting method change to revoke any partial disposition elections that were made in prior tax years. The method change to revoke prior partial disposition elections is only allowed for a tax year beginning after December 31, 2013 and ending on or before December 31, 2016 (Sec. 6.20(3) of Rev. Proc ). Taxpayers who applied Temp. Reg (i)-8T or the general asset account rules under Temp. Reg (i)-1T ( 1239) in a tax year beginning before January 1, 2014 to claim losses on building components may not use the safe harbor until an accounting method change is filed to comply with the final regulations (Reg (i)-8 or Reg (i)-1). The positive Code Sec. 481(a) adjustment related to the losses previously claimed under the temporary regulations or partial disposition losses under the final regulations is included in income in a single tax year (i.e., the year of change) Contributions for Employee Benefits and Health Insurance. Updated to reflect Protecting Americans from Tax Hikes (PATH) Act of 2015 (P.L ). The subparagraph entitled Excise Tax on High-Cost Employer-Provided Insurance is revised to read as follows: