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IRS Intends to Issue Regulations Clarifying Effect of I.R.C. § 67(g) on Trusts and Estates
The IRS recently issued Notice 2018-61, announcing the IRS’s intention to issue regulations that clarify the effect of I.R.C. § 67(g) on the deductibility of certain expenses that are incurred by estates and non-grantor trusts. I.R.C. § 67(g), recently added by the Tax Cuts and Jobs Act (the “2017 Tax Act”), eliminates the ability to claim miscellaneous itemized deductions for tax years beginning after Dec. 31, 2017 and before Jan. 1, 2026 by suspending I.R.C. § 67(a).
In the Notice, the IRS notes that commentators have suggested that I.R.C. § 67(g) might be read to eliminate the ability of estates and non-grantor trusts to deduct those expenses allowed under I.R.C. § 67(e). However, the IRS states that it does not believe the elimination of estate and trust administrative cost deductions “is a correct reading” of the 2017 Tax Act.
The Notice provides that the regulations will clarify that, in determining the adjusted gross income of estates and non-grantor trusts, estates and non-grantor trusts may continue to deduct an expense described in I.R.C. § 67(e)(1) (costs paid or incurred in the administration of an estate or trust that would not have been incurred if the property were not held in such estate or trust) or allowable under I.R.C. § 642(b) (relating to the personal exemption of an estate or nongrantor trust), I.R.C. § 651 (relating to distributions of income to beneficiaries of simple trusts) or I.R.C. § 661 (relating to distributions of income and principal to beneficiaries of complex trusts), even while the application of I.R.C. § 67(a) is suspended pursuant to I.R.C. § 67(g).
The regulations will also clarify that deductions outlined in I.R.C. §§ 67(b) and 67(e) remain outside of the definition of “miscellaneous itemized deductions” and are unaffected by the newly enacted I.R.C. § 67(g). Thus, these expenses are removed from the category of itemized deductions (and thus are not miscellaneous itemized deductions) and are treated as above-the-line deductions allowable in determining adjusted gross income.
The Notice further provides that the regulations will address a beneficiary’s deduction for excess deductions on termination of a trust or estate under I.R.C. § 642(h)(2). In connection with the drafting of new regulations, the IRS requests comments on how deductions described in I.R.C. § 67(e) that make their way into the I.R.C. § 642(h)(2) amount should be dealt with under the 2017 Tax Act.
IRS Issues Proposed Regulations on New Bonus Depreciation Rules
On Friday, the IRS released proposed regulations clarifying the requirements that must be met for property to qualify for the enhanced bonus depreciation deduction under the 2017 Tax Act, which allows businesses to immediately write off the costs of equipment and other capital expenses.
The 2017 Tax Act revised I.R.C. § 168(k) to permit businesses to fully deduct purchases of qualified new and used property – effective for items bought and placed in service after Sept. 27, 2017 and before Jan. 1, 2023. Beginning in 2023, the 100% expensing allowance is reduced by 20 percentage points each year for the next four years.
Among other things, the proposed regulations provide guidance on: (i) the types of property eligible for bonus deprecation; (ii) consolidated group and related party transactions; (iii) application of the original use rules in the case of partnership/partner transactions and 734(b) and 743(b) basis adjustments (clarifying that an increase in the basis of qualified property due to a 754 election can be eligible for bonus depreciation where there is a basis adjustment under I.R.C. § 743(b)); and (iv) the placed in service date for self-constructed property.
For a full copy of the proposed regulations, please click here.
IRS Issues Initial Guidance on Paid Family and Medical Leave Tax Credit
The IRS recently issued guidance regarding the newly created Family and Medical Leave employer tax credit in the form of Frequently Asked Questions (FAQs). The tax credit was created by the 2017 Tax Act and will be applied to wages paid between Jan. 1, 2018 and Dec. 31, 2019. Under I.R.C. § 45S, employers that voluntarily offer qualifying employees up to twelve weeks of paid family and medical leave annually under a written policy may claim a tax credit for a portion of the wages paid during that leave.
Specifically, to receive the credit, employers will have to provide at least two weeks of leave and compensate their workers a minimum of 50% of their regular earnings. The tax credit will range from 12.5% to 25% of the cost of each hour of paid leave, depending on how much of a worker’s regular earnings the benefit replaces. For instance, the credit will cover 12.5% of the benefit’s costs where workers receive half of their regular earnings, rising incrementally up to 25% where workers receive their entire regular earnings. However, employers will only be able to apply the credit toward workers who earn below $72,000 per year. In addition, the credit does not apply if paid leave is mandated by state or local law.
The tax credit is available for protected leave under the Family and Medical Leave Act of 1993 (FMLA) for any of the following reasons:
For a full copy of the FAQs, please click here.
In its 2018 Third Extraordinary Session, the Louisiana Legislature enacted Act 1, which is designed to increase revenue.
Decrease in Overall State Sales Tax Rate
Beginning as of July 1, 2018, Act 1 decreases Louisiana’s overall sales tax rate from 5% to 4.45% by continuing the imposition of 0.45% of the expiring 1% “clean penny” state sales tax. The new rate is to be levied upon the sale at retail, the use, the consumption, the distribution and the lease or rental of an item of tangible personal property, and upon the sale of services. If a business charges a 5% state sales tax rate on or after July 1, 2018, the business must send the excess collected tax to the Louisiana Department of Revenue.
Further, beginning as of July 1, 2018, Louisiana’s overall sales tax rate for business utilities, i.e., the sale at retail, the use, the consumption, the distribution, and the storage to be used or consumed of steam, water, electric power or energy, natural gas, or other energy sources for non-residential use, will be 2%.
The new changes will sunset on June 30, 2025.
Elimination of State Sales Tax Holidays
Pursuant to Revenue Information Bulletin 18-020, Act 1 also eliminates all of Louisiana’s sales tax holidays, i.e., Louisiana Sales Tax Holiday – first Friday and Saturday in August, Louisiana Hurricane Preparedness Sales Tax Holiday – last Saturday and Sunday in May and Louisiana Second Amendment Weekend Sales Tax Holiday – first Friday through Sunday in September, beginning July 1, 2018 and ending June 30, 2025. Accordingly, items of tangible personal property purchased during the sales tax holiday periods will be subject to the full state sales tax rate of 4.45%.