2019 Year-End Tax Guide

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

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“BLUE STATE” WORKAROUNDS State Lawsuit Several states have sued the federal government over the constitutionality of the SALT limitation. However, in State of New York, Connecticut, Maryland & New Jersey v Steven Mnuchin, Treasury Secretary, a New York Court granted the U.S. government’s motion to dismiss a lawsuit claiming harm resulting from the SALT limitation. While other lawsuits remain, it seems most likely that a Congressional fix in the law will be needed to overturn this rule. SALT Cap Workaround Several states developed a workaround to the federal $10,000 limitation on SALT deductions, whereby state residents can receive property or income tax credits as the result of making a contribution to a certain state or municipal charitable organization created for this purpose. In response, the IRS issued regulations requiring a reduction in the charitable deduction if the credit provided exceeds 15% of the amount donated. Under the rules, a credit equivalent to 15% or less of the contribution will not reduce the charitable deduction. An Internal Revenue Service-issued notice indicates that the regulations requiring a reduction of the contribution for the credit do not apply to contributions which would be fully deductible as a business expense, i.e., where the transfer to the charitable or municipal organization bears a relationship to the trade or business and there is a reasonable expectation of a financial reward commensurate with the transfer. Revenue Procedure 2019-12 establishes safe harbors for C corporations and “specified pass-through entities” making such contributions The portion of the donation equal to the credit can be deducted as a business expense (with the treatment of any excess amount being based on facts and circumstances). This is apparently based on the theory that the amount of the credit received is a reasonable expectation of a financial reward commensurate with that portion of the transfer. For a pass-through entity, the safe harbor rule applies only to the extent that the tax credit offsets taxes owed by the business itself (e.g., local property taxes, state excise taxes) other than income taxes. The Revenue Procedure states that if the tax credit applies to state or local taxes owed by individual owners, the safe harbor does not apply and is governed by the TCJA limits, as interpreted by the IRS in regulations.

Pass-Through Entity Tax Several states have created a Pass-Through Entity (PTE) tax which is deductible against the entity’s business income. IRS has not yet ruled on the federal deductibility of such a PTE tax. Each version of the PTE suffers from certain flaws. The Wisconsin and Rhode Island versions are elective. The Connecticut version, while mandatory, provides a credit for the tax paid, allocable to the PTE owners, who include their share of the entity income (net of the taxes taken as a deduction) in their personal incomes. ACA Health Coverage The TCJA repealed the Affordable Care Act (ACA) individual shared responsibility payment (the “individual mandate” penalty) for health coverage, effective as of 2019. In 2018, the law required minimal essential coverage health insurance for each month (unless the individual fell under certain exemptions). Failure to have coverage carried a potential penalty of $695 per adult and $347.50 per child, or 2.5% of Adjusted Gross Income, whichever was higher, up to a maximum penalty of $2,085.Beginning in 2019, required minimal essential coverage and the associated penalties are no longer in effect. However, the law did not eliminate the obligation of an Applicable Large Employer or “ALE” (those with 50 or more full-time or full-time equivalent employees) to provide affordable health coverage. For determining ALE status, related groups of employers must aggregate their employee counts.

The Revenue Procedure states that if the tax credit applies to state or local taxes owed by individual owners, the safe harbor does not apply and is governed by the TCJA limits, as interpreted by the IRS in regulations.

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