See “A Planning Introduction to the 2017 Tax Act – The Overview” which briefly introduces the new tax law enacted in December. We indicated in that introduction that the new legislation tends to make tax planning more and more mathematical. The remark’s emphasis on alternatives and myriad tax rules is particularly true of planning charitable donations.
We’re going to have some emphasis on the new Section 199A that can give owners a 20% of business income deduction. This new provision affects many taxpayers and significantly affects planning for charitable donations whenever the person is active in business, or even a passive investor in an active business. We’ve given a more detailed look at those rules in “A Planning Introduction to the 2017 Tax Act – The 20% of Business Income Deduction.”
See generally, Tax Cuts and Jobs Act, Conference Report to Accompany H.R. 1, 115th Cong., 1st Sess., House Report 115-466, December 15, 2017, which includes the text of the Act, the legislative histories of the House, Senate and Conference. ((Hereinafter, the Conf. Rep. For pagination cites see PDF version: https://www.congress.gov/congressional-report/115th-congress/house-report/466/1?overview=closed.))
THE NEW LANDSCAPE FOR PLANNING DONATIONS
We’re used to thinking: “Charitable donations will save me taxes if I itemize.” That’s still true assuming there is taxable income and the donation translates into an incremental itemized deduction over and above the standard deduction.
However, the math has become more complicated – the savings may be more or less than the incremental tax rate times the additional deduction. In connection with the new 80% of business income deduction, we will demonstrate how an additional charitable deduction or other deduction can reduce the new 20% of business income deduction because of the “taxable income if less” component of Section 199A. There are also limits within those computations which are lifted at lower levels of taxable income, and we can also see tangential benefits when unrelated deductions reduce taxable income and the result brings in levels of income where the limitations are lifted or reduced.
After much discussion of deduction reduction, the “old” charitable deduction rules are still pretty much intact.
There was an exception to the rules requiring charities to give the donor a contemporaneous written acknowledgement of the donation when the charity filed the information directly with the IRS. This was repealed for taxable years beginning after 2016. In 2017 and after, the charities are to provide the donor such acknowledgement. An old exception to this rule is gone, and donors should keep such receipts in their tax records. ((Conf. Rep., p. 272, 273.))
For those in line to make charitable donations to a university and the sign says you also get the right to buy a seat to the football games, you may still get the seat but not the tax deduction. ((Conf. Rep., p. 270, 273. This new rule is effective for taxable years beginning after 2017.))
The limit for cash gifts to public charities by individuals was increased from 50% to 60% of adjusted gross income. ((Conf. Rep., p. 263-273.)) This increased limit generally applies in years beginning after December 31, 2017 and before January 1, 2026. ((Conf. Rep., p. 22, 263.))
The limits on charitable donations in a corporate income tax return are generally 10% of taxable income with certain adjustments. ((See instructions to Form 1120.)) The concept of itemized deductions doesn’t apply in a corporate income tax return, so the issue of whether deductions exceed the standard deduction doesn’t arise in a corporate return.
With exceptions, the general rule is five year carryover of above-the-limit charitable donations whether the taxpayer is a corporation or an individual.
There was some refinement of the charitable contribution rules pertaining to an “electing small business trust” which may own stock in an S corporation. ((Conf. Rep., p. 518.))
Will You Itemize?
Charitable donations are a component of itemized deductions which are asserted when their total exceeds the standard deduction. The standard deduction has significantly increased in 2018, which may mean the taxpayer will no longer itemize. This scenario may also cause some taxpayers to benefit by “bunching” itemized deductions in alternating years to the extent the deductions and timing of payment are discretionary.
Our examples below suggest donors and their advisors need to understand the possible interplay, beneficial or detrimental, between charitable donations or other deductions and the new 20% of business income deduction because of its limitation rules.
“Adjusted gross income” is the Form 1040 figure just before the taxpayer asserts itemized deductions or claims the standard deduction. It was also a figure before claiming personal exemptions, before their temporary repeal in 2018-2025. The new Section 199A 20% of business income deduction is asserted after itemized deductions or the standard deduction. There is an “if less” limitation on this deduction which with adjustments focuses on taxable income, and this limitation can be affected by itemized deductions.
A significant general change is that the 2017 Tax Act repealed or restricted many itemized deductions while also increasing the standard deduction, so more individuals will be using the standard deduction, which means their charitable donations, while they may be as commendable and helpful as ever, may not translate into incremental tax savings.
The standard deduction, which is indexed for inflation, almost doubled. It is $6,350 for singles, $9,350 for heads of households, and $12,700 for joint returns in 2017. It increased in 2018 to $12,000 for singles, $18,000 for heads of households, and $24,000 in joint returns. The increased standard deduction for the elderly and blind is still with us. ((Conf. Rep., p. 201.))
The 2017 Tax Act, while increasing the standard deduction and reducing tax rates to some extent, significantly reduced or eliminated many deductions, particularly itemized deductions. Itemized deductions are in lieu of the standard deduction.
Charitable contributions are generally deductible under long-standing rules, with even some enhanced deductibility from 50% to 60% of adjusted gross income for cash gifts to public charities.
Home mortgage interest is still deductible albeit less so in many circumstances. In so far as interest on a personal residence in 2018-2025, the itemized deduction for “home equity indebtedness” is not allowed but then this limited deduction arises again on debt of up to $100,000 after 2025. There is an exception for home equity indebtedness used to buy, build or substantially improve the home. ((See IR-2018-32, 2/21/18; https://www.irs.gov/newsroom/interest-on-home-equity-loans-often-still-deductible-under-new-law.))
The maximum rule for a home acquisition mortgage is generally $750,000 in 2018-2025, then rising to $1 million thereafter. If the acquisition indebtedness was incurred before December 15, 2017, the general rule is the debt can be as high as $1 million. There are any number of detailed rules pertaining to such situations as marrieds filing separately, refinancing, etc. ((Conf. Rep., p. 256-258.))
In general, the deductibility of home mortgage interest was reduced to some significant extent with the 2017 Tax Act, particularly with the lower limitation for new borrowers not subject to the $1 million rule.
Interest expense is still generally deductible if the loan proceeds are traceable to business or rental properties.
The more severe restrictions may be the $10,000 limit from 2017-2025 for the sum of state income tax and property tax on the personal residence.
The 2017 Tax Act warns that “investment expenses” are in the long list of items covered by the general suspension after 2017 of the deductibility of miscellaneous itemized deduction. This doesn’t include investment interest expense, which we still have as an itemized deduction although it is still limited to investment income. ((Section 163(d); Conf. Rep., p. 273-276.))
There was a long list of miscellaneous itemized deductions that were generally deductible when they exceeded 2% of adjusted gross income. These are generally no longer deductible in 2018-2025. ((Conf. Rep., p. 36 reporting Section 11045 amending Code Section 67, and Conf. Rep., p. 273-276.)) The long list in the legislative history is generally divided into investment expenses relating to the production and collection of income, tax preparation expenses, and employee expenses.
Related to our main topic of charitable donations, we note that appraisal fees related to supporting a charitable donation of property are not deductible in 2018-2025 because they’re not donations to the charity but are within the “miscellaneous” category related to determining your tax.
Unreimbursed medical expenses are still deductible as an itemized deduction, and they are deductible in years 2017 and 2018 to the extent they exceed 7 ½% of adjusted gross income. The traditional rule focuses on 10% of adjusted gross income, and that rule comes back after 2018. ((Conf. Rep., p. 276-277.))
There was an overall limit on itemized deductions, and such limitation was repealed for years 2018-2025. ((Conf. Rep., p. 36 reporting Section 11046 amending Section 68, Conf. Rep., p. 255, 256.)) There were exceptions and limits on the limitations, but basically this cut-back on itemized deductions for high income taxpayers was suspended although it is still a factor in 2017 returns.
There are some aspects of the 2017 Tax Act which may increase the taxpayer’s itemized deductions, and one of those is the enhanced percentage of income limitation for cash gifts to public charities, which can increase one’s charitable deduction.
One of our themes in our writing focusing on the 20% of business income deduction is “do the math.” That theme can also often apply to the matter of itemizing versus claiming the standard deduction. Many taxpayers will want to “do the math” in better understanding how the new rules affect whether they will itemize and whether they may have reduced itemized deductions or possibly even enhanced itemized deductions under the new rules.
The new rules are often “multi-directional“ meaning that even within a given topic, the changes may hurt and help the taxpayer.
After much talk of its repeal, the estate tax remains.
The 2017 Tax Act roughly doubled the estate tax exemptions. Single taxpayers with estates of $11.21 million are exempt and couples with estates of $22.42 million are exempt. These exemptions, which are indexed for inflation, are available after December 31, 2017 and before January 1, 2026. The 2017 exemption was $5.49 million, or $10.98 million in exemptions for a married couple. ((Conf. Rep. 307-316.))
The charitable donation deduction for estate tax purposes is still unlimited. The estate tax deduction for marital transfers is generally unlimited. Structuring possible transfers to charity is often an important part of planning for large estates. Charitable planning for estates expected to be in the $5 to $25 million range is often an important consideration from a tax minimization standpoint, not to say charitable planning of testamentary transfers isn’t always important. While helpful, the temporary nature of the increase in estate tax exemptions adds to the complexity of planning the estate.
Keep in mind that charitable transfers during one’s lifetime have the added advantage of saving income tax, and testamentary transfers to charity of income in respect of a decedent may also reduce income tax.
As we’ve said before in this series, “A key component of estate planning is overall, long-term income tax planning for the family, which may be dramatically impacted by the myriad changes in the 2017 Act.”
This major new 20% of business income deduction provision we’re about to discuss, which is tantamount to a significant tax rate reduction in some circumstances, is not available to corporations. The decision to incorporate and access the 21% income tax rate available to C corporations after 2017, a rate reduction which is not scheduled to expire, means forgoing this new deduction which basically reaches business income of sole proprietors, partners, and shareholders of S corporations
THE NEW 20% OF BUSINESS INCOME DEDUCTION AND CHARITABLE DONATIONS
We refer the reader to our more detailed newsletter focusing on the new 20% deduction under Section 199A. Our discussion here is a reiteration of the basics with some emphasis on what to consider in that context when contemplating charitable donations.
The Basic Rules
The basic idea is that active business income hitting the Form 1040 from 2018 through 2025 may qualify for a 20% deduction taken after the standard deduction or itemized deductions. This new deduction is taken just before taxable income. ((See generally Conf. Rep., p. 10-18 for text of new Sec. 199A, and p. 205-224 for the legislative history.))
Corporations do not qualify. Wages do not qualify, as is the case with guaranteed payments from partnerships.
One can qualify even as a passive investor getting flow-through income. Such income can qualify if it is from an active business. The active business may be owned directly as a sole proprietorship, or the income may flow through to the individual via a partnership or Subchapter S corporation return. This new deduction will require these flow-through entities to report the information needed for the shareholder or partner to compute the deduction.
Certain types of service provider income won’t qualify when the business (or professional) income is significant. The level of taxable income affects the rules when there are certain types of service providers.
There appears to be no upside limit to the deduction. One basically adds up the results of multiple businesses, subtracting losses, but there are issues of how certain limitations may apply when there are multiple businesses. Our examples that demonstrate planning to avoid limitations generally mention the wage or wage and capital limitations that can reduce or even eliminate the deduction, but avoiding those limitations can also simplify and save tax from the standpoint of the rules about multiple businesses.
The “if less rule” says the deduction cannot exceed 20% of taxable income (before this deduction) as reduced by the sum of net long-term capital gains as reduced by net short-term capital losses and as further reduced by qualified dividends. ((See 2017 instructions to the Form 1040, p. 23 discussing “qualified dividends.”))
It is in regard to both the “taxable income if less rule” and mitigating the limitation rules in Section 199A that charitable contributions and other deductions may have a significant impact because the focus is on “taxable income.”
One of the limitations says the deduction can’t be more than (a) 50% of wages, or (b) 25% of wages and 2.5% of qualifying assets added to the business within an extended time frame. Another limitation can focus on whether the taxpayer has multiple businesses. You may need to apply the limitations to each separate trade or business depending on the level of taxable income. The rule that denies the benefit of the 20% of business income deduction to certain categories of service providers, such as lawyers and CPAs, goes away at lesser levels of taxable income.
The limitations in the preceding paragraph do not apply at certain lower levels of taxable income as measured prior to this deduction. For 2018, these levels are basically $157,500 of taxable income or $315,000 in a joint return. There is a range of taxable income somewhat higher where the benefit is phased out. The limitation rules of the preceding paragraph generally apply in full when 2018 taxable income before this deduction is $207,500 or more, or $415,000 or more in a joint return.
Not all assets would qualify under the 2.5% part of the test but a building could qualify as well as equipment. Qualification focuses on “depreciable property” which would seem to rule out, say, land and goodwill. So purchase price allocations between building and land could affect this deduction. The 2.5% test looks to the unadjusted basis of the property immediately after acquisition and continues to focus on such un-depreciated amount for a period of time. The concept is “gross basis” (our term), not net of depreciation. The time period, the “depreciable period” for this unique purpose is the longer of ten years from when the asset is first placed in service, or the “applicable recovery period” looking to Section 168. So the asset needs to be put to work, not just acquired, and can apparently be considered for a ten year period even if such period exceeds the prescribed depreciation period, or if longer, the applicable recovery period. So an asset with a long life can be counted for more than ten years. At least the prior ten years of asset acquisitions look to be relevant here, even starting in 2018, so there is quite a lot of work involved, not to mention issues of finding quite old information
The Big Picture
The basic topic is business income other than corporate income. Practically all business entities as well as sole proprietorships are included other than C corporations that file separately and pay their own tax. If the nature of the activity is business, the income may yield a 20% deduction focusing on the net profits of the business as measured using the tax rules. The taxpayer doesn’t even have to be active. The basic scope in terms of affected taxpayers is huge, and the measure of the new Section 199A deduction, 20% of net profits basically, is very significant. We don’t find an overall limit on the deduction.
The structure is very unusual in that the “if less” income limitation will apply often. This rule basically says “if less,” you get 20% of taxable income before it is reduced by the 20% deduction. This limit, this reduced deduction, flows from taxable income, not just business income, which brings into play not only such business-related tax decisions as whether to use the tax incentives for writing off equipment or pay that business expense by year end, but whether to make that mortgage payment in late December, or make a deductible retirement contribution, or – our main focus here – whether or not to make significant charitable donations. Even paying a medical bill could have an impact, if you itemize and your medical deductions exceed a certain percentage of adjusted gross income.
The rules have rather severe limitations but the limitations may go away altogether with lower levels of taxable income.
Service providers may get the deduction generally because they are in business. However, there is also a long list by type of service, and those taxpayers (doctors, lawyers, CPAs, many others) may get a 20% of business income deduction but they may be rather quickly phased out of this provision depending on – yes – the level of taxable income.
So the planning possibilities, if not necessities, are numerous and wide in scope.
In general, the lower levels of taxable income that help avoid limitations are, for 2018, $157,500 for singles and $315,000 on a joint return. These are taxable incomes before this 20% deduction.
We turn to some basic illustrations. In our simplified illustrations, we will ignore such factors as self-employment income triggering self-employment tax with a portion of such tax being deductible and state taxes. We do not generally assume the taxpayer is subject to the special rules applying to certain service providers.
Caveat: The following illustrations often involve differences in results with reduced taxable income arising from charitable donations, but there are obviously other possible approaches to reducing taxable income.
For ease of reference, the following discussions may present the ending math in the first paragraph; i.e., a results point of reference may be given before we state the facts of the illustration.
Summary of Our Assumptions by Illustration Number
Taxpayer status: Single except joint in #3.
Standard deduction-2008: $12,000 except $24,000 in #3.
Charitable deductions, all cash: $7,500 #1-5, 7; $15,000 #6, $62,000 #8, #9, #10 various.
Other itemized deductions: zero except $12,000 #4, #7.
Interest income: zero except $12,000 #5, #6; $24,000 #7, $62,000 #9, $12,000 to $74,000 #10.
Business income of $75,000 #1, #4-7; $157,500 #9, $219,500 #3, #8, $1 million #10.
Illustration #1 – The Basics of Limitation – Single Taxpayer
This taxpayer’s deduction is $12,600, somewhat less than 15% of business income. The deduction is 20% of $63,000.
Let’s assume a self-employed person with $75,000 of business income who has no other income or deductions other than charitable contributions. The taxpayer contributed $7,500 to a public charity but uses the standard deduction for a single person which is $12,000 in 2018. The taxpayer’s taxable income before the deduction under Section 199A is $63,000.
The 20% of business deduction under the basic rule would be 20% of $75,000, or 15,000, if the limitation did not apply. The wages or wages/capital limitations do not apply because taxable income before the Section 199A deduction is less than $157,500.
The deduction under the “if less rule” would be 20% of 63,000, which is business income of $75,000 less the standard deduction of $12,000.
The taxpayer has no wages in 2018 and no asset additions for purposes of the 2.5% asset component but their absence isn’t a factor at this lower level of taxable income.
The charitable contributions yield no tax savings because the taxpayer uses the standard deduction. In this case, the standard deduction reduces the 20% of business income deduction because the taxable income if less rule applies.
We would not be surprised to see this as a common scenario. We wouldn’t be surprised to see the “if less” rule apply more often than the general rule which is 20% of business income.
Are there situations where the taxpayer is actually worse off because the donation not only doesn’t yield an incremental donation deduction but it also adversely affects the 20% of business income deduction? We don’t think so. We note that the charitable donation doesn’t save income tax because it doesn’t exceed the standard deduction, but we also note the impact in our example is limited to the reduction in taxable income arising from the standard deduction
Illustration #2 – The Basics with Higher Income – Single Taxpayer
This taxpayer’s deduction is zero because at the higher income level of $207,500 assuming a single taxpayer, one needs wages or wages and capital to sustain the deduction. We assume no wages or asset additions for the relevant years.
Let’s assume a self-employed person with $219,500 of business income who has no other income or deductions other than charitable contributions. The taxpayer contributed $7,500 to a public charity but still uses the standard deduction for a single person which is $12,000 in 2018. The taxpayer’s taxable income before the deduction under Section 199A is $207,500.
The 20% of business deduction under the basic rule would be 20% of $219,500, or 43,900, if the limitations did not apply. The wages or wages/capital limitations apply fully because taxable income before the deduction under Section 199A is not less than $207,500.
The deduction under the “if less rule” would be 20% of 207,500, which is business income of $219,500 less the standard deduction of $12,000. This deduction would be $41,500. This rule doesn’t apply because there is no deduction because the general rule applied and the taxpayer didn’t have wages or wages and capital to support that deduction.
The charitable contributions have no effect because the taxpayer uses the standard deduction.
Compare Illustration #8 which has similar facts with planning to avoid the income limitation.
Illustration #3 – Higher Income – Joint Return
This joint return has the same income as the single taxpayer in Illustration #2 but due to the joint return, there is a deduction of $39,100. This is 20% of $219,500 business income as reduced by the $24,000 standard deduction.
Let’s assume a self-employed person with $219,500 of business income; the couple has no other income or deductions other than charitable contributions. The taxpayer contributed $7,500 to a public charity but the couple uses the standard deduction for a joint return which is $24,000 in 2018. The taxpayers’ taxable income on a joint return before the deduction under Section 199A is $195,500.
The 20% of business deduction under the basic rule would be 20% of $219,500, or 43,900, if the limitations did not apply. This is the same as Illustration #2. The wages or wages/capital limitations do not apply because taxable income before the deduction under Section 199A is not less than $315,000, which is the higher threshold amount for joint returns.
The deduction under the “if less rule” would be 20% of 195,500, which is business income of $219,500 less the higher standard deduction of $24,000. This deduction is $39,100. This rule does apply because it is less than the deduction under the general rule.
The charitable contributions have no effect because the taxpayer uses the standard deduction.
Illustration #4 – Average Income Single Taxpayer Who Itemizes
This taxpayer’s deduction is $11,100. The facts are basically the same as Illustration #1 but the single taxpayer has additional itemized deductions. The deduction is 20% of $75,000 business income as reduced by $19,500 of itemized deductions.
Let’s assume a self-employed person with $75,000 of business income who has no other income or deductions except charitable contributions and home ownership related interest and property tax. The taxpayer contributed $7,500 to a public charity. The taxpayer pays home mortgage interest expense and property tax of $12,000, so the total itemized deductions are $19,500. The standard deduction for a single person would have been $12,000 in 2018. The taxpayer’s taxable income before the deduction under Section 199A is $55,500.
The 20% of business deduction under the basic rule would be 20% of $75,000, or 15,000, if the limitation did not apply. The wages or wages/capital limitations do not apply because the taxpayer’s taxable income before the Section 199A deduction is less than $157,500, so our assumptions on this topic do not matter. Wages or wage and capital calculations may be necessary to sustain the deduction at higher income levels but they do not increase the deduction.
The deduction under the “if less rule” would be 20% of 55,500, which is business income of $75,000 less the itemized deductions of $19,500, or $11,100.
The 20% of business deduction is not 20% of $75,000 because the “if less” limitation applies here.
If one assumes the other itemized deductions are fixed and views the charitable donation as incremental, the comparison would be: $75,000 business income net of $12,000 itemized (or the standard deduction) and the Section 199A deduction would be 20% of $63,000 or $12,600, which compares with $75,000 business income net of $19,500 and the deduction is 20% of $55,500 or $11,100. Without the $7,500 donation, taxable income would be $63,000 less $12,600 or $50,400, whereas the $7,500 charitable donation reduced taxable income to $55,500 less $11,100 or $44,400. The difference in $50,400 and $44,400 is $6,000.
The difference in taxable income is $6,000 because of the charitable donation. The charitable donation was deductible and so would have reduced taxable income by $7,500 but it also reduced the taxable income base for the 20% deduction. So the net effect on taxable income under our assumption is a reduction in taxable income of 80% of the $7,500 donation, or $6,000 rather than the donation amount, a $1,500 reduction in the deduction.
Charitable contributions can reduce taxable income as an itemized deduction while at the same time having the effect of increasing taxable income because they can reduce the base for computing this new deduction. When considered in relation to the new 20% of business income concept with its limitation based on taxable income, charitable donations can reduce the benefit of this new business incentive provision because the deduction may be based on taxable income.
Illustration #5 – Average Income, Single Taxpayer, Standard Deduction, No Income Limitation
The taxpayer’s deduction is $15,000, or 20% of business income of $75,000 because our assumptions will remove the income limitation. There is no income limitation because 20% of the following is not less than $15,000: $75,000 business income plus $12,000 of interest income minus the $12,000 standard deduction.
We revert to our assumption in Illustration #1 where the taxpayer’s only itemized deduction is $7,500 charitable donation, which saves no tax because it doesn’t exceed the standard deduction. In our assumptions here, the charitable donation won’t adversely affect the 20% of business income deduction.
Our self-employed person has $75,000 of business income plus $12,000 of interest income less the $12,000 standard deduction. The taxpayer’s taxable income before the 20% deduction is $75,000, so the income limitation rules do not apply. The 20% of business income deduction applies to $75,000, so the deduction is $15,000, and taxable income is $60,000.
The $15,000 deduction here compares to $12,600 in Illustration #1, an improvement of $2,400, which is 20% of the $12,000 interest income that effectively removed the income limitation. Under our assumptions, the income limitation would be $12,000 were it not for the $12,000 of additional interest income, so there is additional tax benefit on the $12,000. Incremental interest income above $12,000 wouldn’t have such benefit because it would not impact the income limitation, which suggests that in some situations projections of business income may affect investment decisions in a new way.
There are some scenarios where the charitable contribution may effectively have no impact because the taxpayer uses the standard deduction, but the effect of particular investments by removing the income limitation may yield unexpectedly beneficial tax results. The new 20% of business income concept with its income limitation feature may well impact such matters as investing for income versus appreciation.
Our assumptions are that the taxpayer is exactly “breaking even” in so far as the standard deduction offsetting income other than business income. We’ve assumed the taxpayer’s itemized are only $7,500 in charitable donations compared to the $12,000 standard deduction, so our results would not change as this taxpayer contributes to charity an additional $4,500. As the taxpayer would make additional charitable contributions beyond the $4,500, they would achieve incremental deductions but they would also introduce the if less income limitation. See the next illustration.
Illustration #6 – Average Income Single Taxpayer and Donations Introduce the Income Limitation
The taxpayer’s deduction is $14,400, or 20% of business income of $75,000 as increased by the $12,000 of interest income and as reduced by the $15,000 of itemized deductions.
Our assumptions are the same as the preceding illustration except we assume charitable donations of $15,000 rather than $7,500.
Our self-employed person has $75,000 of business income plus $12,000 of interest income less $15,000 in itemized deductions. The taxpayer’s taxable income before the 20% deduction is $75,000 plus $12,000 less $15,000, so the 20% of business income deduction is 20% of $72,000 or $14,400.
Under our assumptions of no home mortgage interest, etc. and only charitable contributions, the taxpayer’s $15,000 of donations have translated into only $3,000 of incremental deductions and those have introduced the income limitation feature. The Section 199A deduction of $15,000 in the previous example is reduced to $14,400; the $600 difference is 20% of the $3,000 in incremental deductions as itemized deductions exceed the standard deduction.
In these particular assumptions, the taxpayer’s charitable donations either yield no benefit or, when they do begin to exceed the standard deduction and save income tax under Section 170, they also reduce the tax savings under new Section 199A because of its taxable income if less feature.
Illustration #7 – No Income Limitation Single Taxpayer with Other Itemized Deductions
We shift to what will hopefully be another common scenario. We assume there is no income limitation and any donations translate into additional itemized deductions because the standard deduction is already “absorbed” by mortgage interest and property tax deductions. The taxpayer’s deducts 20% of business income of $75,000, or $15,000.
We begin by assuming the taxpayer makes no charitable donations but has $12,000 of mortgage interest and property taxes so the $12,000 standard deduction is “absorbed.” We assume $24,000 of interest income, $75,000 of business income, and $12,000 of itemized deductions (or standard deduction), so the taxable income if less limitation isn’t a factor. The taxpayer’s taxable income is $24,000 of interest plus $75,000 of business income less $12,000 of itemized deductions less $15,000 Section 199A deduction, or $72,000. Taxable income before the 20% deduction is more than business income, so the deduction is 20% of $75,000, or $15,000.
When we assume the same taxpayer donates $7,500 to charity, the taxable income limitation feature is still not a factor. The $24,000 of interest income is in excess of our itemized deductions of $19,500.
This taxpayer’s income then becomes $64,500: $24,000 of interest income plus $75,000 of business income less $19,500 of itemized deductions less $15,000 deduction as 20% of business income.
Taxable income went from $72,000 to $64,500, a reduction of $7,500 attributable to the donation of that amount. There are still some scenarios where charitable donations have their expected, traditional impact for those taxpayers who still itemize. The 2017 Act increased the standard deduction so there will be some reduction in the number of taxpayers in this “traditional scenario” when considering charitable donations.
We note this “normal” situation after having noted above some scenarios where charitable donations may not have their expected benefit because they aggravate the taxable income if less limitation in the 20% of business income computation.
In the following illustration, to the relief of donors and charities, we at last turn to some situations where charitable contributions or other deductions may have unexpectedly large benefits. This primarily results from the fact that, while the basic math of the income limitation feature may or may not be a factor, there are certain limitation features in the 20% of business income rules that may go away at reduced taxable income levels.
Illustration #8 – Single Taxpayer Whose Major Gift Avoids Limitation of Wages or Wages and Assets
The taxpayer’s deduction is $31,500, which is 20% of $157,500, which is $219,500 business income as reduced by charitable donations of $62,000, whereas the taxpayer would have no deduction without some donations or other deductions.
We’re assuming that without the charitable contribution reducing taxable income, the taxpayer would not have been eligible for the 20% of business deduction. The Section 199A rules generally award high and low income taxpayers, but the normal rules require wages or a level of wages and capital additions. Under our assumptions of the taxpayer not being able to sustain the deduction under the requirements that look to wages or wages and capital additions, we need the reduction in taxable income because there is a lower level of taxable income that doesn’t require wages or wages and capital additions.
The focus is one of three limitations which for a single taxpayer are fully applicable when taxable income in 2018 is $207,500 or more. These limitations do not apply when taxable income is $$157,500 or less. For joint return taxpayers, these taxable income ranges are much higher. At the $415,000 taxable income level and higher, the limitations are fully applicable and at $315,000 of taxable income, the limitations do not apply. These figures of taxable income are before the 20% of business income deduction, and they are subject to annual adjustments. Between the highs and lows, there is a phase-into-total-disallowance range, a partial allowance range, which we’ll not demonstrate here.
We assume $219,500 of business income, and if no charitable donations, the taxable income would be $207,500 – the lowest level of taxable income at which the benefit of the 20% of business income deduction is phased out fully if not a joint return. This is Illustration #2.
If we assume $62,000 of charitable donations, there is a $50,000 incremental deduction over and above the standard deduction of $12,000, and thus income tax savings for $50,000 of the $62,000 charitable donation. There are often some other “given” itemized deductions so the savings on the charitable deduction may be higher from an incremental savings standpoint.
Under these assumptions, the 20% of business income deduction is not phased out or partially phased out because of higher taxable income, but the taxable income if-less rule does apply. The income limitation is 20% of $157,500, which is $219,500 less $62,000, or $31,500. Without the taxable income if-less limitation feature, the deduction would be 20% of the $219,500 of business income, or $43,900.
Under our assumptions, it was the charitable contribution of $62,000 which reduced taxable income to the point that the taxpayer is able to qualify for a 20% deduction of $31,500. So the charitable contribution of $62,000 yielded an incremental deduction of $50,000 in excess of the standard deduction plus “freed up” $31,500 in Section 199A deduction, or $81,500 in incremental deductions arising from the $62,000 donation.
Illustration #9 – Single Taxpayer Whose Major Gift Avoids Limitation of Wages or Wages and Assets
The taxpayer’s deduction is $31,500, which is 20% of assumed business income of $157,500. Our assumptions and goals are the same as the preceding example except the composition of total income changes to assume significant interest income, which avoids the income limitation. The deduction without the income limitation here is the same as the deduction after the income limitation in the previous illustration. Taxable income is the same as the previous example even with a significant reduction in business income..
We again assume $219,500 of income but instead of assuming all business income, here we assume $62,000 of interest income and $157,500 of business income. Again, if no charitable donations, the taxable income would be $207,500 – the lowest level of taxable income at which the benefit of the 20% of business income deduction is phased out fully if not a joint return.
If we assume $62,000 of charitable donations, the 20% of business income deduction is not phased out or partially phased out because of higher taxable income. Unlike the preceding example, the taxable income if less rule does not apply. The income limitation is 20% of $157,500 business income, or $31,500.
Under our assumptions, it was the charitable contribution of $62,000 which reduced taxable income to the point that the taxpayer is able to qualify for a 20% deduction of $31,500. So the charitable contribution of $62,000 yielded an incremental itemized deduction of $50,000 over and above the standard deduction plus $31,500, or $81,500. This is the same as the previous example with its assumption of business income of $219,500 whereas here we assume $157,500 of business income.
Illustrations #8 & 9 Applied to Service Providers on the More-Restricted-Rules List
Regardless of satisfying the wages or wages and capital additions requirements, certain service providers are partially or fully phased out of benefits at higher levels of taxable income.
Illustrations 8 and 9 demonstrate the ability of businesses to get down to the $157,500 level where there are no wages or wages and capital additions requirements by making charitable contributions. A higher income figure would apply if we assumed a joint return. The same illustrations also show the ability of such contributions or other deductions to get certain service providers down to the level of fully qualifying for the 20% of business deduction.
Excerpting our 20% of business income newsletter: “Architects and engineers were excepted, but many professions are denied access to the 20% of business income rule or attain limited access to it under rules naming: health, law, accounting, actuarial science, performing arts, consulting, athletics, financial services, brokerage services, or any trade or business where the principal asset of such trade or business is the reputation or skill of one or more of its employees. ((Sec. 199A’s incorporating with exceptions Sec. 1202(e’)(3)(A).)) While ‘financial services’ are referenced in one area of the list, there is also listed work where the trade or business consists of investing and investment management, trading or dealing in securities, etc.’”
To reiterate, charitable donations and other deductions may move doctors, lawyers, CPAs, entertainers and others to lower levels of taxable income where they may qualify for significant deductions under Section 199A.
Illustration 10 – The Highly Successful Businessperson
In general, the patterns we see in higher income situations are reasonably familiar. At the higher income levels, the wage or wage and capital additions have to be satisfied but when they are, the results are akin to those at the lesser amount levels.
We again assume a single taxpayer but one with $1,000,000 of business income after $500,000 of wages, so the basic limitation feature of wages or wages and capital additions isn’t a limitation. If there is no lesser of 20% of taxable income limitation, we would expect a deduction of $200,000.
If we assume only $1,000,000 of Schedule C business income plus $12,000 of interest income and the $12,000 standard deduction, there is no limitation. If we assume $1,000,000 of business income plus $74,000 of interest income and $74,000 of itemized deductions, we again have a $1,000,000 base and $200,000 deduction. We assume the itemized deductions consist of $12,000 of home mortgage and property taxes and $62,000 of donations. The interest income basically offsets the $12,000 of home related itemized deductions plus $62,000 of donations, freeing up the later to yield a deduction of $62,000 without reducing the 20% of business income deduction.
If we assume interest income is only $62,000, even though such amount equals the donations, there is some introduction of the income limitation feature. The calculation is $1,000,000 business income, plus $62,000 of interest income less itemized deductions of $74,000, or $988,000 X 20% which is $197,600 maximum deduction. We’d have this same result if we assumed $1,000,000 of business income and only $12,000 as an itemized deduction
If we assume interest income is only $12,000, there is a significant decrease in the 20% of business income deduction under the taxable income if less feature, which we calculate as follows: $1,000,000 of business income, plus $12,000 of interest income less itemized deductions of $74,000 which includes $62,000 of donations, or $938,000 X 20% which is $187,600. The base for computing the 20% deduction is reduced from $1,000,000 to $938,000, a reduction corresponding to the charitable donations given our assumptions.
Caveat: It is not our purpose to suggest investment strategy but we would caution that the results in our example may vary depending on whether we assume qualified dividends rather than interest income. While qualified dividends increase taxable income, they are subject to special beneficial income tax treatment and the income limitation feature may be more restrictive with an assumed amount of qualified dividends versus interest income.
Caveat: High income taxpayers are more likely than others to be affected by the way the new rules deal with multiple businesses, and such details as whether there may be wages or wages and capital addition limitations focusing on each business.
Keeping the Planning Perspective and Doing the Math
The concept is significant in nature; a 20% deduction for “business income” is significant to taxpayers big and small. The details are complex, and the topics very broad – key concepts are not only “business income” but “taxable income” with adjustments because of the taxable income if-less feature.
There are complex issues of interpretation and definition, as well as scope and strategy, and practical issues of compliance planning; e.g., identifying older data that may be required under the new rules.
There are such basic issues as the degree to which real estate activities qualify.
The context is one of more liberal rules in terms of maximizing depreciation and expensing additions to capital, but those decisions have to be viewed from the perspective of the 20% of business income deduction.
Our planning illustrations emphasize the impact charitable donations may have under Section 199A but the emphasis is on the effects of lower taxable income under these new rules, and of course business deductions can also reduce taxable income under the limitation feature, while also reducing business income which is the base for the 20% deduction.
It does seem clear that an on-going aspect to this new law will be “doing the math” that can affect many decisions.
Considering Changes in the New Law
We don’t propose to second guess the basic approach of the “if less” limitation with its own 20% computation but even conceding the basic approach, we would argue for refinements.
Our examples demonstrate that when the taxable income if less limitation prevails, there may be taxpayers and their advisors who in “doing their math” will realize that their donations may reduce their deduction under Section 199A. To avoid any disincentive for funding the charitable sector, we would argue that the “if less” computation should start with taxable income as increased for charitable deductions.
We would also argue that medical deductions should be added back in such computations to avoid any disincentive for getting medical care. As we noted in our introduction, the 2017 Act contained some liberalization in so far as medical deductions, basically measuring the deduction focusing on 7 ½ percent of adjusted gross income in 2016 and 2017. The old rule (or old-new rule), which returned in the current year 2018, looks to whether medical expenses exceed 10% of adjusted gross income. The House provision had gone so far as to repeal the income tax deduction for unreimbursed medical expenses. ((Conf. Rep., 276, 277.))
One could also argue that home mortgage interest deductions and property tax deductions should be added back to encourage home ownership.
Among the complexities here would be achieving parity with taxpayers who use the standard deduction, which may get into such discussions as only itemized deductions in excess of the standard deduction should yield an adjustment which can raise such issues as needing an ordering rule as to which deductions are really incremental, over and above the standard deduction. There may be some complications, but the focus should be on avoiding disincentives for expenditures that society generally encourages.
The list of itemized deductions is much reduced in 2018-2025 but such list will, barring legislative changes, be much longer starting in 2026, so we are somewhat inclined to the approach of starting with taxable income and adding back, e.g., charitable donations. However, another approach would be to replace the taxable income starting point with adjusted gross income, and such approach may also deserve consideration.
OVERVIEW OF EXEMPT SECTOR ISSUES
The effect of the 2017 Tax Act on charities may flow mainly from the effect the new law on charitable donations, but there are significant portions of the new laws that directly address the exempt organization. There were provisions proposed that eventually did not get enacted, so the “news” within the exempt sector to a significant degree relates to provisions that didn’t get enacted. ((See Conf. Rep., p. 541-545, 548-552, 556-562.))
Unrelated Business Income – Multiple Businesses
There are limits on how much “unrelated business” an exempt organization can engage in without putting its exempt status at risk, but it is not uncommon for exempt organizations to realize some level of “unrelated business income.” The general exemption from tax doesn’t apply to such income.
A new provision effective for exempt organization taxable years beginning after 2017 prevents an exempt organization with income from one unrelated trade or business from reducing such income via losses from a different unrelated trade or business. Congress saw fit to move away from the basic concept of offsetting income and losses within the same exempt organization, despite the income and loss have the same nature – unrelated business income (or loss). Losses carryovers that pre-date the new law are exempted from its application and generally only post-2017 losses are subject to the new limitation.
One of the problems here from a compliance or planning standpoint is the new need to identify what is a separate trade or business. ((Section 13702 adding Section 512(a)(6), Conf. Rep. , p. 118, 545-548.))
A for-profit corporation with separate businesses can offset income from one business with losses from another business, so in a sense, exempts are uniquely worse off than for-profit companies.
An exempt organization with a recurring pattern of UBI (and loss) from multiple sources may want to consider having such activities in a for-profit corporation owned by the exempt organization.
Unrelated Business Income – Net Operating Losses
Exempt organizations may also encounter more unrelated business income tax because net operating losses incurred post-2017 can only offset up to 80% of taxable income. ((Section 172(a); Conf. Rep., p., 70, 118, 393, 545-8.)) Note that in applying the 80%, the starting point is taxable income, not the loss carryover, so smaller losses (unrelated business losses) carrying into larger UBI income years would normally not be limited by this rule.
The unrelated business income rules of Section 512 incorporate by reference the net operating loss rules of Section 172, so the 80% of taxable income rule in the new law governing deductions from net operating losses would apparently apply to the exempt sector’s computation of its UBI. There may be issues of interpretation in the interplay between the old rules and new rules.
Net operating losses are basically used on an earliest-year-first basis. We would argue that in computing 80% of taxable income for this UBI purpose in taxable years beginning after 2017, taxable income is prior to its reduction by pre-2018 net operating loss deductions. Pre-2018 net operating loss carryovers for UBI purposes shouldn’t, we would argue, reduce the base for computing the new 80% limitation.
Unrelated Business Income – Tax Rates and Effect of 20% of Business Income Deduction on UBI
The 2017 Tax Act rather dramatically reduced the corporate tax rates and repealed the corporate AMT. AMT can be an issue in computing UBI, so the rate reductions can help charities if they have unrelated business income. ((See the instructions to the 2017 Form 990-T.)) In terms of tax rates that may apply, incorporated charities with unrelated business income fared better than other charities in the 2017 Tax Act. ((Conf. Rep. p. 40-42, 323.))
We devoted significant discussion above to the impact of this Section 199A deduction on the donor and the charitable contribution. We would argue that this deduction should also be incorporated into the computations of unrelated business income and so also directly impact unincorporated charities by effectively modifying the tax rate on unrelated business income.
The new 20% of business income deduction under Section 199A introduced in the 2017 Tax Act doesn’t apply to corporations, so corporate exempts with UBI would seemingly have no chance of accessing this new deduction. The Section 199A rules do extend to trusts, and many non-corporate charities have a trust structure. Should non-corporate exempt organizations get a Section 199A deduction in computing unrelated business income?
We note the new Section 199A statute and its legislative history appear to be silent on the topic of UBI, whereas the “old” Section 199, which had similarities and disparities, expressly dealt with how that incentive could reduce UBI. Both Sections 199 and 199A were/are non-expenditure deductions flowing from percentages focused on business income (Section 199A) or qualified production activities income (Section 199). We note 199A vs. 199 implying a degree of “succession.” Both refer to limitations focusing on taxable income. ((See IRS Form 8903, Instructions Rev. January 2018, discussing how exempts with UBI use the form to calculate the deduction under Section 199. ((p. 11.)) The form’s instructions also state, “The allowable DPAD (domestic production activities deduction) of an organization taxed on its UBTI under section 511 generally can’t be more than 9% of its UBTI figured without the DPAD.”
If the IRS does not conclude that the new Section 199A reduces unrelated business income for non-corporate exempt organizations, we would argue for legislation making it deductible in computing unrelated business taxable income. Exempt organizations with unrelated business income should not be at a tax disadvantage with respect to the for-profit sector.
Charities – Miscellaneous Issues
In years beginning after 2017, exempt organizations may incur a new excise tax on very large compensation, generally in excess of $1,000,000. There are also rules focusing on departure-related “parachute payments” which look to certain base amounts in a prior compensation base period. ((Section 13602 adding new Code Section 4960; Conf. Rep., p. 106, 491-494.))
While they may retain their public charity status, private colleges and universities with large endowments may after 2017 be subject to a new excise tax on investment income. ((New Code Section 4968, Conf. Rep., p. 552-555.))
There were introduced new limitations with respect to advance refunding bonds, a provision that may increase the interest costs of some larger exempt organizations. ((Section 149(d), Conf. Rep., p. 458-459.))
Certain fringe benefits the exempt organization provides its employees may be treated as unrelated business income – parking, transportation and athletic facilities. ((Conf. Rep., p. 408-410.)) .
HOW DID THE EXPENSE FOR PARKING AT THE HOMELESS SHELTER BECOME TAXABLE INCOME?
We noted in our discussion of new legislation as it impacts exempt organizations that a new law adds to unrelated business income employer-paid parking. (On exempt organizations paying employee parking, see Conf. Rep., p. 119, 408, 409. On for-profit employers paying employee parking, see Conf. Rep., p. 74, 75, 402-407.))
We start with a brief note of the history of the unrelated business income tax. Charities are basically exempt and the exemption even extends to dividends and interest as well as, usually, any payments they may receive that relate to their exempt function . But early on, some charities got the idea – why not a business if we’re exempt? This put for-profit businesses at a competitive advantage, so we have the unrelated business income tax that applies to charities.
Section 512 begins the detailed outreach to tax unrelated businesses of charities with “gross income derived by any organization from any unrelated trade or business ….”
As part of the revenue raising aspects of the 2017 Tax Act, for taxable entities, there was a “crackdown” on for-profit employers paying employee parking. There were limits under the old rules and the IRS did sometimes audit those limits and include in wages of the employee any “excessive” fringe benefit related to employer-paid parking. If the taxable employer paid a little too much for parking for an employee, the IRS was sometimes watching. ((See “Qualified Parking Fringe Benefit,” https://www.irs.gov/government-entities/federal-state-local-governments/qualified-parking-fringe-benefit.))
The watchful eye of the IRS on this matter would now be looking to determine the for-profit employer wouldn’t be deducting anything for the employee’s parking. This would be true of expenses paid after December 31, 2017. This particular rule doesn’t turn on the taxable year of the employer. ((Conf. Rep., p. 407.))
To achieve perceived parity between for-profit and non-profit sectors, the 2017 Act also passed a provision that didn’t include parking in the exempt employee’s W-2, but it instead added the expense to the charity’s unrelated business income. ((As with the for-profit employer, this rule applies to amounts paid or incurred after December 31, 2017; this particular rule doesn’t turn on the taxable year of the exempt organization. Conf. Rep., p. 409.))
The statute reads: “ Unrelated business taxable income of an organization shall be increased by any amount for which a deduction is not allowable under this chapter by reason of section 274 and which is paid or incurred by such organization for…any parking facility used in connection with qualified parking (as defined in section 132(f)(5)(C’)…” There are other topics, qualified transportation fringe benefits and an on-premises athletic facility, but our focus is on parking, and we note that the statute goes on to say that to the degree the parking relates to unrelated business income, then it is not disallowed.
But charity paid parking for its employees is now generally added to unrelated business income. Say, the homeless shelter’s bookkeeper goes to work and parks next door, so we now have the charity-paid parking added to homeless shelter’s unrelated business income, even though we would argue the parking spot is hardly “unrelated” or “business” or “income.” Notice that it is an expenditure that gets added to income just because the statute says the expense is income. It isn’t our policy to suggest tea-in-the-harbor type behavior, non-compliance, etc., but how does an outlay get classified as income?
We acknowledge that exempts normally get a $1,000 exemption in computing UBI, so our homeless shelter may not have a practical problem… if this is their only UBI problem …. and they don’t have many employees. ((See Form 99T, 2017, instructions to line 33.))
How did parking next to the homeless shelter get so complicated?
We would argue parking next to work is the nature of a business expense for for-profit employers, even if you call it a fringe benefit and make it deductible in all but egregious circumstances, and it is a reasonable expense of the charity needing workers at the charitable activity. It really isn’t a disguised “perk” though the rules have called it a fringe benefit for some time.
This is an example of over-reach in circumstances where the lawmakers are scrambling, sometimes conspicuously, to raise taxes one place to pay for cuts in another. We would hope this particular provision gets repealed because it is unreasonable.
Expenses of doing what you do should, within reasonable limits, be a minus to the results if you keep in mind the basic concept is a tax on income.
We sometimes note tax particulars that just don’t appear reasonable.
We argued in our “Articles” that it was unreasonable to not have some provision for net operating loss carryback as mitigation of the sometimes harsh effects of the annual accounting concept. The NOL carryback did get repealed for years after 2017. Under the new NOL provision, even the NOL carryover may be limited for a time to 80% of the carryover. In general, post-2017 losses are deductible to the extent of 80% of taxable income for losses arising in taxable years beginning after December 31, 2017. ((Amendments to Section 172, Conf. Rep. p. 70-72, 393-394.)) There is an exception that allows carryback relief for farming losses.
The legislative history just basically says what the legislators are doing, disallowing most carrybacks and allowing this or that level of use going forward, which is to say we don’t find an attempt at conceptual justification for not allowing carrybacks and sometimes limiting carryovers.
If the goal is to measure income, and the topic is “taxable income,” how much sense does it make to limit a prior-year business expense now lodged in the NOL carryover when its nature is purely business, say, rent on a retail store or factory, the marketing director’s salary, etc.? There are special circumstances, like the rule allowing 50% of meals while the worker is away from home on business which could be justified arguing the taxpayer would have meals back home, etc. There are such unique topics as charitable donations, which have traditionally been limited to some percentage of income.
The nature of the NOL, with some exceptions, is normally just ordinary business expense. Is it reasonable to limit the deductibility of net operating losses, basically saying they can’t offset more than a particular percentage of income? This is basically limiting the ability of reasonable business expenses to offset business income.
We note the following from our previous, initial newsletter on the 2017 Tax Act. “Potentially costly to certain business taxpayers is the new Act’s amendment limiting `excess business losses’ of non-corporate taxpayers. ((Conf. Rep. p. 19, 238-239, amending Sec. 461(l) for losses in tax years beginning after December 31, 2017.)) This provision limits the ability of the taxpayer to offset non-business income with the current year’s business losses when such losses exceed $250,000, or $500,000 in a joint return. The disallowed business expenses are considered net operating loss carryovers, and thus of potential benefit in the future. The passive loss rules apply prior to these rules. In general, one need not have extremely high income to run into new limitations on deducting ordinary business losses. This new rule can be another consideration in the analysis of whether to incorporate and what assets to incorporate.”
In the zeal to increase taxes, the basic concept of offsetting related expenses against income is deteriorating. We noted that charities now basically cannot offset an unrelated business loss against unrelated business income. The basic concept of a tax on “net income” is conspicuously deteriorating.
While there was repeal of many deductions, which adds something to the professed goal of “simplification,” we note the main Conference Report with its legislative history and text is 694 pages.
In general, the concept of “taxable income” has less and less relationship with the basic idea of “income,” which is inherently a complicated concept.
The range of change in taxable incomes that can result from taxpayer choices is probably more significant than ever; e.g., options to expense under Section 179 and Section 168(k) and choices one can make that affect the results under the new 20% of business income deduction. Many of the major changes in the tax law, including exempting larger estates from estate tax, are only for a period of years, generally 2018-2025 – a lengthy period but not that long.
It does seem an environment in which planning may well be more important than ever, even more complicated than ever.
The complications may impact some prospective donors’ attitudes toward charitable donations, either positively or negatively, because after doing the math, the results don’t always appear reasonable or what one would expect.
The information contained herein is not intended to be “written advice concerning one or more Federal tax matters” subject to the requirements of section 10.37(a)(2) of Treasury Department Circular 230, as the content of this document is issued for general informational purposes only, is intended to enhance the reader’s knowledge on the matters addressed therein, and is not intended to be applied to any specific reader’s particular set of facts. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. Applicability of the information to specific situations should be determined through consultation with your tax adviser.