Proposed Regs. Issued on Net Investment Tax
The IRS released proposed regulations (REG-130507-11) governing the 3.8% net investment income tax imposed under Sec. 1411 that was added to the Code by the Health Care and Education Reconciliation Act of 2010, P.L. 111-152. Taxpayers can rely on the proposed regulations for purposes of complying with the tax until final regulations take effect. The IRS has also posted FAQs explaining the tax and how it operates.
Starting in 2013, Sec. 1411(a)(1) imposes a tax equal to 3.8% of the lesser of an individual’s net investment income for the tax year or the excess (if any) of the individual’s modified adjusted gross income (AGI) for the tax year over a threshold amount. The threshold amounts are $250,000 for married taxpayers filing jointly and surviving spouses, $125,000 for married taxpayers filing separately, and $200,000 for other taxpayers. The tax also applies to estates and trusts on the lesser of (1) the estate’s or trust’s undistributed net investment income or (2) the excess of the estate’s or trust’s AGI over the threshold of the highest income tax bracket applicable to estates and trusts under Sec. 1(e) ($11,950 in 2013).
Prop. Regs. Sec. 1.1411-2(a)(2) provides that nonresident aliens (who are otherwise exempt from the tax) are subject to the tax if they elect to file a joint return with a resident or citizen spouse under Sec. 6013(g).
Prop. Regs. Sec. 1.1411-3 contains the rules for trusts and estates, including the types of trusts to which the tax does not apply (business trusts under Regs. Sec. 301.7701-4(b), certain state law trusts, pooled income funds, cemetery perpetual care funds, qualified funeral trusts, etc., as well as tax-exempt trusts--the latter exclusion applies to unrelated business income of those trusts).
Grantor trusts pay the tax at the level of the grantor, not at the trust level. Electing small business trusts, which are usually treated as two separate trusts, have their AGI determined as if they were one trust for purposes of this tax. Charitable remainder trusts (CRTs) are not subject to the tax, but distributions to noncharitable beneficiaries are (Prop. Regs. Sec. 1.1411-3(c)(2)). Foreign trusts and estates are not subject to the tax unless their net investment income is earned or accumulated for the benefit of U.S. persons. If a debtor is an individual, his or her bankruptcy estate is treated as an individual for purposes of computing the tax.
Prop. Regs. Sec. 1.1411-4 defines net investment income and its components. It also explains the exception for income received in the ordinary course of a trade or business. This section also describes the calculation of net investment income, describing the deductions that are properly allocable to the investment income.
Prop. Regs. Sec. 1.1411-5 provides definitions and examples regarding the trades or businesses to which the tax applies, which include trades or businesses that are passive activities with respect to the taxpayer. A trade or business of trading in financial instruments or commodities is subject to the tax.
Prop. Regs. Sec. 1.1411-7 provides details on determining the gain or loss on the disposition of interests in partnerships or S corporations.
The regulations are proposed to be effective for tax years beginning after Dec. 31, 2013, except for Prop. Regs. Sec. 1.1411-3(c)(2) (special rules for CRTs), which is effective for tax years beginning after Dec. 31, 2012.
Rules Proposed for Partial Identifying Numbers
The IRS issued proposed regulations (REG-148873-09) that permit filers of information returns to use truncated taxpayer identification numbers (TTINs) when issuing payee statements in the Forms 1099, 1098, and 5498 series (with the exception of Form 1098-C, Contributions of Motor Vehicles, Boats, and Airplanes, because it is an acknowledgment). The regulations make permanent a pilot program under Notice 2011-38.
A TTIN is an individual’s Social Security number (SSN), individual taxpayer identification number (ITIN), or adoption taxpayer identification number (ATIN) that is truncated by replacing the first five digits of the nine-digit number with X’s or asterisks. The TTIN program is voluntary for filers. It permits filers to truncate numbers on payee statements but not on forms filed with the IRS. It also does not allow the use of a TTIN on Form W-2, Wage and Tax Statement, because Sec. 6051(a)(2) requires that form, when furnished to employees, to show the name of the employee “and his social security account number.” However, filers may now use TTINs on electronically furnished payee statements.
The regulations will be effective when published in the Federal Register as final; however, affected filers may rely on the proposed regulations until final regulations are published.
Proposed Regs. Issued on Employer Health Coverage
The IRS issued proposed regulations (REG-138006-12) providing guidance on the large employer “shared responsibility” provisions in Sec. 4980H. Taxpayers can rely on the proposed regulations until the IRS issues final regulations or other applicable guidance. The IRS also posted FAQs on its website explaining how the shared-responsibility provisions work and who is subject to them.
The 144-page proposed regulations follow up on four notices the IRS issued in 2011 and 2012 that outlined possible approaches and asked for public comments (Notices 2011-36, 2011-73, 2012-17, and 2012-58). The proposed regulations generally incorporate the provisions of Notice 2012-58, as well as many of the provisions of Notices 2011-36, 2011-73, and 2012-17, with some changes in response to comments received.
Under Sec. 4980H, an applicable large employer is subject to a penalty if its employer-sponsored health coverage does not provide “minimum essential coverage” or is not affordable relative to the employee’s household income and at least one full-time employee (FTE) has been certified as having enrolled in a qualified health plan with respect to which an applicable premium tax credit or cost-sharing reduction is allowed or paid with respect to the employee. An employer is an “applicable large employer” for a calendar year if, during the preceding calendar year, it employed on average at least 50 FTEs. An employee is an FTE for any month if he or she was employed, on average, at least 30 hours per week.
The proposed regulations contain various definitions (Prop. Regs. Sec. 54.4980H-1) and rules for determining:
- Status as an applicable large employer and applicable large employer member (Prop. Regs. Sec. 54.4980H-2);
- FTEs (Prop. Regs. Sec. 54.4980H-3);
- Assessable payments under Sec. 4980H(a) (Prop. Regs. Sec. 54.4980H-4); and
- Whether an employer is subject to assessable payments under Sec. 4980H(b) (Prop. Regs. Sec. 54.4980H-5).
They also provide rules relating to the administration and assessment of assessable payments under Sec. 4980H (Prop. Regs. Sec. 54.4980H-6).
The proposed regulations adopt the position outlined in Notice 2011-36, which determines who is an employee and an employer under the common law standard. The IRS declined to adopt the definition of employer used in the Fair Labor Standards Act.
For purposes of determining who is an FTE, the proposed regulations adopt a commenter’s suggestion that the regulations use the term “hours of service” rather than “hours worked” (which had been used in Notice 2012-58).
Employers can rely on the proposed regulations pending the issuance of final regulations or other guidance. Sec. 4980H is effective for months after Dec. 31, 2013.