Document summaries for the week of Feb. 17, 2020
Tax document summaries for the week of Feb. 17–21, 2020, covering employee benefits, individuals, IRS procedure, and more.
Mary Kay rep owes self-employment tax on amounts received under deferred comp plan
The Tax Court held that payments received by a Mary Kay Cosmetics (Mary Kay) national sales director from a Mary Kay retirement program were subject to self-employment tax. The taxpayer was liable for the resulting tax deficiencies for not reporting the income as self-employment income. The court rejected the taxpayer’s argument that the payments she received under the Sec. 409A nonqualified deferred compensation arrangement were the result of her selling the goodwill of her trade or business to Mary Kay. Dunlap, T.C. Summ. 2020-10 (2/18/20).
IRS issues monthly corporate yield curve and segment rates
The IRS issued guidance on the corporate bond monthly yield curve, the corresponding spot segment rates used under Sec. 417(e)(3), and the 24-month average segment rates under Sec. 430(h)(2). In addition, the IRS provided guidance as to the interest rate on 30-year Treasury securities under Sec. 417(e)(3)(A)(ii)(II), as in effect for plan years beginning before 2008, and the 30-year Treasury weighted average rate under Sec. 431(c)(6)(E)(ii)(I), as reflected by the application of Sec. 430(h)(2)(C)(iv). Notice 2020-11 (2/20/20).
Taxpayer’s loan guarantees to related businesses are considered at risk
The Tax Court held that a taxpayer’s personal guarantee of a loan to a wholly owned business established that he had amounts at risk under Sec. 465. This entitled him to deduct losses from that business. The court further concluded that the taxpayer’s personal guarantee of another loan to a partnership, of which he was a 90% partner, increased his basis in the partnership and established that he had amounts at risk sufficient to allow him to deduct previously disallowed losses. Bordelon, T.C. Memo. 2020-26 (2/20/20).
Insurance agent not taxable on balances in deferred compensation plan
The Tax Court held that an insurance agent was not taxable on the year-end balances in his company’s deferred compensation plan. The court found that the IRS did not show that the deferred compensation plan failed to meet at least one of the requirements of Sec. 409A, and thus the IRS did not meet its burden of proof in the case. Keels, T.C. Memo. 2020-25 (2/19/20).
Foreign housing costs eligible for exclusion or deduction are issued for 2020
The IRS published the 2020 adjustments to the limitation on housing expenses for purposes of Sec. 911. The IRS noted that these adjustments are made on the basis of geographic differences in housing costs relative to housing costs in the United States, and, if the limitation is higher for tax year 2020 than the adjusted limitations on housing expenses provided in Notice 2019-24, qualified taxpayers may apply the adjusted limitations for tax year 2020 to their 2019 tax year. Notice 2020-13 (2/21/20).
IRS issues March applicable federal rates
The IRS issued a ruling that prescribes the applicable federal rates for March 2020. The ruling provides various prescribed rates under Sec. 1274 for federal income tax purposes including the applicable federal interest rates, the adjusted applicable federal interest rates, the adjusted federal long-term rate, and the adjusted federal long-term tax-exempt rate. Rev. Rul. 2020-6 (2/18/20).
IRS provides safe harbor for partnerships claiming the Sec. 45Q credit
The IRS issued a safe harbor for partnerships to make valid allocations of the carbon oxide sequestration credit under Sec. 45Q. The safe harbor is similar to those developed for partnerships receiving the wind energy production tax credit and the rehabilitation credit and simplifies the application of Sec. 45Q credit rules to partnerships able to claim the credit. Rev. Proc. 2020-12 (2/19/20).
Construction contractors can use hybrid method of accounting
The Office of Chief Counsel advised that construction contractors may compute taxable income using the cash receipts and disbursements method, except for purchases and sales, when the contractors are providing substantial services while also producing, purchasing, or selling merchandise as an income-producing factor in their businesses. The Chief Counsel Office noted that its Income Tax & Accounting section routinely grants requests by contractors to change their methods of accounting so that they use the hybrid method in Regs. Sec. 1.446-1(c)(1)(iv) — i.e., an accrual method to reflect income and expenses associated with inventoriable items and the cash receipts and disbursements method to reflect the income and expenses associated with services. CCA 202008007 (2/21/20).
IRS defines ‘beginning of construction’ for purposes of Sec. 45Q credit
The IRS has provided two methods for a taxpayer to establish that construction of a qualified facility or carbon capture equipment has begun for purposes of the carbon oxide sequestration credit under Sec. 45Q. The IRS noted that as a result of the modifications made by the Bipartisan Budget Act of 2015, P.L. 115-123, the credit under Sec. 45Q now applies to the sequestration of “qualified carbon oxide,” a broader term than the “qualified carbon dioxide” that was previously the subject of the credit. Sec. 45Q now provides that construction of a qualified facility that includes carbon capture equipment must begin before Jan. 1, 2024. Notice 2020-12 (2/19/19).
New procedures affect farmers who elected to have Sec. 263A not apply to certain plants
The IRS has issued a revenue procedure regarding the application of Sec. 263A to a taxpayer in a farming business. The revenue procedure provides the exclusive procedures for a taxpayer that qualifies for the Sec. 263A(i) small business taxpayer exemption to revoke its prior election under Sec. 263A(d)(3) and apply the exemption under Sec. 263A(i) in the same tax year. Rev. Proc. 2020-13 (2/21/20).
Business meal deductions after the TCJA
This article discusses the history of the deduction of business meal expenses and the new rules under the TCJA and the regulations and provides a framework for documenting and substantiating the deduction.
Quirks spurred by COVID-19 tax relief
This article discusses some procedural and administrative quirks that have emerged with the new tax legislative, regulatory, and procedural guidance related to COVID-19.