Final regulations dealing with the 100 percent bonus depreciation allowance for qualified property acquired and placed in service after September 27, 2017, allow property which is constructed under a pre-September 28, 2017 binding contract to qualify for the 100 percent rate. The final regulations adopt proposed regulations ( REG-104397-18) with certain modifications, including a revised constructed property rule. In addition, the IRS has issued a new set of proposed regulations dealing with issues it is not ready to finalize.

Final regulations dealing with the 100 percent bonus depreciation allowance for qualified property acquired and placed in service after September 27, 2017, allow property which is constructed under a pre-September 28, 2017 binding contract to qualify for the 100 percent rate. The final regulations adopt proposed regulations ( REG-104397-18) with certain modifications, including a revised constructed property rule. In addition, the IRS has issued a new set of proposed regulations dealing with issues it is not ready to finalize.

FINAL REGULATIONS: Written Binding Contract Rules
Constructed property. The proposed regulations provided that property manufactured, constructed, or produced for the taxpayer by another person under a written binding contract entered into prior to the manufacture, etc., of the property is acquired pursuant to a written binding contract. Thus, if the contract was entered into before September 28, 2017, the 100 bonus rate did not apply.

That rule was scrapped in response to negative feedback. Instead the final regulations provide that such property is treated as self-constructed property, and the contract is ignored for purposes of determining when the property is deemed acquired. The acquisition date is now the date that the taxpayer begins manufacturing, constructing, or producing the property as determined under rules similar to those that apply to 50 percent bonus property.

Acquisition date. The final regulations provide that the acquisition date of property acquired pursuant to a written binding contract is the later of:

• the date on which the contract is entered into;
• the date on which the contract is enforceable under state law;
• if the contract has one or more cancellation periods, the date on which all cancellation periods end; or
• if the contract has one or more contingency clauses, the date on which all conditions subject to such clauses are satisfied.

Liquidated damage clause. When a contract has multiple damage provisions, the final regulations clarify that only the provision with the highest damages is taken into account in determining whether the contract limits damages.

Qualified Improvement Property
The IRS once again declined to make qualified improvement property placed in service after 2017 eligible for bonus depreciation. A legislative change is required to give this property its intended 15-year recovery period. With a 15-year recovery period, qualified improvement property will qualify for bonus depreciation under the general rule that allows bonus depreciation on property with an MACRS recovery period of 20 years or less.

Used Property
Predecessor defined. Property previously used by the taxpayer or a predecessor of a taxpayer does not qualify for bonus depreciation if the taxpayer or predecessor had a depreciable interest in the property. The final regulations define "predecessor" as:

• a transferor of an asset to a transferee in a transaction to which Code Sec. 381(a) applies;
• a transferor of an asset to a transferee in a transaction in which the transferee’s basis in the asset is determined, in whole or in part, by reference to the basis of the asset in the transferor’s hands;
• a partnership that is considered as continuing under Code Sec. 708(b)(2);
• the decedent in the case of an asset acquired by an estate; or
• a transferor of an asset to a trust.

Depreciable interest look back rule. The final regulations do not define a "depreciable interest" because this is a facts and circumstances issue. However, a five-year look back period is provided for determining whether a taxpayer or predecessor held a depreciable interest in property.

Substantially renovated property. If a taxpayer places substantially renovated property in service and the taxpayer or a predecessor previously had a depreciable interest in the property before it was substantially renovated, the taxpayer’s or predecessor’s prior depreciable interest does not prevent the taxpayer from claiming bonus depreciation. Property is substantially renovated if the cost of the used parts is not more than 20 percent of the total cost of the substantially renovated property, whether acquired or self-constructed.

Syndication transactions. A lessor who reacquires property in a syndication transaction is not treated as having a prior depreciable interest in the property.

Partnerships
The final regulations permit a partnership to claim bonus depreciation on the portion of a Code Sec. 743(b) basis increase that is attributable to built-in gain under Code Sec. 704(c), even if the partnership is using the remedial allocation method. An exception is provided for publicly traded partnerships that need to maintain fungibility for publicly traded partnership units.

If a partnership interest is acquired and disposed of during the same tax year, the bonus deduction is not allowed for any Code Sec. 743(b) adjustment arising from the initial acquisition. However, if a partnership interest is purchased and disposed of in a "step-in-the shoes" Code Sec. 168(i)(7) transaction in the same tax year, bonus on the section 743(b) adjustment is allowed. The section 743(b) adjustment is apportioned between the purchaser/transferor and the transferee.

The final regulations also clarify the treatment of qualified property transferred in a Code Sec. 721(a) transaction to a partnership in the same tax year that the qualified property is acquired by the transferor if the partnership has another partner who previously had a depreciable interest in the qualified property. In this situation, the qualified property is deemed placed in service by the transferor during that tax year, and the bonus deduction is allocated entirely to the transferor and not to the partnership. Thus, the contributing partner has contributed property with a zero basis to the partnership, and the contributed property is Code Sec. 704(c) property in the hands of the partnership.

Film, Television, and Theatrical Productions
The final regulations clarify that a used qualified film, television, or live theatrical production does not qualify for bonus depreciation. Also, the basis of a qualified film, television, or live theatrical production is reduced by the deduction claimed under Code Sec. 181 before computing the bonus deduction.

Using ADS
Using the alternative depreciation system (ADS) to determine the adjusted basis of a taxpayer’s qualified business investment (under Code Sec. 250(b)(2)(B) or Code Sec. 951A(d)(3)) or the adjusted basis of a taxpayer’s tangible assets for allocating business interests expense between excepted and non-excepted trades or businesses (under Code Sec. 163(j)) does not cause a taxpayer’s tangible property to be ineligible for bonus depreciation.

Public Utility Property
An example is added to clarify that the 100 percent bonus rate does not apply to self-constructed property of a regulated public utility if construction begins after September 27, 2017, and the property is placed in service in a tax year beginning after 2017.

Effective Date
The final regulations apply to qualified property placed in service during or after the tax year that includes the date of publication in the Federal Register. However, a taxpayer may choose to apply the final regulations in their entirety to qualified property acquired and placed in service after September 27, 2017, provided the taxpayer consistently applies all rules in the final regulations. Additionally, a taxpayer may rely on the proposed regulations issued on August 8, 2018, to qualified property acquired and placed in service after September 27, 2017, in tax years ending before the date of publication of the final regulations.

PROPOSED REGULATIONS: Acquired and Self-Constructed Components
A taxpayer may elect to treat components of a larger self-constructed property that are acquired or self constructed after September 27, 2017, as eligible for the 100 percent bonus rate, even though manufacture, construction, or production of the larger self-constructed began before September 28, 2017. The larger property must be eligible for bonus depreciation at the 50 percent rate.

Businesses With Floor Plan Financing
Property used in a trade or business that has had floor plan financing indebtedness does not qualify for bonus depreciation if the floor plan financing interest related to the indebtedness is taken into account under Code Sec. 163(j)(1)(C) in determining the allowable business interest deduction.

The proposals provide rules for determining whether interest in floor plan financing indebtedness has been taken into account during a tax year. In general, floor plan interest is not considered taken into account for a tax year if the sum of interest business income for the tax year and 30 percent of the adjusted taxable income for the tax year equals or exceeds business interest as defined in Code Sec. 163(j)(5). The proposals clarify that the determination of whether a trade or business that has had floor plan financing indebtedness has taken floor plan financing interest into account is made annually.

Leased Property
The proposals clarify that taxpayers leasing property to a trade or business with floor plan financing indebtedness or a rate-regulated utility may claim bonus depreciation. The taxpayer, however, may not be a trade or business with floor plan financing indebtedness that prevents it from claiming bonus depreciation or a rate-regulated utility.

Used Property
Five-year lookback. A safe harbor provides that a taxpayer who disposes of property within 90 days after placing it in service did not hold a prior depreciable interest in the property. Consequently, the property is eligible for bonus depreciation if subsequently reacquired.

Partnerships. A taxpayer has a prior depreciable interest in a portion of property if the taxpayer was a partner in a partnership at any time the partnership owned the property. The amount of the prior depreciable interest is based on the partner’s total share of depreciation deductions with respect to the property.

Series of related transactions. Special rules in the original proposed regulations governing the treatment of a series of related transactions for purposes of the used property acquisition requirements are modified and expanded.

Consolidated groups. Significant clarifications to the rules governing the used property acquisition requirements for consolidated groups are also made.

Written Binding Contract Rules
Property not acquired pursuant to a contract. The acquisition date of property that is not acquired pursuant to a written binding contract is the date on which the taxpayer paid or incurred more than 10 percent of the total cost of the property. The cost of land and preliminary activities are excluded from cost for this purpose.

Purchase of entities. Binding contract rules that apply to the purchase of an entity are proposed. The current binding contract rules only deal with purchases of assets.

A contract to acquire all or substantially all of the assets of a trade or business, or to acquire an entity such as a corporation, a partnership, or a limited liability company, is binding if it is enforceable under state law against the parties to the contract. The presence of a condition outside the parties’ control (including, for example, regulatory agency approval) will not prevent the contract from being a binding contract. Further, the fact that insubstantial terms remain to be negotiated by the parties to the contract, or that customary conditions remain to be satisfied, does not prevent the contract from being a binding contract. This proposed rule also applies to a contract for the sale of the stock of a corporation that is treated as an asset sale as a result of a deemed asset acquisition election under Code Sec. 338.

Long Production Property
The proposals provide rules for determining qualifying basis attributable to the manufacture, construction, or production of long production property and certain aircraft eligible for an extended placed in service deadline.

Mid-Quarter Convention
The mid-quarter convention applies to property placed in service during the tax year if 40 percent or more of the basis of the property was placed in service in the last three months of the tax year. The proposals clarify that the basis of property is not reduced by the 100 percent bonus allowance. This rule has always applied to 50 percent bonus property.

Effective Date of Proposals
In general, the proposed regulations apply to qualified property placed in service during or after the tax year that includes the date the proposals are finalized. A taxpayer may rely on the proposals in their entirety to qualified property acquired and placed in service after September 27, 2017.

Proposed regulations would provide guidance on the inclusion of income and deduction items in the calculation of built-in gains and losses under Code Sec. 382(h). The proposed regulations would:

• simplify the application of Code Sec. 382;
• provide more certainty to taxpayers in determining built-in gains and losses for Code Sec. 382(h) purposes; and
• ensure that the application of certain law changes made by the Tax Cuts and Jobs Act ( P.L. 115-97) (TCJA) does not further complicate the application of Code Sec. 382(h).

Taxpayers may rely on these proposed regulations until final regulations are issued. When these proposed regulations are adopted as final regulations, it is expected that Notice 87-79, 1987-2 CB 387, Notice 90-27, 1990-1 CB 336, Notice 2003-65, 2003-2 CB 747, and Notice 2018-30, 2018-21 I.R.B. 610, will be withdrawn and declared obsolete.

Built-in Gains and Losses
Generally, Code Sec. 382 imposes a value-based limitation (section 382 limitation) on the ability of a loss corporation to offset its taxable income in periods subsequent to an ownership change with losses attributable to periods prior to that ownership change.

Code Sec. 382(h) provides rules relating to the determination of a loss corporation’s built-in gains and losses as of the date of the ownership change (change date). In general, built-in gains recognized during the five-year period beginning on the change date (recognition period) allow a loss corporation to increase its section 382 limitation. Built-in losses recognized during the recognition period are subject to the loss corporation’s section 382 limitation.

Specifically, if a loss corporation has a net unrealized built-in gain (NUBIG), the section 382 limitation for any tax year ending during the recognition period is increased by the recognized built-in gain (RBIG) for the year, with cumulative increases limited to the amount of the NUBIG. If a loss corporation has a net unrealized built-in loss (NUBIL), the use of any recognized built-in loss (RBIL) during the recognition period is subject to the section 382 limitation.

IRS Guidance and TCJA
Notice 2003-65 provides interim guidance on the identification of built-in gains and losses under Code Sec. 382(h). This notice permits taxpayers to rely on safe harbor approaches for applying Code Sec. 382(h) to an ownership change prior to the effective date of temporary or final regulations issued under that provision.

Notice 2003-65 provides (i) a single safe harbor for computing the NUBIG or NUBIL of a loss corporation, based on principles underlying the calculation of net recognized built-in gain under Code Sec. 1374, and (ii) two safe harbors for the computation of a loss corporation’s RBIG or RBIL: the 1374 approach and the 338 approach.

The 1374 approach identifies RBIG and RBIL at the time of the disposition of a loss corporation’s assets during the recognition period. Generally, this approach relies on accrual method of accounting principles to identify built-in income and deduction items at the time of the ownership change, with certain exceptions.

In contrast, the 338 approach identifies items of RBIG and RBIL generally by comparing the loss corporation’s actual items of income, gain, deduction, and loss recognized during the recognition period with those that would have been recognized had an election under Code Sec. 338 (section 338 election) been made with respect to a hypothetical purchase of all of the outstanding stock of the loss corporation on the change date.

Taxpayers may rely on either the 338 approach or the 1374 approach until the IRS issues temporary or final regulations under Code Sec. 382(h). Compared to the 338 approach, the accrual-based 1374 approach is simpler to apply and administer and provides greater certainty for taxpayers.

Prior to the issuance of Notice 2003-65, the IRS had issued Notice 87-79 and Notice 90-27, which provided much more limited guidance regarding the determination of built-in gains and losses. After the TCJA, the IRS issued Notice 2018-30, which makes the 338 approach unavailable when computing items arising from bonus depreciation under Code Sec. 168(k).

The law changes made by the TCJA created additional uncertainty regarding the application of Code Sec. 382 in general, and Notice 2003-65 in particular. Specifically, certain important changes under the TCJA could potentially compromise the mechanics of the 338 approach and further complicate its application.

1374 Approach
For purposes of computing NUBIG and NUBIL, the proposed regulations would adopt as mandatory the NUBIG/NUBIL safe harbor and the 1374 approach described in Notice 2003-65, with certain modifications. These modifications would include technical fixes to calculations involving cancellation of indebtedness (COD) income, deductions for contingent liabilities, and cost recovery deductions. Additionally, the proposed regulations would clarify that carryovers of Code Sec. 163(j) disallowed business interest are counted only once for purposes of Code Sec. 382.

The modifications to the existing NUBIG/NUBIL safe harbor and the 1374 approach would ensure greater consistency between:

• amounts that are included in the NUBIG/NUBIL computation; and
• items that could become RBIG or RBIL during the recognition period.

Comment 
According to the IRS, the proposed regulations would modestly restrict net operating loss usage by reducing the amount that would qualify as RBIG, reducing the incentive to engage in inefficient, tax-motivated mergers and acquisitions.

NUBIG or NUBIL Computation
The proposed rules for the computation of NUBIG/NUBIL would capture a range of items that closely tracks the NUBIG/NUBIL safe harbor computation in Notice 2003-65. However, the component steps of the proposed NUBIG/NUBIL computation would be more explicit, as follows:

• The proposed NUBIG/NUBIL computation would first take into account the aggregate amount that would be realized in a hypothetical disposition of all of the loss corporation’s assets in two steps treated as taking place immediately before the ownership change:
  • —Step 1: the loss corporation would be treated as satisfying any inadequately secured nonrecourse liability by surrendering to each creditor the assets securing such debt.
  • —Step 2 : the loss corporation would be treated as selling all remaining assets pertinent to the NUBIG/NUBIL computation in a sale to an unrelated third party, with the hypothetical buyer assuming no amount of the seller’s liabilities.
  • That total hypothetical amount realized by the loss corporation pursuant to Steps 1 and 2, above, would be then decreased by (i) the sum of the loss corporation’s deductible liabilities (both fixed and contingent), and (ii) the loss corporation’s basis in its assets.
  • Finally, the decreased hypothetical total would be then increased or decreased, as applicable, by the following:
  • —(i) the net amount of the total RBIG and RBIL income and deduction items that could be recognized during the recognition period (excluding COD income); and
  • —(ii) the net amount of positive and negative section 481 adjustments that would be required to be included on the previously-described hypothetical disposal of all of the loss corporation’s assets.

The proposed regulations generally would not allow COD income to be included in the calculation of NUBIG/NUBIL, but would provide certain exceptions.

RBIG and RBIL Items
As mentioned above, the proposed regulations would apply a methodology for identifying RBIG or RBIL that closely tracks the accrual based 1374 approach described in Notice 2003-65. However, the proposed regulations would significantly modify the 1374 approach to include as RBIL the amount of any deductible contingent liabilities paid or accrued during the recognition period, to the extent of the estimated value of those liabilities on the change date.

The proposed regulations also would add a rule clarifying that certain items do not constitute RBIG (such as dividends paid during the recognition period). In addition, limitations would be provided on the extent to which excluded COD income is treated as RBIG. Further, the proposed regulations would provide two different RBIG ceilings with regard to COD on recourse debt, and would provide special rules for COD income on nonrecourse debt.

Finally, rules would be provided for the interaction between Code Sec. 163(j) and Code Sec. 382. To eliminate the possibility of duplication of RBIL items, the proposed regulations would provide that Code Sec. 382 disallowed business interest carryforwards would not be treated as RBIL if such amounts were allowable as a deduction during the recognition period. The proposed regulations also would clarify the treatment of certain items allocated from a partnership.

Applicability Date
The regulations are proposed to be effective for ownership changes occurring after the date the proposed regulations are published as final regulations in the Federal Register. However, taxpayers and their related parties may apply these proposed regulations to any ownership change occurring during a tax year with respect to which the period described in Code Sec. 6511(a) has not expired, so long as the taxpayers and all of their related parties consistently apply the rules of these proposed regulations to such ownership change and all subsequent ownership changes that occur before the applicability date of the final regulations.

Comments and Requests for Hearing
Written or electronic comments must be received by November 9, 2019. Written or electronic requests for a public hearing and outlines of topics to be discussed at the public hearing must be received by November 9, 2019. Electronic submissions must be sent via the Federal eRulemaking Portal at www.regulations.gov (indicate IRS and REG-125710-18) by following the online instructions for submitting comments. Once submitted to the Federal eRulemaking Portal, comments cannot be edited or withdrawn. The Treasury and the IRS will publish for public availability any comment received to its public docket, whether submitted electronically or in hard copy.

Hard copy submissions must be sent to: Internal Revenue Service, CC:PA:LPD:PR (REG-125710-18), Room 5203, Post Office Box 7604, Ben Franklin Station, Washington, DC 20044. Submissions may be hand-delivered Monday through Friday between the hours of 8:00 a.m. and 4:00 p.m. to CC:PA:LPD:PR (indicate REG-125710-18), Courier’s Desk, Internal Revenue Service, 1111 Constitution Avenue, NW., Washington, DC 20224.

The IRS has issued final regulations that amend the rules relating to hardship distributions from Code Sec. 401(k) plans. The final regulations are substantially similar to the proposed regulations. Further, plans that complied with the proposed regulations satisfy the final regulations as well. The regulations are effective on September 23, 2019.

The IRS has issued final regulations that amend the rules relating to hardship distributions from Code Sec. 401(k) plans. The final regulations are substantially similar to the proposed regulations. Further, plans that complied with the proposed regulations satisfy the final regulations as well. The regulations are effective on September 23, 2019.

The final regulations:

• reflect statutory changes affecting Code Sec. 401(k) plans, including changes made by the Bipartisan Budget Act of 2018 ( P.L. 115-123); and
• affect participants in, beneficiaries of, employers maintaining, and administrators of plans that include cash or deferred arrangements or provide for employee or matching contributions.

Deemed Immediate and Heavy Financial Need
The final regulations modify the safe harbor list of expenses for which distributions are deemed to be made on account of an immediate and heavy financial need. The final regulations:

• add "primary beneficiary under the plan" as an individual for whom qualifying medical, educational, and funeral expenses may be incurred;
• modify the expense listed in existing Reg. §1.401(k)-1(d)(3)(iii)(B)(6) to provide that the limitations in Code Sec. 165(h)(5) do not apply for this purpose; and
• add to the list a new type of expense, relating to expenses incurred as a result of certain disasters.

Distribution Necessary to Satisfy Financial Need
The final regulations modify the rules for determining whether a distribution is necessary to satisfy an immediate and heavy financial need, by:

• eliminating any requirement that an employee be prohibited from making elective contributions and employee contributions after receipt of a hardship distribution; and
• eliminating any requirement to take plan loans prior to obtaining a hardship distribution.

In particular, the final regulations, like the proposed regulations, eliminate the safe harbor in existing Reg. §1.401(k)-1(d)(3)(iv)(E), under which a distribution is deemed necessary to satisfy the financial need only if elective contributions and employee contributions are suspended for at least six months after a hardship distribution is made and, if available, nontaxable plan loans are taken before the hardship distribution is made.

Expanded Sources for Hardship Distributions
The final regulations modify existing Reg. §1.401(k)-1(d)(3) to permit hardship distributions from Code Sec. 401(k) plans of elective contributions, qualified nonelective contributions (QNECs), qualified matching contributions (QMACs), and earnings on these amounts, regardless of when contributed or earned.

Section 403(b) Plans
A hardship distribution of Code Sec. 403(b) elective deferrals is subject to the rules and restrictions set forth in Reg. §1.401(k)-1(d)(3). Accordingly, the preamble to the proposed regulations had stated that the new rules relating to a hardship distribution of elective contributions from a Code Sec. 401(k) plan generally apply to Code Sec. 403(b) plans. Because this requirement is retained in the final regulations, at Reg. §1.401(k)-1(d)(3)(iii)(B), it applies to Code Sec. 403(b) plans.

Applicability Dates
The changes to the hardship distribution rules made by the Bipartisan Budget Act of 2018 are effective for plan years beginning after December 31, 2018.

Plan Amendments
The Treasury Department and IRS expect that plan sponsors will need to amend their plans’ hardship distribution provisions to reflect the final regulations, and any such amendment must be effective for distributions beginning no later than January 1, 2020. The deadline for amending a disqualifying provision is set forth in Rev. Proc. 2016-37, I.R.B. 2016-29,136.

For a taxpayer using an accrual method of accounting, the all events test is not met for item of gross income any later than when is included in revenue on an applicable financial statement (AFS) or other financial statement specified by the Treasury Secretary. How the AFS income inclusion rule applies to accrual method taxpayers with an AFS is described and clarified by Proposed Reg. §1.451-3.

For a taxpayer using an accrual method of accounting, the all events test is not met for item of gross income any later than when is included in revenue on an applicable financial statement (AFS) or other financial statement specified by the Treasury Secretary. How the AFS income inclusion rule applies to accrual method taxpayers with an AFS is described and clarified by Proposed Reg. §1.451-3.

Year-by-Year Application
The proposed regulations provide that the AFS income inclusion rule generally applies to accrual method taxpayers with an AFS when the timing of income inclusion for one or more items of income is determined using the all events test. They further clarify that the AFS income inclusion rule applies only to taxpayers that have one or more AFS covering the entire tax year.

The AFS income inclusion rule applies on a year-by-year basis and, therefore, an accrual taxpayer with an AFS in one tax year that does not have an AFS in another tax year must apply the AFS income inclusion rule in the tax year that it has an AFS, and does not apply the rule in the tax year in which it does not have an AFS.

No Change to Income Tax Treatment
The proposed regulations also clarify that AFS income inclusion rule does not change the treatment of a transaction for federal income tax purposes:

• The treatment of a transaction or event in a tax year may be different for federal income tax and AFS purposes.
• The applicability of any exclusion provision, or the treatment of nonrecognition transactions, in the Code, the Income Tax Regulations, or other guidance does not change.

Partial Payment
The proposed regulations provide that an amount included in the transaction price for AFS purposes may not be treated as contingent on the occurrence or nonoccurrence of a future event if the taxpayer has been paid or has an equitable, contractual, or other right to partial payment for performance completed to date. Additionally, that transaction price may not be reduced for amounts subject to Code Sec. 461, including reward amounts in credit card transactions.

Special Methods and Multi-Year Contracts
The proposed regulations clarify that when a taxpayer uses a special method of accounting, the special method of accounting determines the timing of the income inclusion.

Proposed regulations also provide guidance for taxpayers with a financial reporting period that is different than the taxpayer’s tax year. The taxpayer must use one of three permissible methods in order to determine whether an item of income has been included in revenue on an AFS.

For a contract with multiple performance obligations, the allocation of the transaction price to each performance obligation equals the amount allocated to each performance obligation for purposes of including the item in revenue in the taxpayer's AFS. The proposed regulations clarify that a transaction price does not include amounts collected on behalf of third parties, or amounts that are contingent on the occurrence or nonoccurrence of a future event.

A taxpayer with a multi-year contract applies the all events test by applying a cumulative approach reflecting amounts previously included under Code Sec. 451 rather than an annualized approach.

Fees
Under the proposed regulations if the taxpayer does not treat a fee as discount or as an adjustment to the yield of a debt instrument over the life of the instrument (such as points) in its AFS, and the fee otherwise would be treated as creating or increasing original issue discount (OID) for federal income tax purposes (specified fee), then the rules in the proposed regulations under Code Sec. 451(b) apply before the rules in Code Secs. 1271 through Code Sec. 1275. Removing specified fees and specified credit card fees from the calculation of OID will permit taxpayers to apply only the rules of Code Sec. 451(b) to these fees, without also having to apply the rules relevant to OID.

The proposed section regulations would not apply to determine the time at which OID generally is includible in income.

Effective Date
The regulations are proposed generally to apply to tax years beginning on or after the date the final regulations are published in the Federal Register. However, in the case of a specified fee, Proposed Reg. §1.451-3(i)(2) is proposed to apply for a taxpayer’s first tax year beginning one year after the date the Treasury Decision adopting these regulations as final is published in the Federal Register.

A taxpayer may rely on the proposed regulations (other than the proposed regulations relating to specified fees) for tax years beginning after December 31, 2017 (after December 31, 2018, for specified credit card fees), as long as the taxpayer: (1) applies all the applicable rules contained in the proposed regulations for specified credit card fees; and (2) consistently applies the proposed regulations to all items of income during the tax year (other than specified fees).

Proposed regulations provide rules for accrual method taxpayers who receive advance payments. The proposed regulations include provisions affecting both taxpayers both with and without applicable financial statements (AFS), and describe and clarify the statutory requirements of Code Sec. 451(c).

Similar to Rev. Proc. 2004-34
The proposed regulations include many provisions similar to those of Rev. Proc. 2004-34, I.R.B. 2004-22, 991. For example the proposed regulations:

• provide a similar deferral method for non-AFS taxpayers;
• provide a list of items excluded from the definition of advance payment;
• provide rules consistent with Rev. Proc. 2004-34 to ensure the acceleration of an advance payment when a taxpayer dies or ceases to exist, or when a taxpayer’s obligation is satisfied or otherwise ends; and
• use the short tax year rules of Rev. Proc. 2004-34 for the AFS and non-AFS deferral methods
  The proposed regulations also provide additional definitions and clarifications.

Change in Accounting Method
The IRS intends to provide the procedures by which a taxpayer may change its method of accounting to use one of the deferral methods described in these proposed regulations. Until further guidance is issued, a taxpayer may continue to rely on Rev. Proc. 2004-34, as described in Notice 2018-35, I.R.B. 2018-18, 520.

Effective Date
The proposed regulations are to apply to tax years beginning on or after the date the final regulations are published in the Federal Register. Until the date the Treasury Decision adopting these regulations as final regulations is published in the Federal Register, a taxpayer may rely on these proposed regulations for tax years beginning after December 31, 2017, as long as the taxpayer: (1) applies all the applicable rules contained in these proposed regulations, and (2) consistently applies these proposed regulations to all advance payments.

Taxpayers may use the automatic consent procedures to change accounting methods to comply with the recent proposed regulations described above. Rev. Proc. 2018-31, I.R.B. 2018-22, 637, is modified.

Taxpayers may use the automatic consent procedures to change accounting methods to comply with the recent proposed regulations described above. Rev. Proc. 2018-31, I.R.B. 2018-22, 637, is modified.

The proposed regulations provide rules for:

• inclusion in gross income under the all events test for taxpayers with an applicable financial statement (AFS) ( NPRM REG-104870-18); and
• use of the deferral method for advance payments for taxpayers with or without an AFS ( NPRM REG-104554-18).

Certain qualifying taxpayers may apply for a change to comply with the proposed regulations without filing a Form 3115, Application for Change in Accounting Method.

Taxpayers Affected
The accounting change procedures for inclusion in gross income for taxpayers with an AFS generally apply to taxpayers with an AFS that want to:

• change to a method of accounting that treats an item of gross income as meeting the all events test no later than when the item is taken into account as revenue in its AFS under Code Sec. 451(b)(1)(A);
• in certain cases, allocate the transaction price to performance obligations under Code Sec. 451(b)(4);
• change to a method of accounting that complies with Proposed Reg. §1.451-3; or
• change to a method of accounting that complies with Proposed Reg. §1.451-8(c).

The procedures also apply to taxpayers that do not have an AFS and that want to change to a method of accounting that complies with Proposed Reg. §1.451-8(d).

In addition, the procedures apply to a change in AFS in order to apply certain revenue recognition methods of accounting.

Pending Nonautomatic Applications
The IRS will return any Form 3115 requesting a change in method of accounting available under this revenue procedure that:

• was filed on or before September 9, 2019, under the non-automatic procedures for a tax year beginning after December 31, 2017; and
• is pending with the National Office on September 9, 2019.

The National Office will send a letter to the taxpayer acknowledging the return of the Form 3115, and will return the user fee submitted with the form. A timely resubmitted Form 3115 will be considered filed as of the date the taxpayer originally filed the Form 3115 under the nonautomatic change procedures.

Effective Date
This revenue procedure is generally effective for tax years beginning after December 31, 2017. For specified credit card fees, it is effective for tax years beginning after December 31, 2018.

Amendments to have been proposed to update the information reporting regulations under Code Sec. 6033, which generally apply to organizations exempt from tax under Code Sec. 501(a). The proposed regulations reflect statutory amendments and certain grants of reporting relief announced through guidance that has been made since the current regulations were adopted. The amendments and grants of relief apply particularly with respect to tax-exempt organizations required to file an annual Form 990, Return of Organization Exempt from Income Tax, or a Form 990-EZ information return.

Amendments to have been proposed to update the information reporting regulations under Code Sec. 6033, which generally apply to organizations exempt from tax under Code Sec. 501(a). The proposed regulations reflect statutory amendments and certain grants of reporting relief announced through guidance that has been made since the current regulations were adopted. The amendments and grants of relief apply particularly with respect to tax-exempt organizations required to file an annual Form 990, Return of Organization Exempt from Income Tax, or a Form 990-EZ information return.

Annual Return and Reporting Requirements
Code Sec. 6033 outlines various requirements for an annual information return to be filed by organizations that are exempt from tax under Code Sec. 501(a) or are described in Code Sec. 527, including exceptions to the filing requirement. The reporting requirements under Code Sec. 6033(h) mandate controlling organizations to include on their returns:

• interest, annuities, royalties, or rents received from each controlled entity under Code Sec. 512(b)(13);
• any loans made to each such controlled entity; and
• any transfers of funds between such controlling organization and each such controlled entity.

Penalty Relief
Under Code Sec. 6104(b), the IRS must make the filed annual returns available to the public. Under Rev. Proc. 2018-38, I.R.B. 2018-31, 280, tax-exempt organizations (other than charities exempt under Code Sec. 501(c)(3) and Code Sec. 527 political organizations) were no longer required to report the names and addresses of contributors on Schedule B when filing their information returns. This change applied to information reporting for tax years ending on or after December 31, 2018, for donations above certain applicable thresholds.

However, Rev. Proc. 2018-38 has been overturned by a federal district court ( S.C. Bullock, DC Mont., 2019-2 ustc ¶50,245), which held that the IRS failed to follow the notice and comment procedures required by the Administrative Procedure Act (APA).

Code Sec. 6652(c)(1)(A) imposes penalties for a failure to file a return required under Code Sec. 6033, failure to include any required information, or failure to provide correct information. Under Code Sec. 6652(c)(5), the penalty is not imposed if it is shown that the failure was due to reasonable cause. Notice 2019-47 provides that the IRS will consider there to be a reasonable cause based on reliance on Rev. Proc. 2018-38 for any organizations that file Form 990 or 990-EZ and did not include on their 2018 information return such donor information as Rev. Proc. 2018-38 indicated was not required.

Proposed Amendments
The proposed amendments to the regulations would restore relief from the requirement to report contributor names and addresses on the annual returns filed by certain tax-exempt organizations that was previously provided in Rev. Proc. 2018-38 before the federal district court overturned that rule. Therefore, only organizations exempt under Code Secs. 501(c)(3) and 527 would need to continue reporting their donor information on their Forms 990, 990-EZ, or 990-PF.

In addition, the proposed amendments would incorporate into the regulations the existing exception from having to file an annual return for certain organizations that normally have gross receipts of $50,000 or less, found in Rev. Proc. 2011-15, I.R.B. 2011-3, 322.

The Surface Transportation Act of 2015: Tax Provisions (enacted on Jul. 31, 2015) provided for major changes in certain tax return deadlines. To allow for a transition period for taxpayers to adjust to the new due dates, the new filing deadlines carried a delayed effective date: for tax returns for tax years starting on or after January 1, 2016. As a result, the upcoming 2017 filing season is the first year these changes will take place.

The Surface Transportation Act of 2015: Tax Provisions (enacted on Jul. 31, 2015) provided for major changes in certain tax return deadlines. To allow for a transition period for taxpayers to adjust to the new due dates, the new filing deadlines carried a delayed effective date: for tax returns for tax years starting on or after January 1, 2016. As a result, the upcoming 2017 filing season is the first year these changes will take place.

Partnerships

The due date for partnerships to file Form 1065, U.S. Return of Partnership Income and Schedule K-1s, Partner's Share of Income, is moving this year from April 15 to March 15 (or to the 2½ months after the close of its tax year). This will be the same filing deadline now in place for S corporations.

The shift to a March 15 deadline will better enable partners, like current S corporation shareholders, to receive their Schedules K-1 in time to report that information on their Form 1040 before its April 15 due date. Many partners in the past had been forced to file for a six-month extension to file their Form 1040s.

Note: The traditional April 15, 2017 deadline falls on a Saturday and because Washington, D.C., will celebrate Emancipation Day the following Monday, April 17, 2017, the filing deadline has been pushed to Tuesday, April 18, 2017.

C Corporations

The filing deadline for regular C corporations is moving this year from March 15 (or the 15^th day of the 3^rd month after the end of its tax year) to April 15 (or the 15^th day of the 4th month after the end of its tax year). One exception: For C corporations with tax years ending on June 30, the filing deadline will remain at September 15 until tax years beginning after December 31, 2025, when it will become October 15.

Further, an automatic six-month extension will be available for C corporations, except for calendar-year C corporations through 2025, during which an automatic five-month extension until September 15 will generally apply. The stop-gap bill also instructs the IRS to modify regulations to provide for a variety of extensions-to-file rules, including, among others, a 6-month extension of Form 1065 to September 15 for calendar-year partnerships; and 5½ months ending September 30 for calendar-year trusts filing Form 1041.

FBARs

The new law also aligns the FBAR (Report of Foreign Bank and Financial Accounts) due date with the due date for individual returns, moving it from June 30 to April 15.

As the 2015 tax filing season comes to an end, now is a good time to begin thinking about next year's returns. While it may seem early to be preparing for 2016, taking some time now to review your recordkeeping will pay off when it comes time to file next year.

As the 2015 tax filing season comes to an end, now is a good time to begin thinking about next year's returns. While it may seem early to be preparing for 2016, taking some time now to review your recordkeeping will pay off when it comes time to file next year.

Taxpayers are required to keep accurate, permanent books and records so as to be able to determine the various types of income, gains, losses, costs, expenses and other amounts that affect their income tax liability for the year. The IRS generally does not require taxpayers to keep records in a particular way, and recordkeeping does not have to be complicated. However, there are some specific recordkeeping requirements that taxpayers should keep in mind throughout the year.

Business Expense Deductions

A business can choose any recordkeeping system suited to their business that clearly shows income and expenses. The type of business generally affects the type of records a business needs to keep for federal tax purposes. Purchases, sales, payroll, and other transactions that incur in a business generate supporting documents. Supporting documents include sales slips, paid bills, invoices, receipts, deposit slips, and canceled checks. Supporting documents for business expenses should show the amount paid and that the amount was for a business expense. Documents for expenses include canceled checks; cash register tapes; account statements; credit card sales slips; invoices; and petty cash slips for small cash payments.

The Cohan rule. A taxpayer generally has the burden of proving that he is entitled to deduct an amount as a business expense or for any other reason. However, a taxpayer whose records or other proof is not adequate to substantiate a claimed deduction may be allowed to deduct an estimated amount under the so-called Cohan rule. Under this rule, if a taxpayer has no records to provide the amount of a business expense deduction, but a court is satisfied that the taxpayer actually incurred some expenses, the court may make an allowance based on an estimate, if there is some rational basis for doing so.

However, there are special recordkeeping requirements for travel, transportation, entertainment, gifts and listed property, which includes passenger automobiles, entertainment, recreational and amusement property, computers and peripheral equipment, and any other property specified by regulation. The Cohan rule does not apply to those expenses. For those items, taxpayers must substantiate each element of an expenditure or use of property by adequate records or by sufficient evidence corroborating the taxpayer's own statement.

Individuals

• Record keeping is not just for businesses. The IRS recommends that individuals keep the following records:
• Copies of Tax Returns. Old tax returns are useful in preparing current returns and are necessary when filing an amended return.
• Adoption Credit and Adoption Exclusion. Taxpayers should maintain records to support any adoption credit or adoption assistance program exclusion.
• Employee Expenses. Travel, entertainment and gift expenses must be substantiated through appropriate proof. Receipts should be retained and a log may be kept for items for which there is no receipt. Similarly, written records should be maintained for business mileage driven, business purpose of the trip and car expenses for business use of a car.
• Business Use of Home. Records must show the part of the taxpayer's home used for business and that such use is exclusive. Records are also needed to show the depreciation and expenses for the business part of the home.
• Capital Gains and Losses. Records must be kept showing the cost of acquiring a capital asset, when the asset was acquired, how the asset was used, and, if sold, the date of sale, the selling price and the expenses of the sale.
• Basis of Property. Homeowners must keep records of the purchase price, any purchase expenses, the cost of home improvements and any basis adjustments, such as depreciation and deductible casualty losses.
• Basis of Property Received as a Gift. A donee must have a record of the donor's adjusted basis in the property and the property's fair market value when it is given as a gift. The donee must also have a record of any gift tax the donor paid.
• Service Performed for Charitable Organizations. The taxpayer should keep records of out-of-pocket expenses in performing work for charitable organizations to claim a deduction for such expenses.
• Pay Statements. Taxpayers with deductible expenses withheld from their paychecks should keep their pay statements for a record of the expenses.
• Divorce Decree. Taxpayers deducting alimony payments should keep canceled checks or financial account statements and a copy of the written separation agreement or the divorce, separate maintenance or support decree.

Don't forget receipts. In addition, the IRS recommends that the following receipts be kept:

• Proof of medical and dental expenses;
• Form W-2, Wage and Tax Statement, and canceled checks showing the amount of estimated tax payments;
• Statements, notes, canceled checks and, if applicable, Form 1098, Mortgage Interest Statement, showing interest paid on a mortgage;
• Canceled checks or receipts showing charitable contributions, and for contributions of $250 or more, an acknowledgment of the contribution from the charity or a pay stub or other acknowledgment from the employer if the contribution was made by deducting $250 or more from a single paycheck;
• Receipts, canceled checks and other documentary evidence that evidence miscellaneous itemized deductions; and
• Pay statements that show the amount of union dues paid.

Electronic Records/Electronic Storage Systems

Records maintained in an electronic storage system, if compliant with IRS specifications, constitute records as required by the Code. These rules apply to taxpayers that maintain books and records by using an electronic storage system that either images their hard-copy books and records or transfers their computerized books and records to an electronic storage media, such as an optical disk.

The electronic storage rules apply to all matters under the jurisdiction of the IRS including, but not limited to, income, excise, employment and estate and gift taxes, as well as employee plans and exempt organizations. A taxpayer's use of a third party, such as a service bureau or time-sharing service, to provide an electronic storage system for its books and records does not relieve the taxpayer of the responsibilities described in these rules. Unless otherwise provided under IRS rules and regulations, all the requirements that apply to hard-copy books and records apply as well to books and records that are stored electronically under these rules.

FAQ: Must I retain original business expense receipts if I computer scan them?

No, taxpayers may destroy the original hardcopy of books and records and the original computerized records detailing the expenses of a business if they use an electronic storage system.

Business often maintain their books and records by scanning hardcopies of their documents onto a computer hard drive, burning them onto compact disc, or saving them to a portable storage device. The IRS classifies records stored in this manner as an "electronic storage system." Businesses using an electronic storage system are considered to have fulfilled IRS records requirements for all taxpayers, should they meet certain requirements. And, they have the freedom to reduce the amount of paperwork their enterprise must manage.

Record-keeping requirements

Code Sec. 6001 requires all persons liable for tax to keep records as the IRS requires. In addition to persons liable for tax, those who file informational returns must file such returns and make use of their records to prove their gross income, deductions, credits, and other matters. For example, businesses must substantiate deductions for business expenses with appropriate records and they must file informational returns showing salaries and benefits paid to employees.

It is possible for businesses using an electronic storage system to satisfy these requirements under Code Sec. 6001. However, they must fulfill certain obligations.

Paperwork reduction

In addition, using an electronic storage system may allow businesses to destroy the original hardcopy of their books and records, as well as the original computerized records used to fulfill the record-keeping requirements of Code Sec. 6001. To take advantage of this option, taxpayers must:

(1) Test their electronic storage system to establish that hardcopy and computerized books and records are being reproduced according to certain requirements, and

(2) Implement procedures to assure that its electronic storage system is compliant with IRS requirements into the future.

Our firm would be glad to work with you to meet the IRS's specifications, should you want to establish a computerized recordkeeping system for your business. The time spent now can be worth considerable time and money saved by a streamlined and organized system of receipts and records.

Telecommuting not only offers employees flexibility, but accommodates lives that can often be hectic. While employees love the lifestyle and family/home advantages of telecommuting, the potential improvement to the bottom line is what appeals to employers.

Telecommuting not only offers employees flexibility, but accommodates lives that can often be hectic. While employees love the lifestyle and family/home advantages of telecommuting, the potential improvement to the bottom line is what appeals to employers. For example, turnover may decrease as satisfied employees are less likely to jump ship; absences may decrease since inclement weather and sick children do not prevent a home-bound employee from working; and overhead is reduced as less office space and support staff are required. Employees also enjoy financial benefits as they find their expenses for clothing, lunch and commuting are drastically reduced.

Tax implications of telecommuting

Although it may not be a top consideration as you and your employees contemplate the desirability of telecommuting, the question should nevertheless be addressed: what is the tax effect of such an arrangement?

Employer

If your employees telecommute, you probably won't feel a thing. The employee is paid just as he would be if he were on-site; the collection and payment of employment taxes will still be your responsibility as the employer; supplies and computer that you provide will still be deductible as an ordinary and necessary business expense.

Employee

But what about a telecommuting employee? Can telecommuting lead to an increase or decrease in net income? A change in deductions? An increase in the amount and types of required recordkeeping? The answer is yes... to all of the above.

Home office deduction. A discussion of telecommuting deductions should begin with the telecommuter's home office. A home office offers not only the possibility of a tax deduction in and of itself; it also affects the employee's ability to deduct other items that he may provide in order to do his job, such as computers and peripherals.

Strict requirements are applied by the IRS to home offices: expenses of the office are deductible only if certain conditions are met. The area used for business must be used (1) for the convenience of his employer and (2) regularly and exclusively as a principal place of business (or as a place to meet with clients or customers, but that will not usually be the case for a telecommuting employee).

• Convenience of the employer. When is an employee's home office used for the "convenience of the employer"? Courts, taxpayers and the IRS have struggled with this issue. The U.S. Supreme Court has said that it is a response to a business necessity. This test is satisfied if it is the employer who wants the arrangement. It is possible, however, that if it is the employee who asks for telecommuting, the IRS will conclude that the arrangement is not for the convenience of the employer. If your employee plans to take a home office deduction, it will be easier for him to meet the test if your records document that you requested the arrangement or that you mutually decided that telecommuting was preferred.

• Principal place of business. If the convenience of the employer test is met, the employee still has to show that his home office is his principal place of business. If he strictly telecommutes, this should not be a problem. If he alternates between his home office and your office location, he will meet this test if (1) he uses his home office for administrative and management activities related to the business and (2) there is no other place where he conducts substantial activities of this type. If this test doesn't produce a clear answer, the determination will have to be made based on (1) which location he spends more time at and (2) the relative importance of the business activities he conducts at both.

If the home office qualifies for deduction, all of the expenses relating to the office and its use may be deductible. These expenses include direct expenses, such as repairs to the room, installation of carpeting, etc. and indirect expenses, which relate to the office as part of the entire house, such as utilities, rent or mortgage interest, real estate taxes, etc. If the employee's income from the business use of his home equals or exceeds total business expenses, all of the expenses can be deducted.

Deducting computers and peripherals. How a telecommuting employee treats computers and related equipment depends on whether these items are the property of the employer or the employee.

• Supplied by employer. If the employer supplies them, he is entitled to deduct the cost. The tax result to the employee is less clear. It is possible, and in fact most likely, that the items will simply be treated as any other untaxed supplies and equipment provided to on-site employees to do their job, like paper and pens and a desk.

Alternatively, although it is difficult to support an argument that an employee's use of a computer in doing business for his employer should be treated as a fringe benefit, this is relatively new territory for the IRS and it has not officially tackled the issue. If employee non-office business use of employer-provided equipment is determined to be covered by the Internal Revenue Code, it seems likely that it would be treated as an excludable working condition fringe benefit. If so, employees will have to substantiate their business use in order to qualify for the exclusion. And what about an employee's personal use of the employer's computer? If the employee who uses an employer-provided computer can substantiate his business use of the computer and if his personal use is minimal, that benefit may be a de minimis fringe benefit he can exclude from taxation.

• Supplied by employee. If the computer is supplied by the employee, he can expense or depreciate the computer if it is both (1) required as a condition of employment and (2) used for the convenience of the employer. Qualifying for the home office deduction operates somewhat as a safe harbor for computer-related deductions. If the employee couldn't satisfy the requirements for a deductible home office, he will have to substantiate his business use in order to depreciate the computer and/or deduct related expenses. Substantiation requires the employee to keep adequate records documenting the time and amount of the business use, the date of expenditure or of use of the computer, the business purpose of the use of the computer, and the amount of each expenditure respecting the computer, such as the acquisition cost. If he met the requirements for taking a home office deduction, however, he does not have to substantiate the business use of the computer. Regardless, if the computer is not acquired or used by the employee as a condition of his employment and for the convenience of his employer, he can't depreciate or expense it. In addition to these requirements, computer expenses, just like all other business expenses, must be ordinary and necessary.

If the employee does use the computer for the employer's convenience and as a condition of his employment but can't meet the requirements for a home office deduction and must substantiate his business use in order to depreciate or deduct his computer, the amount deductible will be that proportion of expenses that correlates to the business use of the computer. The depreciation method available to the telecommuting employee will depend on whether the computer or other related equipment is used more or less than 50% for business. If more than 50%, he can use MACRS 200% declining balance depreciation for the business-use portion of the property plus that portion of the computer he personally used in the production of investment, royalty or rental income. If business use was less than 50%, the employee is limited to the straight-line method of depreciation. If the employee wants to expense the computer, he can only do so if its business use was more than 50%, and then he can expense only that portion of the property that was allocated to business use.

Dealing with reimbursed expenses. What about employer-reimbursed expenses? A telecommuting employee may be reimbursed for utilities, phone expenses or similar charges related to his home office and may be supplied with office materials or other supplies. All of these amounts will be considered either (1) employer owned items used in performing the employer's work and not income to the employee or (2) working condition fringe benefits and tax-free to your employee if he could deduct them as ordinary and necessary business expenses if he had paid them himself. In order to categorize these amounts as working condition fringes, the employee must be able to establish his home office as his principal place of business.

Telecommuting is increasing in acceptance and favor as a work option providing significant benefits to employee and employer alike. As its use expands, employers and employees should be aware that there is more to telecommuting than reduced costs and a more relaxed lifestyle. Careful and creative tax planning will help avoid any surprises or pitfalls.

Maintaining good financial records is an important part of running a successful business. Not only will good records help you identify strengths and weaknesses in your business' operations, but they will also help out tremendously if the IRS comes knocking on your door.

Maintaining good financial records is an important part of running a successful business. Not only will good records help you identify strengths and weaknesses in your business' operations, but they will also help out tremendously if the IRS comes knocking on your door.

The IRS requires that business owners keep adequate books and records and that they be available when needed for the administration of any provision of the Internal Revenue Code (i.e., an audit). Here are some basic guidelines:

Copies of tax returns. You must keep records that support each item of income or deduction on a business return until the statute of limitations for that return expires. In general, the statute of limitations is three years after the date on which the return was filed. Because the IRS may go back as far as six years to audit a tax return when a substantial understatement of income is suspected, it may be prudent to keep records for at least six years. In cases of suspected tax fraud or if a return is never filed, the statute of limitations never expires.

Employment taxes. Chances are that if you have employees, you've accumulated a great deal of paperwork over the years. The IRS isn't looking to give you a break either: you are required to keep all employment tax records for at least 4 years after the date the tax becomes due or is paid, whichever is later. These records include payroll tax returns and employee time documentation.

Business assets. Records relating to business assets should be kept until the statute of limitations expires for the year in which you dispose of the asset in a taxable disposition. Original acquisition documentation, (e.g. receipts, escrow statements) should be kept to compute any depreciation, amortization, or depletion deduction, and to later determine your cost basis for computing gain or loss when you sell or otherwise dispose of the asset. If your business has leased property that qualifies as a capital lease, you should retain the underlying lease agreement in case the IRS ever questions the nature of the lease.

For property received in a nontaxable exchange, additional documentation must be kept. With this type of transaction, your cost basis in the new property is the same as the cost basis of the property you disposed of, increased by the money you paid. You must keep the records on the old property, as well as on the new property, until the statute of limitations expires for the year in which you dispose of the new property in a taxable disposition.

Inventories. If your business maintains inventory, your recordkeeping requirements are even more arduous. The use of special inventory valuation methods (e.g. LIFO and UNICAP) may prolong the record retention period. For example, if you use the last-in, first-out (LIFO) method of accounting for inventory, you will need to maintain the records necessary to substantiate all costs since the first year you used LIFO.

Specific Computerized Systems Requirements

If your company has modified, or is considering modifying its computer, recordkeeping and/or imaging systems, it is essential that you take the IRS's recently updated recordkeeping requirements into consideration.

If you use a computerized system, you must be able to produce sufficient legible records to support and verify amounts shown on your business tax return and determine your correct tax liability. To meet this qualification, the machine-sensible records must reconcile with your books and business tax return. These records must provide enough detail to identify the underlying source documents. You must also keep all machine-sensible records and a complete description of the computerized portion of your recordkeeping system.

Some additional advice: when your records are no longer needed for tax purposes, think twice before discarding them; they may still be needed for other nontax purposes. Besides the wealth of information good records provide for business planning purposes, insurance companies and/or creditors may have different record retention requirements than the IRS.

After your tax returns have been filed, several questions arise: What do you do with the stack of paperwork? What should you keep? What should you throw away? Will you ever need any of these documents again? Fortunately, recent tax provisions have made it easier for you to part with some of your tax-related clutter.

After your tax returns have been filed, several questions arise: What do you do with the stack of paperwork? What should you keep? What should you throw away? Will you ever need any of these documents again? Fortunately, recent tax provisions have made it easier for you to part with some of your tax-related clutter.

The IRS Restructuring and Reform Act of 1998 created quite a stir when it shifted the "burden of proof" from the taxpayer to the IRS. Although it would appear that this would translate into less of a headache for taxpayers (from a recordkeeping standpoint at least), it doesn't let us off of the hook entirely. Keeping good records is still the best defense against any future questions that the IRS may bring up. Here are some basic guidelines for you to follow as you sift through your tax and financial records:

Copies of returns. Your returns (and all supporting documentation) should be kept until the expiration of the statute of limitations for that tax year, which in most cases is three years after the date on which the return was filed. It's recommended that you keep your tax records for six years, since in some cases where a substantial understatement of income exists, the IRS may go back as far as six years to audit a tax return. In cases of suspected tax fraud or if you never file a return at all, the statute of limitations never expires.

Personal residence. With tax provisions allowing couples to generally take the first $500,000 of profits from the sale of their home tax-free, some people may think this is a good time to purge all of those escrow documents and improvement records. And for most people it is true that you only need to keep papers that document how much you paid for the house, the cost of any major improvements, and any depreciation taken over the years. But before you light a match to the rest of the heap, you need to consider the possibility of the following scenarios:

• Your gain is more than $500,000 when you eventually sell your house. It could happen. If you couple past deferred gains from prior home sales with future appreciation and inflation, you could be looking at a substantial gain when you sell your house 15+ years from now. It's also possible that tax laws will change in that time, meaning you'll want every scrap of documentation that will support a larger cost basis in the home sold.
• You did not use the home as a principal residence for a period. A relatively new income inclusion rule applies to home sales after December 31, 2008. Under the Housing and Economic Recovery Act of 2008, gain from the sale of a principal residence will no longer be excluded from gross income for periods that the home was not used as the principal residence. These periods of time are referred to as "non-qualifying use." The rule applies to sales occurring after December 31, 2008, but is based only on non-qualified use periods beginning on or after January 1, 2009. The amount of gain attributed to periods of non-qualified use is the amount of gain multiplied by a fraction, the numerator of which is the aggregate period of non-qualified use during which the property was owned by the taxpayer and the denominator of which is the period the taxpayer owned the property. Remember, however, that "non-qualified" use does not include any use prior to 2009.

• You may divorce or become widowed. While realizing more than a $500,000 gain on the sale of a home seems unattainable for most people, the gain exclusion for single people is only $250,000, definitely a more realistic number. While a widow(er) will most likely get some relief due to a step-up in basis upon the death of a spouse, an individual may find themselves with a taxable gain if they receive the house in a property settlement pursuant to a divorce. Here again, sufficient documentation to prove a larger cost basis is desirable.

Individual Retirement Accounts. Roth IRA and education IRAs require varying degrees of recordkeeping:

• Traditional IRAs. Distributions from traditional IRAs are taxable to the extent that the distributions exceed the holder's cost basis in the IRA. If you have made any nondeductible IRA contributions, then you may have basis in your IRAs. Records of IRA contributions and distributions must be kept until all funds have been withdrawn. Form 8606, Nondeductible IRAs, is used to keep track of the cost basis of your IRAs on an ongoing basis.

• Roth IRAs. Earnings from Roth IRAs are not taxable except in certain cases where there is a premature distribution prior to reaching age 59 1/2. Therefore, recordkeeping for this type of IRA is the fairly simple. Statements from your IRA trustee may be worth keeping in order to document contributions that were made should you ever need to take a withdrawal before age 59 1/2.
• Education IRAs. Because the proceeds from this type of an IRA must be used for a particular purpose (qualified tuition expenses), you should keep records of all expenditures made until the account is depleted (prior to the holder's 30th birthday). Any expenditures not deemed by the IRS to be qualified expenses will be taxable to the holder.

Investments. Brokerage firm statements, stock purchase and sales confirmations, and dividend reinvestment statements are examples of documents you should keep to verify the cost basis in your securities. If you have securities that you acquired from an inheritance or a gift, it is important to keep documentation of your cost basis. For gifts, this would include any records that support the cost basis of the securities when they were held by the person who gave you the gift. For inherited securities, you will want a copy of any estate or trust returns that were filed.

Keep in mind that there are also many nontax reasons to keep tax and financial records, such as for insurance, home/personal loan, or financial planning purposes. The decision to keep financial records should be made after all factors, including nontax factors, have been considered.