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President Biden, on August 16, 2022, signed the Inflation Reduction Act ( P.L. 117-169) into law following its passage along party lines in both chambers of Congress.

The law is a slimmed down version of the Build Back Better Act that passed the House in 2021 but failed to even come up for a vote in the Senate due to opposition primarily from Sen. Joe Manchin (D-W.V.). The Inflation Reduction Act did manage to keep some of the failed Build Back Better Act’s provisions in terms of generating revenues from corporations and wealthy taxpayers, as well as meeting some of the White House’s goals in the energy and health care sectors.

The law includes a one percent excise tax on stock repurchases, which goes into effect beginning in 2023, as well as a new corporate alternative minimum tax, although that does not apply to companies owned by private equity funds or certain manufacturing.

On the individual side, the IRS received a boost in funding of $80 billion across 10 years, part of which will be used to hire new agents who will help to the agency close the tax gap and get the wealthiest individuals to pay their fair share of taxes. Department of the Treasury Secretary Janet Yellen has directed the Internal Revenue Service to not use any of the new funding to increase the share of small businesses or households making $400,000 or less that are exposed to audit.

To help meet the Biden Administration’s environmental goals, the law includes tax credits for electric vehicle purchases, as well as new tax credits and extensions on expiring tax credits to produce electricity from renewable sources; making homes more energy efficient; and other activities aimed at reducing the carbon output of the nation.

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President Biden signed the CHIPS and Science Act into law after it received bipartisan support in both the House of Representatives and the Senate.

The law ( H.R. 4346) "will boost American semiconductor research, development, and production, ensuring U.S. leadership in the technology that forms the foundation of everything from automobiles to household appliances to defense systems," the White House said in a fact sheet released August 9, 2022, the day of the signing.

To help with that, the bill contains a 25 percent investment tax credit for the manufacture of semiconductors as well and the manufacture of the tools to do so in addition to the grants that it provides the semiconductor industry.

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Department of the Treasury Secretary Janet Yellen is seeking a detailed plan from the Internal Revenue Service on how it plans to spend to the $80 billion in additional funds that the agency received as part of the Inflation Reduction Act that was signed by President Biden on August 16, 2022.

"I would like the IRS to work closely with the Deputy Secretary to identify specific operational initiatives and associated timelines that will improve taxpayer services, modernize technology, and increase equity in our system of tax administration by pursuing tax evasion by those at the top who today do not pay their tax bill," Secretary Yellen said in an August 17, 2022, memorandum to IRS Commissioner Charles Rettig.

In the memo, she directed the IRS to deliver an operational plan within six months, which "should include details on how resources will be spent over the ten-year horizon on technology, service equipment, and personnel. This operational plan is key to ensuring the public and Congress are able to hold the agency accountable as it pursues needed improvements."

Yellen added that she is "prepared to approve the near-term use of funds to improve services for next filing season, but we should treat this plan as a prerequisite for expending these resources more broadly, as I think there is value in thinking carefully over the course of the next few months how work should be prioritized and sequenced to achieve our goals."

Replacing Those Who Will Be Retiring

Yellen’s memo comes in the wake of GOP messaging that states the IRS is looking to hire 87,000 new agents that will be coming after the lower and middle class individuals.

Yellen reiterated in her memo that new funds from the Inflation Reduction Act "will not result in households earning $400,000 per year or less or small businesses seeing an increase in the chances they are audited relative to historic levels. Instead, they will allow the IRS to work to end the two-tiered system, where most Americans pay what they owe, but those at the top of the distribution often do not."

Much of the new hiring will go to simply maintaining employment levels as the funds will help "to replace the attrition that is on the horizon from the expected retirement of at least 50,000 employees over the next five years," the memo states. At this time, the official was not able to provide a breakdown in the functions of the people expected to retire, but the official emphasized that these are simply not new employees that would be added to the agency.

A Treasury official noted that revenue agents will not be the main focus of the hiring, but rather the majority will be individuals who will help improve customer service through IT upgrades and serving as customer service representatives. The IRS will also seek out auditors with specialized experience who can enforce the tax laws against high income individuals and corporations who avoid paying their tax bill.

The official noted that the number of IRS auditors that can handle the complex returns of high income individuals and corporations is roughly the same number today as the agency had during World War II, which allows the IRS to exam about 7,500 returns of the nearly 4.5 million it receives in this category.

The Criminal Investigations unit is not expected to see a spike in its number of employed. The official points out that the CI unit accounts for less than three percent of the total IRS workforce (less than 2,000 employees).

Closing The Tax Gap

The aim of the hiring of specialized auditors and agents that target high earners is to close the tax gap. The official noted that with the additional resources from the Inflation Reduction Act, the IRS could collect an additional $400 billion over the next 10 years, although others, including former IRS Commissioner Charles Rossotti puts the collection amount at more than $1 trillion during the additional funding time period, according to testimony he provided to the Senate Finance Committee’s Subcommittee on Taxation and IRS Oversight during a May 11, 2021 hearing.

The Treasury official said the IRS is unable to collect 15 percent of the taxes that are owed, and over the next ten years, the tax gap could reach as high as $7.5 trillion.

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National Taxpayer Advocate Erin Collins has taken an "unusual step" to appeal an Internal Revenue Service Deputy Commissioners’ decision directly to Commissioner Charles Rettig for reconsideration regarding the use of scanning technology for paper tax returns.

In March, Collins issued a Taxpayer Advocate Directive calling on the agency to work with tax software companies to implement a 2-D barcode on all returns prepared using the software. The barcodes would be printed on the paper returns and, when scanned, would transfer all the information from a paper-filed return without the need for manual entry, which is currently required for all paper returns.

For handwritten returns or returns where the barcode was not readable, the directive called for the agency to use optical scanning technology to automate the processing of those returns.

"If the IRS had implemented scanning technology, it is unlikely the current processing backlog would exist," Collins said in a March 29, 2022, letter outlining the directive.

Collins noted in an August 4 blog post that the IRS Deputy Commissioner for Services and Enforcement Douglas O’Donnell and Deputy Commissioner for Operations Support Jeffrey Tribiano would not be following the directive.

In a July 18, 2022, memorandum for Collins, the deputy commissioners said the agency was exploring various barcoding technologies, but it would not follow the directive related to the scanning of handwritten forms or forms where the barcode could not be read.

Collins stated in the blog that "due to the magnitude of this issue and the unprecedented backlog of paper returns, I took the unusual step of appealing the Deputy Commissioners’ decision to the Commissioner for reconsideration."

In an August 2, 2022, memorandum to Commissioner Rettig, Collins noted that deputy commissioners’ response "declined to make a commitment to implement scanning technology to machine read v-coded returns, and it expressly rejected implementing scanning technology to machine read handwritten returns." She again called for the implementation of the use of some form of barcoding technology by the start of the 2023 filing season and the use of technology to machine read handwritten returns by the start of the 2023 filing season or, if that is not feasible, by the start of the 2024 filing season.

To frame the need, Collins noted in her blog post that the IRS "will have to process an average of about 525,000 paper-filed Forms 1040 per week during the second half of 2022 to eliminate the backlog" that came about as a result of the COVID-19 pandemic. "As of July 15, however, it had processed a weekly average of paper-filed Forms 1040 over the prior four weeks of just 295,000."

She added: "While we all hope the IRS can work through the backlog this year, I often say that hope is not a business plan."

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The IRS and the Security Summit partners have warned tax professionals to beware of evolving identity theft scams perpetrated through phishing emails and SMS-text that are designed to trick practitioners into opening embedded links or attachments that infect their computer systems with the potential to steal personal and client information such as passwords, bank account numbers, credit card numbers, or social security numbers.

The IRS and the Security Summit partners have warned tax professionals to beware of evolving identity theft scams perpetrated through phishing emails and SMS-text that are designed to trick practitioners into opening embedded links or attachments that infect their computer systems with the potential to steal personal and client information such as passwords, bank account numbers, credit card numbers, or social security numbers. The IRS has urged tax professionals to work on strengthening their systems and protect client data by avoiding such scams and take necessary measures to protect themselves, such as:

multi-factor authentication, wherein tax professionals using cloud-based platforms are urged to use multi-factor options like phone, text, or tokens. This could avoid potential vulnerabilities with authentication done just through email, which may be accessible to identity thieves;
automatic updating of anti-virus software to prevent scams that target software vulnerabilities; and
drive encryption and regular backing up of files to help stop theft and ransomware attacks.

The IRS has also identified various kinds of scams that tax professionals should keep an eye out for, such as:

spear phishing in which scammers take time to identify their victim and craft a more enticing phishing email known as a lure;
identity thieves who pose as potential clients and exchange several emails with tax professionals before following up with an attachment that they claimed was their tax information. Once the tax professional click on the embedded URL and/or opened the attachment, malware is secretly downloaded onto their computers, and gives thieves access to passwords to client accounts or remote access to the computers themselves. After the thieves take over the computer systems, they identify pending tax returns, complete them, and e-file them, changing only the bank account information to steal the refund; and
ransomware attacks that make an unsuspecting tax professional open links or attachments, triggering malware to attack their computer system to encrypt files and the thieves hold the data for ransom.

The IRS has also reminded tax professionals that securing their network to protect taxpayer data is their responsibility as a tax preparer.

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The IRS has extended the deadlines for amending a retirement plan or individual retirement arrangement (IRA) to reflect certain provisions of Division O of the Further Consolidated Appropriations Act, 2020, P. L. 116-94, known as the Setting Every Community Up for Retirement Enhancement Act of 2019 (SECURE Act), and Section 104 of Division M of the Further Consolidated Appropriations Act, 2020, known as the Bipartisan American Miners Act of 2019 (Miners Act). In addition, the IRS has extended the deadline for amending a retirement plan to reflect Section 2203 of the Coronavirus Aid, Relief, and Economic Security Act (CARES Act), P. L. 116-136.The extended amendment deadline for (1) a qualified retirement plan or Code Sec. 403(b) plan (including an applicable collectively bargained plan) that is not a governmental plan or (2) an IRA is December 31, 2025.

SECURE Act and Miners Act

The deadlines for amending a retirement plan or IRA to reflect the provisions of the SECURE Act or the Miners Act, as set forth in Notice 2020-68 and Notice 2020-86, are extended as follows:

For a qualified plan (including an applicable collectively bargained plan) that is not a governmental plan within the meaning of Code Sec. 414(d), the deadline to amend a plan for provisions of the SECURE Act, or section 104 of the Miners Act is December 31, 2025.
The plan amendment deadline for a qualified governmental plan, within the meaning of Code Sec. 414(d), is 90 days after the close of the third regular legislative session of the legislative body with the authority to amend the plan that begins after December 31, 2023.
The deadline for a Code Sec. 403(b) plan (including an applicable collectively bargained plan) that is not maintained by a public school, as described in Code Sec. 403(b)(1)(A)(ii), to amend a plan for provisions of the SECURE Act or the regulations thereunder is December 31, 2025.
The plan amendment deadline for a Code Sec. 403(b) plan that is maintained by a public school, as described in Code Sec. 403(b)(1)(A)(ii), is 90 days after the close of the third regular legislative session of the legislative body with the authority to amend the plan that begins after December 31, 2023.
The deadline to amend a governmental plan under Code Sec. 457(b) for provisions of the SECURE Act or section 104 of the Miners Act is the later of (i) 90 days after the close of the third regular legislative session of the legislative body with the authority to amend the plan that begins after December 31, 2023, or (ii) if applicable, the first day of the first plan year beginning more than 180 days after the date of notification by the Secretary that the plan was administered in a manner that is inconsistent with the requirements of Code Sec. 457(b).
The deadline to amend the trust governing an IRA that is an individual retirement account or the contract issued by an insurance company with respect to an IRA that is an individual retirement annuity for provisions of the SECURE Act is December 31, 2025, or such later date as the Secretary prescribes in guidance.

Amendments to a retirement plan to reflect a provision of the SECURE Act that are made on or before the dates as extended will not cause the retirement plan to fail to satisfy the anti-cutback requirements of Code Sec. 411(d)(6) or section 204(g) of ERISA by reason of such amendments.

CARES Act

The deadlines for amending a retirement plan to reflect the provisions of section 2203 of the CARES Act are extended as follows:

the deadline for amending a retirement plan that is not a governmental plan is December 31, 2025; and
the deadline for amending a retirement plan that is a governmental plan is 90 days after the close of the third regular legislative session of the legislative body with the authority to amend the plan that begins after December 31, 2023, or, if later, with respect to a governmental plan under Code Sec. 457(b), the first day of the first plan year beginning more than 180 days after the date of notification by the Secretary that the plan was administered in a manner that is inconsistent with the requirements of Code Sec. 457(b).

Notice 2020-68, 2020-38 I.R.B. 567, and Notice 2020-86, 2020-53 I.R.B. 1786 are modified.

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The Treasury and IRS have issued final regulations eliminating the signature requirement for making a Code Sec. 754 election (section 754 election). The regulations finalize 2017 proposed regulations ( REG-116256-17), on which taxpayers were entitled to rely.

Election Signature Requirement

A partnership can make a section 754 election to adjust the basis of partnership property in the event the inside and outside bases are unequal. If the partnership files a section 754 election and there is a distribution of property, the basis of partnership property will be adjusted in the manner provided in Code Sec. 734. If the partnership files a section 754 election and there is a transfer of a partnership interest, the basis of partnership property will be adjusted in the manner provided in Code Sec. 743. The section 754 election applies to all distributions of property by the partnership and to all transfers of interests in the partnership during the tax year for which the election was filed and all subsequent tax years.

The regulations under Code Sec. 754 require a section 754 election to be made in a written statement (section 754 election statement) filed with the partnership return for the tax year during which the distribution or transfer occurs. The requirement of a written statement applies to returns filed either electronically or on paper. For the election to be valid, the return must be filed by the due date for the return, including extensions.

The amended regulation, which is identical to the 2017 proposed amendment, removes a requirement that the section 754 election statement be signed by one of the partners. Under the regulation before its amendment, a partnership filing an unsigned section 754 election statement with its partnership return failed to make a valid section 754 election. An unsigned statement is valid under the amended regulation if it meets the remaining requirements.

The regulation, as amended, retains two requirements. It continues to provide that a taxpayer making a section 754 election must file a statement with its return that:

sets forth the name and address of the partnership making the section 754 election, and
contains a declaration that the partnership elects under section 754 to apply the provisions of Code Sec. 734(b) and Code Sec. 743(b).

Effective and Applicability Dates

The amendment eliminating the signature requirement is effective August 5, 2022, and applies to tax years ending on or after the date of publication of the final regulation in the Federal Register. Taxpayers may, however, apply the amendment to tax years ending before that date.

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The American Institute of CPAs highlighted several challenges that tax practitioners are experiencing with the use of the Internal Revenue Service’s Practitioner Priority Service (PPS) line.

In an August 9, 2022, letter to the agency, the AICPA called the “plummeting” PPS line level of service "an area of continuing concern."

"Anecdotally, we are hearing from tax practitioners everyday regarding their significant PPS line challenges and the impact those challenges have on their interactions with IRS on behalf of taxpayers," the letter states.

The letter highlights issues with the handling of power of attorney (POA), transcripts, and account management versus automated collections, as well as providing some general recommendations.

In the area of power of attorney, the AICPA offered several recommendations, including having customer service representatives provide a fax number at the start of the call if a practitioner states that the POA likely is not on file and where "a delegated POA is presented and appears in order, do not require the first POA be posted to the Central Authorization File (CAF) before recognizing the delegated POA."

The AICPA also noted that customer service representatives "are often inconsistent on what is required to be completed on a POA for it to be valid," and called for better training of the representatives. The organization noted that the agency "should allow use of POAs that are signed by the taxpayer and the representative calling in—even if it is not yet signed by other listed representatives. While the Internal Revenue Manual (IRM) provides that IRS staff are to accept the POAs, the IRM is not universally followed in this regard."

In the area of transcripts, the AICPA asked the IRS to restore customer service representatives’ ability to provide internal screen-print type transactions as well as the IRS message line that existed solely to provide internal and other types of transcripts to practitioners as they waited.

"PPS CSRs have indicated lately that they will not provide internal screen-print type transcripts by fax or secure mailbox; they are only willing to use U.S. mail, which takes 4 to 6 weeks for receipt," the AICPA stated, adding that the delay makes it more difficult to resolve issues in a timely manner.

The AICPA also called for the elimination of the so-called "law line."

"Practitioners should not need to consult with IRS staff on interpretations of law—the practitioners should be competent in those areas. Moreover, the breadth of knowledge of the ‘law line’ staff is often not high or incorrect information is given," the letter states

The organization suggested the law line staff be utilized in other areas of the PPS line to help alleviate long wait times.

Another suggestion forwarded by the AICPA was that the IRS restore the ability of accounts management (AM) staff to grant cycle holds for accounts not in collection.

"Recently, AM has been unwilling to grant cycle holds, referring such requests to ACS [automated collection system]," the letter states. "Restoring authority to grant cycle holds with AM before an account goes to Collection will return more speed and efficiency in resolving issues, will eliminate needless Collection Due Process cases, and will keep more cases out of the Taxpayer Advocate Service as well."

That being said, the AICPA suggested that automated collection system be empowered to resolve more account issues, such as penalty abatement and other account-related issues and authorize PPS CSRs to grant 180-day holds where correspondence was sent in.

Other general recommendations included staffing the PPS line with "highly trained, highly empowered personnel;" discontinuing the practice of asking practitioners for their social security number and date of birth; enhancing the new automatic return call system; providing more supervisor availability; and enabling PPS CSRs to handle international issues.

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The American Institute of CPAs offered up suggestions to Congress, focused on the trust and estate proposals found within the fiscal year 2023 revenue proposal, as the legislative branch considers the White House Budget request.

In a July 28, 2022, letter sent to Democrat and Republican leadership on both the Senate Finance Committee and the House Ways and Means Committee, AICPA outlined a number of proposals across four areas, including strengthening taxation of high-income taxpayers; modifying estate and gift taxation; and improving tax administration and compliance.

The White House budget revenue proposals were published in March 2022 in the so-called "Green Book."

With regards to strengthening taxation of high-income taxpayers, AICPA noted that it is "currently concerned that some of the provisions in the 2023 Treasury Green Book … regarding valuation rules for certain transfers of assets are inconsistent with well-established valuation principles and could result in valuations that do not reflect the true economic value of transferred assets. These inconsistencies could, in turn, unjustly negatively affect taxpayers."

Specifically, it raised concerns with treating transfers of appreciated property by gift or on death "as realization events," which could alter how the property is valuated and could put taxpayers at a disadvantage for not having complete access to different valuations.

In the tax administration section, AICPA expressed concern that proposed reporting requirements, the organization expressed concern that reporting requirements for tax year would apply to each trust whose estimated total value on the last day of the tax year exceeds $300,000 or whose gross income for the tax year exceeds $10,000, along with what may be overly burdensome informational reporting requirements.

"These low thresholds would capture a substantial number of trusts – many of which are likely of lower risk to the IRS due to the lowers dollars at stake," the letter states.

AICPA also called the taxing of estates the same as trusts for many of the provisions in the Green Book "problematic. The AICPA recommends that estates be treated similar to married filing separately for all estate provisions in the Green Book, as well as existing law (such as income tax and net investment income tax). This recommendation would restore estates to their federal tax position from 1954-1986."

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The American Institute of CPAs (AICPA) has urged the IRS and Treasury in an August 12 letter to issue guidance on President Trump’s payroll tax deferral memorandum. The executive action signed by the president on August 8 instructs Treasury to defer the collection and payment of payroll taxes from September 1 through years-end for eligible employees.

The presidential memorandum to defer payroll taxes has "caused confusion and concern among accountants and businesses," according to the AICPA. Thus, in its letter released on August 13, the AICPA asks IRS Commissioner Charles "Chuck" Rettig and Assistant Treasury Secretary David Kautter to issue guidance on a number of related issues, including the following items:

Guidance stating that the deferral is voluntary and that an "eligible employee" is responsible for making an affirmative election to defer the payroll taxes;
Guidance stating that an "eligible employee" is an employee whose wages are less than $4,000 per bi-weekly pay period;
Guidance stating that the $4,000 limit should apply separately to each employer of an employee; and
Guidance stating a payment due date(s) for the deferred taxes and a mechanism for employees to pay the deferred taxes.

Payroll Tax Forgiveness

Notably, Treasury Secretary Steven Mnuchin indicated earlier this week that participation in the deferral of payroll taxes is not mandatory. "We cannot force people to participate," Mnuchin said in a televised interview. "But I think many small businesses will do this and pass on the benefits." Additionally, Mnuchin alluded that Trump intends to make the deferral a cut if reelected, essentially forgiving the deferred taxes.

To that end, White House economic advisor Larry Kudlow attempted to clarify Trump’s position that the payroll tax deferral should be forgiven rather than delayed. And when Trump talks about "terminating the payroll tax", he is only referring to those taxes specified within the presidential memorandum, not the entire payroll tax as a whole, according to Kudlow.

"I just want to be clear that the president is saying that he will provide forgiveness; he will terminate the deferral on a forgiveness basis," Kudlow told reporters at the White House on August 13. "That is what he is saying just to be clear…there was some confusion about that."

Additionally, Kudlow told reporters that the payroll tax deferral would apply to the self-employed. Although the applicable presidential memorandum is not currently written as such, Kudlow added that the administration "will make a technical change to it."

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The IRS has released final regulations that address the interaction of the $10,000/$5,000 cap on the state and local tax (SALT) deduction and charitable contributions. The regulations include:

a safe harbor for individuals who have any portion of a charitable deduction disallowed due to the receipt of SALT benefits;
a safe harbor for business entities to deduct certain payments made to a charitable organization in exchange for SALT benefits; and
application of the quid pro quo principle under Code Sec. 170 to benefits received or expected to be received by the donor from a third party.

The IRS has released final regulations that address the interaction of the $10,000/$5,000 cap on the state and local tax (SALT) deduction and charitable contributions. The regulations include:

a safe harbor for individuals who have any portion of a charitable deduction disallowed due to the receipt of SALT benefits;
a safe harbor for business entities to deduct certain payments made to a charitable organization in exchange for SALT benefits; and
application of the quid pro quo principle under Code Sec. 170 to benefits received or expected to be received by the donor from a third party.

The final rules generally adopt the proposed regulations issued in December 2019 ( NPRM REG-107431-19) with minor clarifications.

SALT Limit

An individual’s itemized deduction of SALT taxes is limited to $10,000 ($5,000 if married filing separately) for tax years beginning after 2017. Some states and local governments adopted laws that allowed individuals to receive a state tax credit for contributions to certain charitable funds. These laws are aimed at getting around the SALT deduction limit by creating a charitable deduction for federal income tax purposes.

Under previously issued regulations, the receipt of a SALT credit for a charitable contribution is the receipt of a return benefit (quid pro quo benefit). Thus, the taxpayer must reduce any contribution deduction by the amount of any SALT credit received or expected to receive in return. A de minimis exception is available if the SALT credit does not exceed 15 percent of the taxpayer’s charitable payment.

A taxpayer is not required to reduce the charitable contribution deduction because of the receipt of SALT deductions. However, the taxpayer must reduce the charitable deduction if it receives or expects to receive SALT deductions in excess of the taxpayer’s payment or the fair market value of property transferred.

Payments by Individuals

The final regulations adopt the safe harbor for individuals whose have a portion of a charitable deduction disallowed due to the receipt of a SALT credit. Any disallowed portion of the charitable contribution deduction may be treated as the payment of SALT taxes for the purposes of deducting taxes under Code Sec. 164. The safe harbor is allowed in the tax year the charitable payment is made, but only to the extent that the SALT credit is applied as provided under state or local law to offset the individual’s SALT liability for the current or preceding tax year. Any unused credit may be carried forward as provided under state and local law.

The final regulations are not intended to permit a taxpayer to avoid the SALT deduction cap. Thus, any payment treated as a state or local tax under Code Sec. 164 is subject to the limit. Also, a taxpayer is not permitted to deduct the same under more than one rule, so a taxpayer who relies on this safe harbor to deduction payments as SALT taxes may also not deduct the same payment under any other Code provision.

Payments by Business Entities

The final regulations adopt the safe harbor that business entities may continue to deduct charitable contributions in exchange a SALT credit. A business entity may deduct the payments as an ordinary and necessary business expenses under Code Sec. 162 if made for a business purpose.

If a C corporation or specified passthrough entity makes the charitable payment in exchange for a SALT credit, it may deduct the payment as a business expense to the extent of any SALT credit received or expected to be received. In addition, if the charitable payment bears a direct relationship to the taxpayer’s business, then it may be deducted as a business expense rather than a charitable contribution regardless of whether the taxpayer receives or expects to receive a SALT credit.

The safe harbor for C corporations and specified passthrough entities applies only to payments of cash and cash equivalents. The safe harbor for specified passthrough entities does not apply if the credit received or expected to be received reduces a state or local income tax.

Benefits from Third Party

If a taxpayer receives any goods, services, or other benefits from a charitable organization in consideration for a contribution, then the charitable deduction must be reduced by the value of those benefits. If the contribution exceeds the fair market value of the benefits received, then only the excess is a deductible as a charitable contribution.

The final regulations continue to provide that this quid pro quo principal applies regardless of whether the party providing the goods, services, or other benefits is the charitable organization or not. A taxpayer will be treated as receiving goods and services in consideration for the taxpayer’s charitable contribution if, at the time the taxpayer makes the payment or transfer, the taxpayer receives or expects to receive goods or services in return. The final rules clarify that the quid pro quo principle applies regardless of whether the party providing the quid pro quo is the donee or a third party.

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The IRS has provided guidance on the special rules relating to funding of single-employer defined benefit pension plans, and related benefit limitations, under Act Sec. 3608 of the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) (P.L. 116-136). The guidance clarifies application of the extended contribution deadline, and the optional use of the prior year’s adjusted funding target attainment percentage (AFTAP), with examples.

Affected Funding Rules

A single-employer defined benefit plan is subject to minimum required contribution rules under Code Sec. 430. The minimum required contribution for a plan year generally depends on a comparison of the value of plan assets (reduced by any credit balances) with the plan's funding target. If the value of plan assets is less than the funding target of the plan for the year, the minimum required contribution for that plan year is the sum of:

the target normal cost for the plan year;
the shortfall amortization installments for the plan year; and
the waiver amortization installments for the plan year.

The minimum required contribution for a plan year must be paid within 8-1/2 months after the close of the plan year ( Code Sec. 430(j)). Payments made on a date other than the valuation date for the plan year must be adjusted for interest accruing for the period from the valuation date to the payment date, at the effective interest rate for the plan for the year. Employers maintaining plans that had a funding shortfall for the preceding plan year (i.e., the value of plan assets, reduced by credit balances, was less than the funding target for the preceding year) must make quarterly contributions to the plan. If the employer fails to pay the full amount of a required quarterly installment, interest is assessed at the plan's effective interest rate plus five percentage points.

Benefit limits apply to plans that have funded target attainment percentage for the preceding year below designated thresholds are deemed to be in "at-risk" status and are subject to increased target liability. The benefit limits on single-employer defined benefit plans are based on the plan’s AFTAP ( Code Sec. 436(b)). Generally, a plan's funding target attainment percentage is the ratio of the value of plan assets for the plan year (reduced by any funding standard carryover balance and prefunding balance) to the funding target for the plan year (determined without regard to the plan's at-risk status) ( Code Secs. 430(d)(2) and 436(j)(1)).

CARES Act Relief
Minimum required contributions to a single-employer retirement plan otherwise due in calendar year 2020 (including any quarterly contributions) are delayed until January 1, 2021. The amount of each such contribution is increased by any interest accruing for the period between the original due date (without regard to the delay) for the contribution and the payment date. A plan sponsor also may elect to treat the plan’s AFTAP for the last plan year ending before January 1, 2020, as the AFTAP for plan years that include calendar year 2020 (Act Sec. 3608 of P.L. 116-136.

Extended Deadline and Interest
The extended contribution due date of January 1, 2021, does not apply to a multiemployer plan, a CSEC plan, a fully-insured plan, or a money purchase pension plan. If the contribution deadline for a plan year is during 2020, a contribution in excess of the amount needed to satisfy the minimum required contribution for the plan year that is made by January 1, 2021, may be designated as a contribution for that plan year.

Any payment made after the original due date for the contribution and by the extended due date must be increased for the period between the original due date and the payment date at the effective interest rate for the plan year that includes the payment date. If the contribution is less than the amount that was due on the original due date for the minimum required contribution, as increased with interest pursuant to the CARES Act, then a portion of the minimum required contribution for that plan year would remain unpaid. The unpaid portion of the minimum required contribution, determined as of the valuation date and based on contributions made on or before January 1, 2021, with the contributions discounted for interest to the valuation date, would give rise to an unpaid minimum required contribution that would be subject to an excise tax. Furthermore, a contribution made after January 1, 2021, to satisfy that unpaid minimum required contribution must be adjusted for interest for the period between the date that the contribution is made and the valuation date at the effective interest rate for the plan year for which the contribution is made (with additional interest as required to reflect any late quarterly installments for the plan year).

The CARES Act specifies that to determine the amount of a quarterly installment due by the extended due date, the amount of that installment is increased from the installment’s original due date to the payment date at the effective interest rate for the plan year that includes the date the quarterly installment is paid. If a plan sponsor does not satisfy a quarterly installment originally due during 2020 by the extended due date, then the unpaid portion of that installment is subject to a higher interest rate for the period during which the installment (or a portion thereof) remains unpaid when determining the amount of the minimum required contribution that is satisfied by a contribution.

A contribution made after the original due date for a plan year but on or before the extended due date is taken into account as of a valuation date for a plan year after the plan year for which the contribution was made. For purposes of determining the value of plan assets, if an employer makes a contribution to the plan after the valuation date for the current plan year and the contribution is for an earlier plan year, then the present value of the contribution determined as of that valuation date is taken into account as an asset of the plan as of the valuation date, provided the contribution is made before a specified deadline. The specified deadline is the deadline for contributions for the plan year immediately preceding the current plan year. However, that deadline is extended by the CARES Act. Furthermore, the interest adjustment rules override the discounting rules that apply generally for this purpose. Note, however, that certification of the AFTAP for a plan year must not take into account contributions that are expected to be made after the certification date.

If the plan year is a plan year for which the extended due date for minimum required contributions applies, then the deadline for a plan sponsor’s election to increase a prefunding balance or to use a prefunding balance or a funding standard carryover balance to offset the minimum required contribution for that plan year is extended to January 1, 2021. However, the extended due date does not change the date by which a contribution must be made in order to be deducted for a tax year. A taxpayer is deemed to have made a payment on the last day of the preceding tax year if the payment is on account of that tax year and is made no later than the time prescribed by law for filing the return for that tax year (including extensions).

Guidance for AFTAP Election

A plan sponsor may elect to apply the AFTAP for the last plan year ending before January 1, 2020, for a plan year that includes any portion of calendar year 2020. For example, if a plan sponsor makes an election for a plan year that runs from July 1, 2019, to June 30, 2020, then the AFTAP that applies is the certified AFTAP from the plan year that ends on June 30, 2019. That plan sponsor may separately elect to use that same AFTAP for the plan year that begins on July 1, 2020.

The AFTAP election must be made using the procedures that apply for elections relating to funding balances. Thus, the plan sponsor must provide written notification of the election to the plan's actuary and the plan administrator. If a plan’s actuary has not certified the plan’s AFTAP for a plan year before the plan sponsor makes the election, then the plan sponsor’s election is treated as a certification of the AFTAP. Thus, beginning with the date of the election, the AFTAP for the last plan year ending on or before December 31, 2019, applies for the plan year for which the election is made, rather than any presumed AFTAP.

A plan’s actuary generally must certify the plan’s AFTAP for a plan year for which the plan sponsor makes the election. However, if the plan sponsor makes the election for a plan year that begins in 2019 and ends in 2020 and also makes an election for the next plan year, then the actuary is not required to certify the plan’s AFTAP for the plan year that begins in 2019. If the plan’s actuary has certified an AFTAP for a plan year, then the Schedule SB of Form 5500, Annual Return/Report of Employee Benefit Plan, for that plan year should reflect the certified AFTAP.

If a plan’s actuary certified the plan’s AFTAP for a plan year before the plan sponsor makes the election, then the plan sponsor’s election is treated as a subsequent determination of the AFTAP for that plan year. However, the plan sponsor’s election is eligible for deemed immaterial treatment, and the election is treated as the recertification on the part of the actuary that is otherwise required for deemed immaterial treatment. Thus, the AFTAP that applies pursuant to the plan sponsor’s election is applied on a prospective basis beginning with the election date.

If the AFTAP that applies is pursuant to a plan sponsor’s election, then the restriction on plan amendments and unpredictable contingent event benefits is applied, except that the AFTAP that applies pursuant to the election is substituted for the presumed AFTAP. Thus, for example, the AFTAP that applies pursuant to the plan sponsor’s election will be used to calculate a presumed adjusted funding target and an inclusive presumed AFTAP.

The AFTAP that applies pursuant to a plan sponsor’s election for a plan year generally will not apply for purposes of the presumptions used in a subsequent plan year. Instead, the actual AFTAP for the plan year that was certified by the plan’s actuary generally is used for purposes of applying the presumption rules the subsequent plan year.

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The IRS has reminded taxpayers that the Coronavirus Aid, Relief, and Economic Security (CARES) Act ( P.L. 116-136) can provide favorable tax treatment for withdrawals from retirement plans and Individual Retirement Accounts (IRAs). Under the CARES Act, individuals eligible for coronavirus-related relief may be able to withdraw up to $100,000 from IRAs or workplace retirement plans before December 31, 2020, if their plans allow. In addition to IRAs, this relief applies to 401(k) plans, 403(b) plans, profit-sharing plans and others.

Also, until September 22, 2020, individuals eligible to take coronavirus-related withdrawals may be able to borrow as much as $100,000 (up from $50,000) from a workplace retirement plan, if their plan allows. Loans are not available from an IRA. For eligible individuals, plan administrators can suspend, for up to one year, plan loan repayments due on or after March 27, 2020, and before January 1, 2021. A suspended loan is subject to interest during the suspension period, and the term of the loan may be extended to account for the suspension period.

To be eligible for COVID-19 relief, coronavirus-related withdrawals or loans can only be made to an individual if:

the individual is diagnosed with COVID-19 by a test approved by the Centers for Disease Control and Prevention (including a test authorized under the Federal Food, Drug, and Cosmetics Act);
the individual’s spouse or dependent is diagnosed with COVID-19 by such a test; or
the individual, their spouse, or a member of the individual’s household experiences adverse financial consequences from: (1) being quarantined, furloughed or laid off, having work hours reduced, being unable to work due to lack of childcare, having a reduction in pay (or self-employment income), or having a job offer rescinded or start date for a job delayed, due to COVID-19; or (2) closing or reducing hours of a business owned or operated by the individual, the individual’s spouse, or a member of the individual’s household, due to COVID-19.

Taxpayers can learn more about these provisions in IRS Notice 2020-50, I.R.B. 2020-28, 35. The IRS has also posted FAQs that provide additional information.

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The Treasury and IRS have issued final and proposed regulations under the global intangible low-taxed income (GILTI) and subpart F provisions for the treatment of high-taxed income. The final regulations provide guidance on determining the type of high-taxed income that is eligible for the exclusion (the "GILTI high-tax exclusion" or GILTI HTE).

Proposed regulations generally conform the rules for the subpart F high-tax exception to the rules for the GILTI high-tax exclusion. A single election is provided under Code Sec. 954(b)(4) for purposes of subpart F and tested income.

Under the Code Sec. 954(b)(4) high tax exception, income received by a controlled foreign corporation (CFC) is excluded under subpart F, if the income is subject to an effective rate of foreign tax that is greater than 90 percent of the maximum U.S. corporate tax rate.

Final Regulations on the GILTI HTE

The final regulations:

provide that the GILTI HTE applies, on an elective basis, to high-taxed income of a CFC that is excluded from foreign base company (FBCI) ( Code Sec. 954) or insurance income ( Code Sec. 953) under Code Sec. 954(b)(4), regardless if the income would otherwise be FBCI or insurance income;
provide that the effective foreign tax rate is determined on a tested unit basis;
provide rules to determine the net amount of income (i.e., tentative tested income) and the foreign taxes paid or accrued with respect to such net amount of income that are used to compute the effective rate of tax;
indicate how to make a GILTI HTE election; and
do not provide rules that account for the use of foreign tax NOL carryforwards.

An exception under Code Sec. 954(b)(4) for purposes of the GILTI HTE applies to any item of income that is subject to an effective rate of tax greater than the maximum U.S. corporate tax rate, which is 18.9 percent based on a 21 percent tax. Controlling domestic shareholders of CFCs can elect to apply the exception to items of income that would not otherwise be FBCI or insurance income. An item of gross income is subject to a high-rate of foreign tax, if after taking into account properly allocable expenses, the net item of income is subject to an effective rate of tax above the statutory threshold.

The high-tax exception is applied on the basis of the items of gross income of a tested unit of a CFC, rather than the CFC as a whole. All tested units of a CFC in the same country are generally grouped together to determine the effective foreign tax rate for the purpose of applying the high-tax exclusion. The approach minimizes the blending of tax rates within a CFC and is thought to provide a more accurate idea of the income subject to a high-rate of foreign tax.

The election to exclude high-taxed income from gross tested income is generally made or revoked for a one-year period.

Proposed Regulations Single Election

The proposed regulations provide for a single election under Code Sec. 954(b)(4) for purposes of both subpart F and GILTI, based on the final GILTI high-tax exclusion regulations.

Under the proposed regulations:

the election is made with respect to all members of a CFC group (rather than on a CFC-by-CFC basis);
the determination of whether income is high taxed is made on a tested unit-by-unit basis;
the determination of high tax income is simplified by grouping certain income that would otherwise qualify as subpart F income with income that would otherwise qualify as tested income for purposes of determining the effective foreign tax rate, and for purposes of the high-tax exception; and
the method for allocating and apportioning deductions to items of gross income is modified for purposes of the high-tax exception.

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