The IRS has proposed regulations on the limitation on the business interest expense deduction under Code Sec. 163(j), as amended by the Tax Cuts and Jobs Act (TCJA) ( P.L. 115-97). The IRS also has issued a safe harbor that allows taxpayers to treat certain infrastructure trades or businesses as real property trades or businesses solely for purposes of qualifying as an electing real property trade or business under Code Sec. 163(j)(7)(B).

Business Interest Limitation
For tax years beginning after 2017, the deduction of interest paid or incurred on debt properly allocable to a trade or business is limited to the sum of:

• 30 percent of the taxpayer’s adjusted taxable income (but not less than zero);
• the taxpayer’s business interest income (not including investment income); and
• the taxpayer’s floor plan financing interest.

The proposed regulations provide general rules and definitions related to the limitation, as well as rules for calculating the limitation in consolidated group, partnership, and international contexts. The regulations affect taxpayers that have deductible business interest expense, other than certain small businesses, electing real property trades or businesses, electing farming businesses, and certain utility businesses. The IRS is also withdrawing a prior notice of proposed rulemaking on the disallowance of a deduction for certain interest paid or accrued by a corporation under former Code Sec. 163(j).

The proposed regulations will generally be effective for tax years ending after the date the Treasury Decision adopting them as final is published in the Federal Register. However, taxpayers can apply certain provisions to tax years beginning after December 31, 2017, so long as the rules are consistently applied.

Safe Harbor
Further, in Rev. Proc. 2018-59, a safe harbor is provided allowing taxpayers to treat certain infrastructure trades or businesses as electing real property trades or businesses not subject to the Code Sec. 163(j) business interest deduction limit. These include trades or businesses that are conducted in connection with the designing, building, managing, operating, or maintaining of certain core infrastructure projects for purposes of private activity bond financing proposals. If a taxpayer makes this election, the taxpayer must use the alternative depreciation system (ADS) to depreciate property. Taxpayers may apply the safe harbor to tax years beginning after December 31, 2017.

Comments Requested
Public comments to the proposed regulations should be submitted no later than 60 days after the date that the notice of proposed rulemaking is published in the Federal Register. Send submissions to: CC:PA:LPD:PR (REG-106089-18), Room 5203, P.O. Box 7604, Ben Franklin Station, Washington, DC 20044. Submissions may be hand-delivered Monday through Friday between the hours of 8 a.m. and 4 p.m. to CC:PA:LPD:PR (REG-106089-18), Courier’s Desk, Internal Revenue Service, 1111 Constitution Avenue, NW, Washington, DC, 20224, or sent electronically, via the Federal Rulemaking Portal at http://www.regulations.gov (indicate IRS and REG-106089-18).

A public hearing has been scheduled for February 25, 2019. It will be held on February 25, 2019, beginning at 10 a.m., in the Main IRS Auditorium, Internal Revenue Building, 1111 Constitution Avenue, NW, Washington, DC 20224.

The House’s top Republican tax writer has introduced a revised tax and IRS oversight package. The “tweaked” 253-page package addresses retirement savings, disaster relief, IRS reform, tax law corrections, and the delay and repeal of certain Affordable Care Act (ACA) taxes, among other things.

“This package delivers bipartisan relief from some of [the ACA’s] most egregious taxes including ones that stifle innovation, reduce jobs, and increase the cost of families’ health insurance," House Ways and Means Committee Chairman Kevin Brady, R-Tex., said in a November 10 statement. “The package also includes bipartisan negotiated reforms to redesign the IRS for the first time in two decades, and helps workers save more and earlier for retirement and for their children’s education."

Tax Extenders Out
The new package comes on the heels of Republican leadership pulling the original bill from a floor vote last month. The previously 297-page package was reportedly pulled for a lack of GOP support.

Notably, the revised measure no longer includes tax extenders for over 20 expired tax breaks. However, it is expected on Capitol Hill that tax extenders will instead be attached to a year-end government funding bill. Generally, tax extenders are traditionally a fairly routine and bipartisan lame-duck legislative initiative.

ACA Provisions In
Although the measure contains some bipartisan provisions, such as retirement savings and IRS reform, the ACA-adds appear to be targeted at gaining more GOP support. The new package includes the following health care-related tax provisions:

extend the moratorium on the medical device excise tax from 2020 to 2025;

further delay the implementation of the excise “Cadillac" tax on costly employer-sponsored health plans from 2022 to 2023;

further extend the suspension of the annual fee on health insurance providers from 2020 to 2023; and

repeal the excise tax on indoor tanning services.

While delaying and repealing ACA-related taxes seems a largely partisan move, Brady told reporters on November 10 that delaying certain ACA taxes has received bipartisan support in the past.

Looking Ahead
The revised package is expected to easily clear the House. However, congressional tax staffers have expressed doubt that the Senate will have time to take up a separate tax bill during the lame-duck session while Congress works to iron out a government spending bill. Additionally, nine Democratic votes in the Senate will be needed for congressional approval, only adding to the package’s anticipated uphill climb.

A top Senate tax writer has said additional proposed regulations for the new tax code are expected to be released soon. Treasury Secretary Steven Mnuchin provided Republican senators with an update on tax reform-related rules in a meeting at the U.S. Capitol on December 6.

Treasury appears to be “about done" with tax reform-related regulations, Sen. Chuck Grassley, R-Iowa, told reporters after meeting with Mnuchin, adding that the regulations could surface as early as December 10. Grassley is expected to chair the Senate Finance Committee (SFC) next year when current SFC Chairman Orrin G. Hatch, R-Utah, retires.

The Tax Cuts and Jobs Act (TCJA) ( P.L. 115-97), enacted last December, will significantly impact next year’s tax filing season. Treasury and the IRS are currently working to stay on track with the anticipated timeline of all TCJA proposed regulations being issued in 2018, as originally estimated by former acting IRS Commissioner David Kautter. Kautter, who currently serves as assistant Treasury secretary for tax policy, also attended the meeting with Mnuchin and Republicans senators.

TCJA Technical Corrections
Mnuchin and the lawmakers also reportedly discussed various corrections needed to the new tax law. To that end, Grassley told reporters after the meeting that the TCJA’s new 21-percent tax for nonprofit organizations on unrelated business income was a topic of discussion. The TCJA provision has garnered significant criticism, seemingly sparking the recent effort by House Ways and Means Committee Chairman Kevin Brady, R-Tex., to repeal the tax.

Brady introduced a manger’s amendment, which would repeal the tax for nonprofits, to the sweeping, catch-all tax package he introduced late November. Additionally, the measure consists of a mix of partisan and bipartisan priorities, which include tax extenders, IRS reform, and TCJA technical corrections, among other things.

Although the nearly 300-page tax and IRS oversight package, an amendment to HR 88, was scheduled for a House floor vote on November 30, leadership pulled the measure from the floor late on November 29 because it reportedly lacked requisite GOP support. Moreover, adding to the package’s dwindling chances of legislative success this year is the need for at least nine Democratic votes in the Senate.

Additionally, there is talk on Capitol Hill that Treasury may try to administratively remedy some needed technical corrections to the new tax law. Although some fixes will undoubtedly need legislative correction, Hatch told reporters that he “thinks" that some corrections could come by way of Treasury.

Government Shutdown Averted … for Two Weeks
In related news, Congress avoided a possible government shutdown on December 7 at midnight by approving a two-week stopgap spending bill. The measure was signed by President Donald Trump. The stopgap spending bill keeps the government and federal agencies including the IRS open through December 21.

Republican tax writers appear to have not yet given up hope on addressing some tax provisions in a more long-term, year-end government funding bill that Congress is currently ironing out. It is expected on Capitol Hill that the next spending bill may be used as a legislative vehicle for some tax measures. In particular, IRS reform and tax extenders for certain expired tax breaks are seen as measures carrying higher odds of success, both of which are considered bipartisan proposals.

The Tax Court adopted amendments to its electronic filing and paying rule. The adopted rules cover petitions and other documents that are currently not filed electronically. These rules were first proposed in January 2016. The new rules also cover cases involving passport revocation certification.

Amended Electronic Filing and Payment Rules
The Tax Court issued proposed amendments to its rules in January 2016. Those amendments provided for electronic filing of petitions and certain other documents. The court has adopted these amendments. The court will provide detailed information on filing petitions and other documents electronically. This information will be in the court’s updated electronic filing guidelines.

The court also adopted new rules that allow for payment of court fees and charges through Pay.gov.

Other Amended Rules
The court also adopted amended rules on:

• jurisdiction after a taxpayer files a bankruptcy petition;
• beginning a case; and
• conducting trials.

Generally, these amended rules are effective November 30, 2018.

New Rules for Passport Certification Actions
The court also adopted new rules for passport certification cases. The IRS may certify a seriously delinquent tax debt to the State Department. Such a certification may result in the revocation or denial of the taxpayer’s passport. The taxpayer may protest a seriously delinquent certification in the Tax Court. A taxpayer may also protest the IRS’s failure to reverse an incorrect certification.

The new rules cover, among other things:

• the contents of a certification petition;
• the required filing fee; and
• place of trial requests.

The new rules apply to cases filed in response to certification notices issued after December 4, 2015.

A key figure in shaping last year’s tax reform has been confirmed as the Treasury’s second-highest ranking official. The Senate confirmed Justin Muzinich as deputy Treasury secretary on December 11 by a nearly party-line 55-to-44 vote. Muzinich played a pivotal role in crafting last year’s tax reform legislation, the Tax Cuts and Jobs Act (TCJA) ( P.L. 115-97), signed by President Donald Trump last December. Muzinich has served as counselor to Treasury Secretary Steven Mnuchin since early 2017. He has been credited by Republican lawmakers and the Trump administration for significantly influencing the TCJA.

Prior to joining the Trump administration, Muzinich served as president of an international investment firm and taught at Columbia Business School. Muzinich holds a J.D. from Yale Law School, an M.B.A. from Harvard Business School, and a B.A. from Harvard College, according to Treasury.

The Treasury Inspector General for Tax Administration (TIGTA) has released its semiannual report to Congress, highlighting its audits, investigations, inspections and evaluations. The report includes challenges faced with the IRS impersonation scam with more than 14,700 taxpayers losing upwards of $72.8 million to the scam’s perpetrators. In a particular case, 15 individuals in connections with overseas call centers were indicted.

The report also highlights efforts made to increase resources for protection of taxpayer data. An audit by TIGTA to evaluate IRS controls designed to authenticate requests received from individual tax preparers who have access to taxpayer information in the course of representing their clients was undertaken. The IRS’s efforts into implementing and enforcing data protection measures of private contractors participating in its Private Debt Collection Program was also analyzed. Finally, the report highlighted the IRS’s ongoing efforts to detect and prevent business identity theft.

Proposed regulations address and intend to reduce taxpayer burden in complying with certain withholding requirements under the Foreign Account Tax Compliance Act (FATCA), Chapter 4 ( Code Secs. 1471 – 1474) and Chapter 3 ( Code Secs. 1441, 1461). The proposed regulations can generally be relied upon, until final regulations are issued. The proposed regulations on credits and refunds, however, will not apply until Form 1042 and Form 1042-S are updated for the 2019 calendar year.

Under FACTA, withholdable payments made to certain foreign financial institutions (FFIs) and certain non-financial foreign entities (NFFEs) are subject to withholding under Chapter 4. A withholdable payment is:

• a payment of interest (including original issue discount), dividends, rents, salaries, wages and other fixed or determinable annual or periodical gains, profits or income (FDAP) from U.S. sources, and
• gross proceeds from the sale of the type of property that can produce U.S. source dividends or interest.

The proposed regulations make a number of changes that affect withholdable payments. The proposed regulations also clarify the definition of an investment entity and address:

• due diligence of withholding agents;
• credits and refunds of overwithheld tax; and
• nonqualified intermediaries.

Changes affecting withholdable payments
The proposed regulations eliminate gross proceeds as withholdable payments. Withholding on gross proceeds was delayed until January 1, 2019, based on concerns that withholding would require significant efforts by withholding agents. It has been determined that withholding on gross proceeds is no longer necessary given the current compliance with FATCA.

The proposed regulations extend the time for withholding on foreign passthru payments made to a recalcitrant account holder or nonparticipating FFI. Withholding is not required on foreign passthru payments made before the date that is two years after the publication in the Federal Register of final regulations defining the term foreign passthru payment.

The exclusion from withholdable payments for nonfinancial payments will include premiums on insurance contracts without cash value under the proposed regulations. The exclusion was made possible due to changes made by the Tax Cuts and Jobs Act ( P.L. 115-97), which added a more stringent test for determining whether an exception from the U.S. owner reporting and anti-deferral rules applied to passive foreign investment companies (PFICs) in the insurance business.

The IRS and the Treasury intend to provide regulations that will address issues affecting foreign corporations with previously taxed earnings and profits (PTEP). The regulations are in response to changes made by the Tax Cuts and Jobs Act (TCJA) ( P.L. 115-97), and are intended to include rules for:

the maintenance of PTEP in annual accounts and within certain groups;

the ordering of PTEP upon distribution and reclassification; and

the adjustment required when an income inclusion exceeds a foreign corporation’s earnings and profits.

The IRS and Treasury intend to withdraw 2006 proposed regulations relating to the exclusion from gross income of PTEP and associated basis adjustments ( NPRM REG-121509-00), and issue new proposed regulations under Code Sec. 959 and Code Sec. 961.

Previously Taxed Earnings and Profits
Previously taxed earnings and profits (PTEP) are a foreign corporation’s earnings and profits attributable to amounts which are or have been included in a U.S. shareholder’s gross income under Code Sec. 951(a) or under Code Sec. 1248(a). Under the subpart F rules, a U.S. shareholder of a controlled foreign corporation (CFC) is generally currently taxed on certain income earned by the CFC, and on certain earnings invested in U.S. property.

To prevent double taxation, Code Sec. 959 provides that earnings and profits of the foreign corporation that are attributable to the inclusion are excluded from gross income when actually distributed. An exclusion is also allowed when earnings and profits are attributable to amounts included in the U.S. shareholder’s gross income that would otherwise again be included in gross income under the rule for investment of earnings in U.S. property.

To determine the amount of an actual distribution that is not taxable because it represents previously taxed income upon an actual distribution by the CFC, the earnings distributed are treated as attributable in the following order:

first, to retained earnings that were required in prior years to be included in income on account of investments in excess passive assets, together with the earnings in prior years that were required to be included in income on account of investments in U.S. property under Code Sec. 956, allocated to each category on a pro rata basis ( “section 959(c)(1) PTEP");

next, to retained earnings that were required to be included in income as subpart F income ( “section 959(c)(2) PTEP"); and

finally, to other earnings and profits ( “section 959(c)(3) E&P").

Changes made by the TCJA created the need to account for new groups of PTEP, because section 959(c)(2) PTEP may arise due to income inclusions under Code Secs. 951(a)(1)(A), 245A(e)(2), 951A(f)(1), 959(e), 964(e)(4), or 965(a), or by applying Code Sec. 965(b)(4)(A). Those different groups of PTEP may be subject to different rules under Code Secs. 960, 965(g), 245A(e)(3), and 986(c).

In addition, Proposed Reg. § 1.960-3(c) establishes, for purposes of determining the amount of foreign income taxes deemed paid, a system of accounting for PTEP in annual accounts for each separate category of income ( “section 904 category") and further segregate each annual account among 10 PTEP groups.

Annual Accounts and Groups of Previously Taxed Earnings and Profits
The new regulations are expected to provide that an annual account must be maintained and each annual PTEP account must be segregated into 16 PTEP groups in each section 904 category:

• reclassified section 965(a) PTEP;
• reclassified section 965(b) PTEP;
• section 951(a)(1)(B) PTEP;
• reclassified section 951A PTEP;
• reclassified section 245A(e)(2) PTEP;
• reclassified section 959(e) PTEP;
• reclassified section 964(e)(4) PTEP;
• reclassified section 951(a)(1)(A) PTEP;
• section 956A PTEP;
• section 965(a) PTEP;
• section 965(b) PTEP;
• section 951A PTEP;
• section 245A(e)(2) PTEP;
• section 959(e) PTEP;
• section 964(e) PTEP; and
• section 951(a)(1)(A) PTEP.

Section 959(c)(1) PTEP will consist of PTEP groups (1) through (9), and section 959(c)(2) PTEP will consist of PTEP groups (10) through (16). Once PTEP is assigned to a PTEP group within an annual PTEP account for the year of the income inclusion under Code Sec. 951(a)(1) or the year of application of Code Sec. 965(b)(4)(A), the PTEP will be maintained in an annual PTEP account with a year that corresponds to the year of the account from which the PTEP originated if PTEP is distributed or reclassified in a subsequent tax year.

Additionally, the new regulations are expected to provide that:

• to the extent a CFC has E&P in a PTEP group that is in more than one section 904 category, any distribution out of that PTEP group is made pro rata out of the earnings and profits in each such category;
• dollar basis must be tracked for each annual PTEP account, and, to the extent provided in the regulations, separately for each PTEP group within an annual account; and
• distributions from any PTEP group reduce the shareholder’s stock basis under Code Sec. 961(b)(1) without regard to how that basis was originally created.

The regulations also will provide transition rules for annual PTEP accounts maintained before the regulations’ applicability date.

Ordering of Earnings and Profits upon Distribution and Reclassification
The new regulations are expected to provide that:

• a distribution will be a distribution of PTEP only to the extent it would have otherwise been a dividend under Code Sec. 316;
• a “last in, first out" approach will be required for sourcing distributions from annual PTEP accounts, subject to the special priority rule for PTEP arising due to Code Sec. 965;
• PTEP attributable to income inclusions under Code Sec. 965(a) or by reason of Code Sec. 965(b)(4)(A) receive priority when determining the group of PTEP from which a distribution is made; and
• reclassifications of PTEP under Code Sec. 959(a)(2) will be sourced first from section 965(a) PTEP, then section 965(b) PTEP, and then, under a last-in, first-out approach, pro rata from the remaining section 959(c)(2) PTEP groups in each annual PTEP account, starting from the most recent annual PTEP account.

Adjustments Due to an Income Inclusion in Excess of Current Earnings and Profits
The new regulations are expected to provide that:

• current E&P are first classified as section 959(c)(3) E&P, and then section 959(c)(3) E&P are reclassified as section 959(c)(1) PTEP or section 959(c)(2) PTEP, as appropriate, in full, which may result in creating or increasing a deficit in section 959(c)(3) E&P; and
• if a foreign corporation has a current-year deficit in E&P, that deficit will solely reduce the foreign corporation’s section 959(c)(3) E&P without affecting the amount of its section 959(c)(1) PTEP or section 959(c)(2) PTEP.

Application
The new regulations are expected to apply to tax years of U.S. shareholders and successors in interest ending after December 14, 2018, and to tax years of foreign corporations ending with or within the U.S. shareholders’ tax years. Before the regulations are issued, a shareholder can rely on the rules provided in the announcement notice if the shareholder and each related shareholder apply the rules consistently regarding the PTEP of all foreign corporations in which they own stock for all tax years beginning with the shareholder’s or related shareholder’s tax year that includes the tax year end of any such foreign corporation to which Code Sec. 965 applies.

Insurers, self-insuring employers, other coverage providers, and applicable large employers now have until March 4, 2019, to provide individuals with Forms 1095-B, Health Coverage, or Forms 1095-C, Employer-Provided Health Insurance Offer and Coverage. This is a 30-day extension from the original due date of January 31, 2019. The due dates for employers and insurers to file 2018 information returns with the IRS are not extended. They are still due on February 28, 2019, for paper filers, and April 1, 2019, for electronic filers.

Employers and providers must furnish Forms 1095-B and 1096-C to employees or covered individuals regarding the health care coverage offered to them. The forms may help recipients determine whether they may claim the premium tax credit on their income tax returns. However, taxpayers do not have to file these forms with their returns; thus, they may prepare and file their returns before they receive their Forms 1095-B or 1095-C. This blanket extension of the filing deadline means that the IRS will not respond to any requests for 30-day extensions that employers and providers have already filed.

Penalty Relief
The IRS also extended transition relief from late-filing penalties for reporting entities that can show they made good faith efforts to comply with reporting requirements for both individual statements and information returns that have missing or inaccurate taxpayer identification numbers and dates of birth, as well as other required information. In determining good faith, the IRS will take into account whether an employer or other coverage provider made reasonable efforts to prepare for reporting and providing the required information. Employers and providers that cannot file timely forms should still file the overdue forms as soon as possible, because the IRS will take the late forms into account in determining whether to abate the late-filing penalties.

The IRS has issued a memo that sets forth guidelines for determining various factual scenarios such as whether a taxpayer may qualify as a designer of energy efficient commercial building property under Code Sec. 179D(d)(4). The Service also analyzed if designers could qualify for the maximum Code Sec. 179D deduction of $1.80 per square foot, if they only designed one system of energy efficient commercial building property in a government-owned building.

The Service clarified that a taxpayer could qualify as a designer of these particular properties under Code Sec. 179D(d)(4) if the taxpayer created technical specifications for construction and contract documents for the design. Further, the Service stipulated that the $1.80 deduction could be allocated to the primary designer or spread amongst several designers of the property at the building owner’s discretion. However, the owner would need to qualify for the $1.80 deduction for the installation of the property.

IRS Advice Memorandum AM 2018-005

Massachusetts updated a directive on:

• the sales and use tax exemption for purchases by federal employees; and
• the room occupancy excise tax exemption for room rentals by federal employees.

Sales Tax Exemption

Sales to federal employees, including meals and travel, are exempt from sales tax if the employee pays with:

• a government check; or
• a government bankcard associated with a centrally billed account.

The sales tax exemption applies to government bankcards that state on the front of the card:

• “U.S. Government Tax Exempt" and “Purchase";
• “Fleet";
• “Travel" or “U.S. Government CBA Tax Exempt" and “Tax Advantage"; and
• “U.S. Government Tax Exempt" and “Integrated".

Sales are not exempt if:

• payment is not made directly to the U.S. government; or
• the employee pays with a government bankcard associated with an individually billed account.

These sales are not exempt even if the government reimburses the employee.

Bankcard Sales Tax Exemption Procedures

Federal employees who use government bankcards must provide a personal ID at the time of purchase. If the credit card system authorizes the sale, the vendor should charge no tax. The vendor’s sales receipt should include the words “United States Government Tax Exempt." The vendor must keep the receipt for audit and verification purposes.

Room Occupancy Tax Exemption

Massachusetts exempts stays at hotels, motels, or other public lodging from excise tax if:

• the employee is acting in his or her official government duties; or
• the employee is working for the U.S. military and traveling on military orders that include the date of room occupancy.

The exemption applies even if the government later reimburses the employee.

Room Occupancy Tax Exemption Procedures

A federal employee who pays a room bill with cash or non-government bankcard must provide the lodging operator:

• a government ID or other proof of federal employment; and
• a signed affidavit, letter or other proof on official stationery that the employee is traveling at government direction.

Military employees must provide:

• a military ID;
• a copy of the actual military orders; and
• a signed affidavit, letter, or other proof on official stationery that the employee is traveling under military orders during the period of occupancy.

Evidence of traveling at government or military direction can include email if it meets certain requirements.

The lodging operator must keep copies of the substantiating documents. Directive 18-1, Massachusetts Department of Revenue, December 17, 2018