2019 Year-End Tax Guide

THE MARCUM 2019 YEAR-END TAX GUIDE | www.marcumllp.com

a. Whether payments treated as guaranteed payments meet the statutory and IRS definitions. In many cases, these payments are being mischaracterized. b. Other partnerships have amended their operating agreements to convert guaranteed payments to non- guaranteed payments. Note that any change to a partnership agreement for calendar year 2019 allocations must be done by March 15, 2020. Increased Penalty: The tax law generally provides for a substantial understatement of income tax where an underpayment of tax exceeds the greater of (a) 10% of tax o be shown on the return, or (b) $5,000. Under the TCJA, where a section 199A deduction is taken, the threshold is reduced to 5% of the tax to be shown on the return – even if the underpayment is due to a reason other than a section 199A deduction error. BUSINESS INTEREST LIMITATION Under new IRC section 163(j), every business, regardless of form, is subject to a disallowance of the deduction for net interest expenses (i.e., business interest expense in excess of business interest income) which exceeds 30% of adjusted taxable income. For years beginning before January 1, 2022, adjusted taxable income is business taxable income without considering the deductions for depreciation, amortization, or depletion. The law contains several exceptions: 1. A small business exception excludes from this limitation a business whose average gross receipts do not exceed $25 million. However, as with the accounting simplification rules discussed below, certain commonly controlled businesses will need to be aggregated to determine if this income requirement is satisfied. 2. Certain businesses can elect out of this interest limitation such as an electing real property trade or business or an electing farming business. The cost of this election is that the business is required to use the Alternate Depreciation System (ADS) instead of the normal cost recovery rules. ADS requires the use of longer lives and the use of a straight-line method. Of greater significance, those required to use ADS cannot take bonus depreciation on the acquired assets. 3. Certain floor plan interest is excluded from this rule. 4. Certain regulated public utilities and electric cooperatives are not subject to this rule.

There was a problem with IRS regulations used to determine whether businesses need to be aggregated for determining whether average gross receipts exceed $25 million. The intention was to use attributions that would provide for constructive ownership between family members, from entities to their owners, from owners to their entities, and to treat stock subject to an option to purchase as being owned by the option holder. However, the published regulations referred only to the option attribution rule. IRS republished the regulations including the full constructive ownership rules. However, the IRS also noted that it would not upset conclusions reached using the previous regulation for 2018 and 2019 filings. This may provide an opportunity for these two years for taxpayers to fall under the $25 million threshold. ACCOUNTING SIMPLIFICATION The TCJA contains a number of accounting method simplification rules which should be considered by all taxpayers who may be affected. n Cash Basis: v C corporations and partnerships with C corporation partners, and certain farming entities, will be permitted to use the cash basis where average gross receipts for the prior three years is $25 million or less. Previously, the gross receipts level was set at $5 million. v Businesses where sales are an income-producing factor are normally required to use the accrual basis with inventories. Prior IRS authority permitted those with average annual gross receipts of $1 million, or $10 million for certain taxpayers, to elect to use the cash basis of accounting. The TCJA increases the threshold to $25 million. n Uniform Cost Capitalization: Businesses, including manufacturers and other producers of property, are exempt from using the uniform cost capitalization rule if they have average gross receipts of $25 million or less. n Percentage-of-Completion: The law’s exception from the use of the percentage-of-completion method for certain long-term contracts to be completed within a two-year period applies to taxpayers with average gross receipts of $25 million or less. This exception permits the use of cash basis or even the completed contract method.

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