IRS wheels out additional guidance on company cars

The IRS has updated the inflation-adjusted “luxury automobile” limits on certain deductions taxpayers can take for passenger automobiles — including light trucks and vans — used in their businesses. Revenue Procedure 2019-26 includes different limits for purchased automobiles that are and aren’t eligible for bonus first-year depreciation, as well as for leased automobiles.

The role of the TCJA
The Tax Cuts and Jobs Act (TCJA) amended Internal Revenue Code (IRC) Section 168(k) to extend and modify bonus depreciation for qualified property purchased after September 27, 2017, and before January 1, 2023, including business vehicles. Businesses can expense 100% of the cost of such property (both new and used, subject to certain conditions) in the year the property is placed in service.

The amount of the allowable deduction will begin to phase out in 2023, dropping 20 percentage points each year for four years until it vanishes in 2027, absent congressional action. The applicable percentage for qualified property acquired before September 28, 2017, and placed in service in 2019, is 30%.

But 100% (or 30%) bonus depreciation is available only for heavier business vehicles that aren’t considered passenger automobiles. The maximum bonus depreciation amount for passenger automobiles is much smaller.

IRC Sec. 280F limits the depreciation deduction allowed for luxury passenger automobiles for the year they’re placed into service and each succeeding year. The TCJA amended the provision to increase the Sec. 280F first-year limit for qualified property acquired and placed after September 27, 2017, by $8,000. It increased the limit on first-year depreciation for qualified property acquired before September 28, 2017, and placed in service in 2019, by $4,800. These amounts are the bonus depreciation.


Annual depreciation caps
The new guidance includes three depreciation limit tables for purchased autos placed in service in calendar year 2019. The limits for automobiles acquired before September 28, 2017, that qualify for bonus depreciation are:

  • 1st tax year: $14,900

  • 2nd tax year: $16,100

  • 3rd tax year: $9,700

  • Each succeeding year: $5,760

The limits for autos acquired after September 27, 2017, that qualify for bonus depreciation are:

  • 1st tax year: $18,100

  • 2nd tax year: $16,100

  • 3rd tax year: $9,700

  • Each succeeding year: $5,760

The limits for autos that don’t qualify for bonus depreciation are:

  • 1st tax year: $10,100

  • 2nd tax year: $16,100

  • 3rd tax year: $9,700

  • Each succeeding year: $5,760

Other restrictions
The bonus depreciation deduction isn’t available for automobiles for 2019 if the business:

  • Didn’t use the automobile more than 50% for business purposes in 2019,

  • Elected out of the deduction for the class of property that includes passenger automobiles (that is, five-year property), or

  • Purchased the automobile used and the purchase didn’t meet the applicable acquisition requirements (for example, the business cannot have used the auto at any time before acquisition).

Limits on leased automobiles
The new guidance also includes the so-called “income inclusion” table for passenger automobiles first leased in 2019 with a fair market value (FMV) of more than $50,000. The FMV is the amount that would be paid to buy the car in an arm’s-length transaction, generally the capitalized cost specified in the lease.

Taxpayers that lease a passenger automobile for use in their business can deduct the part of the lease payment that represents business use. Thus, if the car is used solely for business, the full cost of the lease is deductible. (Alternatively, you could just deduct the standard mileage rate — 58 cents for 2019 — for business miles driven.)

But Sec. 280F requires the deduction to be reduced by an amount that’s substantially equivalent to the limits on the depreciation deductions imposed on owners of passenger automobiles. The idea is to balance out the tax benefits of leasing a luxury car vs. purchasing it. That’s where the table comes into play.

Lessees must increase their income each year of the lease to achieve parity with the depreciation limits. The income inclusion amount is determined by applying a formula to an amount obtained from the IRS table. The latter amount depends on the initial FMV of the leased auto and the year of the lease term. Although the $50,000 FMV threshold for 2019 is unchanged from 2018, many of the other values in the new table have changed since then.

For example, let’s say you leased a car with an FMV of $56,500 on January 1, 2019, for three years and placed it in service that same year. You use the car for business purposes only. According to the table, your income inclusion amounts for each year of the lease would be as follows:

  • Year 1: $26

  • Year 2: $59

  • Year 3: $86

The annual income inclusion amount may seem small compared to the depreciation deduction limits, but it represents a permanent tax difference that affects the effective tax rate but not book or taxable income. The depreciation limits, on the other hand, represent a timing difference that affects book and taxable income in the same way but at different times and doesn’t change the effective tax rate. The business will recover the timing difference through depreciation deductions or when it disposes of the auto.

Drive carefully

The new tax rules for vehicles used in business generally are favorable but aren’t easily navigable. We can help steer you toward the best strategy given your current circumstances.
© 2019

IRS updates rules for personal use of employer-provided vehicles

The IRS recently announced the inflation-adjusted maximum value of an employer-provided vehicle under the vehicle cents-per-mile rule and the fleet-average value rule. Employers can use the rules to value an employee’s personal use of such a vehicle for income and employment tax purposes. 

The new values reflect vehicle-related amendments in the Tax Cuts and Jobs Act (TCJA) and the IRS’s intent to make the rules more widely available to employers. The IRS is also temporarily loosening some of the consistency requirements for 2018 and 2019.

Valuation methods for personal use

When an employer provides an employee with a vehicle that’s available for personal use, it must include the value of the personal use in the employee’s income. Employers generally have four methods available to value an employee’s personal use of a company car:

  1. General valuation rule. This involves the fair market value (FMV), which is defined as the amount the employee would have to pay a third party to lease the same or similar vehicle on the same or comparable terms in the geographic area where the employee uses the vehicle.

  2. Commuting valuation rule. This is the amount of each one-way commute, from home to work or from work to home, multiplied by $1.50. (This method’s availability is subject to stringent requirements, including having a written policy limiting the employee’s use to commuting and “de minimis” personal use.)

  3. The cents-per-mile rule. Employers can use the business standard mileage rate (58 cents for 2019, less up to 5.5 cents if the employer doesn’t provide fuel) multiplied by the total miles the employee drives the vehicle (including cars, trucks and vans) for personal purposes.

  4. The automobile annual lease valuation rule. With this method, employers use the annual lease value of the automobile (including trucks and vans) — as specified by an IRS table that bases annual lease value on an automobile’s FMV — multiplied by the percentage of personal miles out of total miles driven by the employee. This amount also is subject to a fuel adjustment.

The fleet-average value rule allows employers operating a fleet of 20 or more qualifying automobiles to use an average annual lease value for every qualifying vehicle in the fleet when applying the automobile annual lease valuation rule.

The fleet-average value rule or the simple cents-per-mile rule isn’t available, though, if the FMV of the vehicle exceeds a certain base value, adjusted annually for inflation, on the first date the vehicle is made available to the employee for personal use. In 2017, the maximum value for the cents-per-mile rule was $15,900 for a passenger automobile and $17,800 for a truck or van. The maximum value for the fleet-average value rule that year was $21,100 for a passenger automobile and $23,300 for a truck or van.

The role of the TCJA

The base values were raised significantly earlier this year, in IRS Notice 2019-08, to reflect amendments made by the TCJA. The law changes the price inflation measure for automobiles (including trucks and vans). It also substantially increases the maximum annual dollar limitations on the depreciation deductions for passenger automobiles, basing the latter on the depreciation of a passenger automobile with a cost of $50,000 (up from $12,800), inflation adjusted annually, over a five-year recovery period. 

The IRS announced in the guidance that it intended to amend the tax regulations to incorporate a base value of $50,000 for both the cents-per-mile and the fleet-average value rules, effective for the 2018 calendar year. It also intended to amend the regulations to provide that the base value will be adjusted annually for 2019 and future years using the new price inflation measure. 

The latest news

Now, in Notice 2019-34, the IRS has announced the adjusted values for 2019. For vehicles and automobiles first made available to employees for personal use in calendar year 2019, the maximum value under both rules is $50,400. Under planned amendments to the applicable regulations, these maximum values will be the same as the maximum standard automobile cost that determines eligibility to set reimbursement allowances under a fixed and variable rate (FAVR) plan — an alternative to the business standard mileage rate.

The IRS also shared its intention to amend the tax regulations to provide relief to employers that previously didn’t qualify for the cents-per-mile rule because, under the earlier rules, the vehicle’s FMV exceeded the permissible maximum value. Under amended regulations, the employer may first adopt the cents-per-mile valuation rule for 2018 or 2019 based on the maximum value of a vehicle for 2018 or 2019. 

Note, though, that employers that adopt the cents-per-mile rule generally must continue to use it for all subsequent years in which the vehicle qualifies for it. An employer can, however, use the commuting valuation rule for any year the vehicle qualifies.

Similarly, employers that didn’t qualify for the fleet-average value rule before 2019 because of the pre-2018 maximum value limit can adopt the rule for 2018 or 2019 if it falls under the applicable maximum value.

The new notice confirms that employers can use the flexible guidelines in Announcement 85-113 to determine the timing for when personal use income is deemed paid. That means employers may use the rules in that guidance, the adjustment process, or the refund claim process to correct any overpayment of federal employment taxes resulting from application of the notice’s transition relief.

Additional requirements

Satisfying the maximum value limit isn’t enough for an employer to use the cents-per-mile rule or the fleet-average value rule to value an employee’s personal use of a vehicle. Both rules come with other requirements that can prove difficult to meet. For example, the cents-per-mile rule generally is available only if the employer reasonably expects the vehicle to be regularly used in its trade or business throughout the calendar year or the vehicle meets the mileage test. We can help you determine the appropriate valuation method for your circumstances.
© 2019

IRS issues proposed regulations on the pass-through business income deduction

The IRS recently released highly anticipated regulations addressing the deduction for up to 20% of qualified business income (QBI) from pass-through entities. The deduction was a major component of the Tax Cuts and Jobs Act, which became law late last year. It has also been referred to as the pass-through deduction, the QBI deduction or the Section 199A deduction. 

Defining the deduction

For tax years beginning in 2018 and ending in 2025, the QBI deduction can be up to 20% of a pass-through entity owner’s QBI, subject to restrictions that can apply at higher income levels and another restriction based on the owner’s taxable income. 

For QBI deduction purposes, pass-through entities are defined as sole proprietorships, single-member (one owner) LLCs that are treated as sole proprietorships for tax purposes, S corporations, partnerships, and LLCs that are treated as partnerships for tax purposes. 

The QBI deduction is available only to individuals, estates and trusts. The newly proposed regulations refer to all three as “individuals.” For the purposes of this article, let’s follow that terminology to be consistent with the language used in the proposed regs. 

This deduction is scheduled to sunset after 2025 unless Congress extends it. Even though the new QBI deduction regs are in proposed form, you can rely on them until final regs are issued. 

Operational rules and definitions

The proposed regs supply operational rules for determining allowable QBI deductions, including how to apply the phaseout rules that can reduce or eliminate QBI deductions for individuals with taxable income (calculated before any QBI deduction) that exceeds the phaseout threshold of $157,500 ($315,000 for married joint filers). Phaseout is complete when an owner’s taxable income reaches $207,500 ($415,000 for married joint filers). At that point: 1) QBI deductions for a nonservice business must be based on the business’s W-2 wages or its W-2 wages plus the basis of qualified property used in the business, and 2) no QBI deduction can be claimed based on income from a specified service trade or business (SSTB), as defined below.

Definitions of new terms used to apply the QBI deduction rules are also included in the proposed regs, including the definition of QBI and of specified service trades or businesses (SSTBs). 

In defining what constitutes an eligible business for QBI deduction purposes, the IRS decided to go with the Internal Revenue Code Section 162 definition of a trade or business, because that definition is derived from longstanding case law and IRS guidance dealing with a broad range of industries.

Deduction limitations and when businesses can be “aggregated”
When an individual owns interests in several qualifying non-SSTB businesses, the individual can potentially choose to aggregate and treat them as a single business for purposes of: 

  • Calculating QBI and

  • Calculating the QBI deduction limitation based on 50% of W-2 wages paid by a business to generate QBI or the limitation based on 25% of such W-2 wages plus 2.5% of the unadjusted basis immediately after acquisition (UBIA) of qualified property used to generate QBI.

The limitation involving the UBIA of qualified property is for the benefit of capital-intensive businesses.

These QBI deduction limitations kick in when an individual’s (the pass-through business owner’s) taxable income (calculated before any QBI deduction) exceeds $157,500 ($315,000 for a married joint filer). When the limitations are fully phased in, the QBI deduction is limited to the greater of: 1) the individual’s share of 50% of W-2 wages paid to employees and properly allocable to QBI during the tax year or 2) the sum of the individual’s share of 25% of W-2 wages plus the individual’s share of 2.5% of the UBIA of qualified property. 

In any case, the deduction can’t exceed 20% of QBI, and it can’t exceed 20% of the individual’s taxable income calculated before: 1) any QBI deduction and 2) any net capital gain amount (net long-term capital gains in excess of net short-term capital losses plus qualified dividends). The proposed regs explain how to calculate a business’s W-2 wages for purposes of applying the QBI deduction limitations. 

A business’s UBIA of qualified property generally equals the original cost of the property. Qualified property is defined as depreciable tangible property (including real estate) that: 

1. Is owned by a qualified business as of the tax year end,
2. Is used by the business at any point during the tax year for the production of QBI, and 
3. Hasn’t reached the end of its depreciable period as of the tax year end. 

Why aggregating businesses could pay off

Aggregating businesses can allow an individual with higher taxable income to claim a larger QBI deduction when the limitations based on W-2 wages and the UBIA of qualified property would otherwise reduce or eliminate the allowable deduction. For instance, if a high-income individual owns an interest in one business with high QBI but little or no W-2 wages and an interest in another business with minimal QBI but significant W-2 wages, aggregating the two could result in a healthy QBI deduction. Keeping them separate could result in a lower deduction or maybe no deduction at all. However, certain tests set forth in the proposed regs must be passed for businesses to be aggregated. Also, it’s important to remember that an SSTB cannot be aggregated with any other business, including another SSTB. 

Specified service trades or businesses

The proposed regs define specified SSTBs. The status as an SSTB is important, because QBI deductions based on SSTB income begin to be phased out after an individual’s taxable income (calculated before any QBI deduction) exceeds $157,500 ($315,000 for a married joint filer). 
The proposed regs also include an antiabuse rule intended to prevent service business owners from separating out parts of what otherwise would be an integrated SSTB, such as an optometrist practice’s sales of vision care items, in an attempt to qualify the separated part for the QBI deduction. 

Defining SSTBs

In general, an SSTB is a trade or business that performs services in one or more of the following fields:

  • Health,

  • Law,

  • Accounting,

  • Actuarial science,

  • Consulting,

  • Financial, brokerage, investing or investment management,

  • Trading,

  • Performing arts, and

  • Athletics.

In addition, an SSTB can be any trade or business where the principal asset is the reputation or skill of one or more of its employees or owners. 

You may ask: What’s a trade or business where the principal asset is the reputation or skill of an owner or employee? Good question. Before the proposed regs were released, there was concern that this SSTB definition could snare unsuspecting businesses, such as a restaurant with a well-regarded chef. 

Thankfully, the proposed regs limit this definition to trades or businesses that meet one or more of the following descriptions:

  • One in which a person receives fees, compensation or other income for endorsing products or services,

  • One that licenses or receives fees, compensation or other income for the use of an individual’s image, likeness, name, signature, voice, trademark or any other symbol associated with that individual’s identity, or

  • One that receives fees, compensation or other income for appearing at an event or on radio, television or another media format.

Other QBI deduction issues

The proposed regs supply guidance on when QBI deductions can be claimed based on qualified income from publicly traded partnerships (PTPs) and qualified dividends from real estate investment trusts (REITs).

Finally, the proposed regs include special computational and reporting rules that pass-through entities, PTPs, trusts and estates may need to follow to provide their owners and beneficiaries with the information necessary to calculate allowable QBI deductions at the owner or beneficiary level.

Getting the best results

The proposed QBI deduction regs are lengthy and complex. This article only scratches the surface of the proposed rules. We can help you sort through the details to get the best QBI deduction.

Home equity borrowers get good news from the IRS

Passage of the Tax Cuts and Jobs Act (TCJA) in December 2017 has led to confusion over some of the changes to longstanding deductions, including the deduction for interest on home equity loans. In response, the IRS has issued a statement clarifying that the interest on home equity loans, home equity lines of credit and second mortgages will, in many cases, remain deductible under the TCJA — regardless of how the loan is labeled.

Previous provisions

Under prior tax law, taxpayers could deduct “qualified residence interest” on a loan of up to $1 million secured by a qualified residence, plus interest on a home equity loan (other than debt used to acquire a home) up to $100,000. The home equity debt couldn’t exceed the fair market value (FMV) of the home reduced by the debt used to acquire the home.

For tax purposes, a qualified residence is the taxpayer’s principal residence and a second residence, which can be a house, condominium, cooperative, mobile home, house trailer or boat. The principal residence is where the taxpayer resides most of the time; the second residence is any other residence the taxpayer owns and treats as a second home. Taxpayers aren’t required to use the second home during the year to claim the deduction. If the second home is rented to others, though, the taxpayer also must use it as a home during the year for the greater of 14 days or 10% of the number of days it’s rented.

In the past, interest on qualifying home equity debt was deductible regardless of how the loan proceeds were used. A taxpayer could, for example, use the proceeds to pay for medical bills, tuition, vacations, vehicles and other personal expenses and still claim the itemized interest deduction.

The TCJA rules

The TCJA limits the amount of the mortgage interest deduction for taxpayers who itemize through 2025. Beginning in 2018, a taxpayer can deduct interest only on mortgage debt of $750,000. The congressional conference report on the law stated that it also suspends the deduction for interest on home equity debt. And the actual bill includes the section caption “DISALLOWANCE OF HOME EQUITY INDEBTEDNESS INTEREST.” As a result, many people believed the TCJA eliminates the home equity loan interest deduction.

On February 21, the IRS issued a release (IR 2018-32) explaining that the law suspends the deduction only for interest on home equity loans and lines of credit that aren’t used to buy, build or substantially improve the taxpayer’s home that secures the loan. In other words, the interest isn’t deductible if the loan proceeds are used for certain personal expenses, but it is if the proceeds go toward, for example, a new roof on the home that secures the loan. The IRS further stated that the deduction limits apply to the combined amount of mortgage and home equity acquisition loans — home equity debt is no longer capped at $100,000 for purposes of the deduction.

Some examples from the IRS help show how the TCJA rules work:

Example 1: A taxpayer took out a $500,000 mortgage to buy a principal residence with an FMV of $800,000 in January 2018. The loan is secured by the residence. In February, he takes out a $250,000 home equity loan to pay for an addition to the home. Both loans are secured by the principal residence, and the total doesn’t exceed the value of the home.

The taxpayer can deduct all of the interest on both loans because the total loan amount doesn’t exceed $750,000. If he used the home equity loan proceeds to pay off student loans and credit card bills, though, the interest on that loan wouldn’t be deductible.

Example 2: The taxpayer from the previous example takes out the same mortgage in January. In February, he also takes out a $250,000 loan to buy a vacation home, securing the loan with that home. Because the total amount of both mortgages doesn’t exceed $750,000, he can deduct all of the interest paid on both mortgages. But, if he took out a $250,000 home equity loan on the principal home to buy the second home, the interest on the home equity loan wouldn’t be deductible.

Example 3: In January 2018, a taxpayer took out a $500,000 mortgage to buy a principal home, secured by the home. In February, she takes out a $500,000 loan to buy a vacation home, securing the loan with that home. Because the total amount of both mortgages exceeds $750,000, she can deduct only a percentage of the total interest she pays on them.

Stay tuned

The new IRS announcement highlights the fact that the nuances of the TCJA will take some time to shake out completely. We’ll keep you updated on the most significant new rules and guidance as they emerge.

© 2018

There’s still time to get substantiation for 2018 donations

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To claim an itemized deduction for a donation of more than $250, generally you need a contemporaneous written acknowledgment from the charity. “Contemporaneous” means the earlier of

1) the date you file your income tax return, or

2) the extended due date of your return.

If you made a donation in 2018 but haven’t received substantiation and you’d like to deduct it, consider requesting a written acknowledgment from the charity and waiting to file your 2018 return until you receive it. Additional rules apply to certain types of donations.

Contact us to learn more.