Monday September 16, 2019
IRS Publishes 2019 Business, Moving, Medical and Charitable Mileage Rates
Business mileage for employees was previously deductible as a miscellaneous expense. Miscellaneous expense deductions were permitted if they were over 2% of adjusted gross income. However, the Tax Cuts and Jobs Act (TCJA) repealed miscellaneous expense deductions, including the employee business mileage deduction.
Because employee business mileage is not deductible, most employers reimburse their employees for mileage. The employer must be able to show the mileage was an "ordinary and necessary" business expense. Employees should record the date, miles driven, the start and end locations and how the travel relates to their job responsibilities. Reimbursements in 2019 will usually be at the 58 cents per mile rate.
Moving and medical mileage were also affected by the TCJA. Moving mileage is generally not deductible for most taxpayers. There is an exception for active duty military who move due to a permanent change of station. They may deduct 20 cents per mile.
Medical travel is deductible, but subject to the 10% floor. If a taxpayer's total medical expenses exceed 10% of adjusted gross income, he or she should record the date, miles, start and end points and the medical purpose of each trip. It may be helpful to retain receipts to document that medical purpose.
Charitable travel is deductible at 14 cents per mile. Once again, "reliable written records" should include the date, miles, start and end points and the charitable purpose of each trip. The taxpayer will need to itemize to take the mileage and other charitable deductions.
JCT Guidance for 60% - 50% - 30% Charitable Deduction Limits
The Tax Cuts and Jobs Act (TCJA) increased the cash gifts charitable deduction limit from 50% to 60%. Instead of changing the 50% limit in IRC Secs. 170(b)(1)(A), 170(b)(1)(B)(ii), 170(b)(1)(E)(i) and 170(b)(1)(E)(v) to 60%, the drafters of the TCJA chose to write a new paragraph, Sec. 170(b)(1)(G) (published below).
While the 60% limit for cash gifts was welcome, adding a new paragraph created uncertainty about the ordering of deductions. Generally, the deduction order for gifts to public charities (Sec. 170(b)(1)(A) ) is 50%-type cash gifts, then 30%-type appreciated property gifts and next carryforward gifts.
Section 170 is one of the more complex parts of the Internal Revenue Code. With 15 major paragraphs, over 100 subparagraphs, deduction limits of 50%, 30% and 20% for gifts, 20 to 25 different gift categories and the need for CPAs to deduct each type of gift in the correct priority, it is challenging. The IRS and the Tax Court have never explained in detail the ordering of all 20 plus gift types.
Because a number of CPAs and commentators were uncertain how to calculate charitable deductions for donors who make both cash and appreciated property gifts, Annette Nellen, CPA, CGMA, Esq., Chair, AICPA Tax Executive Committee, sent a letter in February to Treasury with a proposed technical correction.
The AICPA proposal: The AICPA recommends that Congress provide a technical correction for Sec. 170(b)(1)(G)(iii) as changed by TCJA Sec. 11023 for the 60% of adjusted gross income (AGI) charitable deduction limitation to function as intended. We recommend that Congress replace the statutory provision with the language below:
"Notwithstanding subparagraphs (A)-(F), a taxpayer may deduct a cash contribution to an organization described in subparagraph A up to 10% of their adjusted gross income in addition to any amount allowed in the current year (or under a carryover) under this subsection. Any amount contributed to an organization under this paragraph in excess of the 10% described in the preceding sentence shall be treated as a carryover paid in each of the 5 succeeding years in order of time."
In December 2018, the Joint Committee on Taxation (JCT) published a "Blue Book" (JCS-1-18) on the Tax Cuts and Jobs Act. On page 51, "Coordination with certain other percentage limits applicable to individuals," JCT stated, "It is intended that any contribution of cash by an individual to an organization described in section 170(b)(1)(A) (generally, public charities and certain private foundations that are not nonoperating private foundations) shall be allowed to the extent that the aggregate of such contributions for the taxable year does not exceed 60 percent of the taxpayer's contribution base, reduced by the aggregate amount of the contributions allowed under section 170(b)(1)(A) for the year. In other words, the 60-percent limit for cash contributions is intended to be applied after (and reduced by) the amount of noncash contributions to organizations described in section 170(b)(1)(A)."
JCT also offered an example for a donor with $100,000 contribution base and 50%-type gift of $50,000 and a cash gift of $10,000. This example shows ordering and stated, "The cash contribution limit under new section 170(b)(1)(G) is determined after accounting for noncash contributions. Thus, the $50,000 contribution of unappreciated property is accounted for first, using up the individual's entire 50-percent contribution limit under section 170(b)(1)(A) (50 percent of the individual's $100,000 contribution base), and leaving $10,000 in allowable cash contributions under the 60-percent limit ($60,000 (60 percent of $100,000) reduced by the $50,000 in noncash contributions allowed under section 170(b)(1)(A))."
In a footnote, JCT noted that a "technical correction" may be needed to clarify this ordering method.
Editor's Note: Both JCT and AICPA agree that the intent of Congress was to permit an added 10% of cash gifts over the prior 50% and 30% limits. The JCT Blue Book explanation suggests that Sec. 170(b)(1)(G)(iii) was not intended to change the prior 50% and 30% ordering. While the JCT explanation of the TCJA did not give many specific examples, both JCT and the AICPA amendment have the same goal. The prior 50% and 30% deductions are reported first, and up to 10% of additional cash deductions may be taken, for a potential total of 60%. Some CPAs may rely on the JCT Blue Book and report Sec. 170(b)(1)(A) charitable gifts of cash and then appreciated property. To maximize tax savings through the capital gain bypass, the total gifts could be 20% cash and 30% appreciated property. If a CPA relies on the JCT ordering of Sec. 170(b)(1)(A) followed by the Sec. 170(b)(1)(G) gifts, then he or she will report an added 10% cash gift. Some CPAs may choose the 60% combination gift limit for tax year 2018 and some may hold with a 50% limit until a technical correction provision is passed.
SEC. 11023. INCREASED LIMITATION FOR CERTAIN CHARITABLE CONTRIBUTIONS.
(a) IN GENERAL.Section 170(b)(1) is amended by redesignating subparagraph (G) as subparagraph (H) and by inserting after subparagraph (F) the following new subparagraph:
(G) INCREASED LIMITATION FOR CASH CONTRIBUTIONS.(b) EFFECTIVE DATE.The amendment made by this section shall apply to contributions in taxable years beginning after December 31, 2017.
(i) IN GENERAL.In the case of any contribution of cash to an organization described in subparagraph (A), the total amount of such contributions which may be taken into account under subsection (a) for any taxable year beginning after December 31, 2017, and before January 1, 2026, shall not exceed 60 percent of the taxpayer's contribution base for such year.
(ii) CARRYOVER.If the aggregate amount of contributions described in clause (i) exceeds the applicable limitation under clause (i) for any taxable year described in such clause, such excess shall be treated (in a manner consistent with the rules of subsection (d)(1)) as a charitable contribution to which clause (i) applies in each of the 5 succeeding years in order of time.
(iii) COORDINATION WITH SUBPARAGRAPHS (A) AND (B).
(I) IN GENERAL.Contributions taken into account under this subparagraph shall not be taken into account under subparagraph (A).
(II) LIMITATION REDUCTION. For each taxable year described in clause (i), and each taxable year to which any contribution under this subparagraph is carried over under clause (ii), subparagraph (A) shall be applied by reducing (but not below zero) the contribution limitation allowed for the taxable year under such subparagraph by the aggregate contributions allowed under this subparagraph for such taxable year, and subparagraph (B) shall be applied by treating any reference to subparagraph (A) as a reference to both subparagraph (A) and this subparagraph.
Applicable Federal Rate of 3.4% for January -- Rev. Rul. 2019-3; 2019-2 IRB 1 (19 December 2018)
The IRS has announced the Applicable Federal Rate (AFR) for January of 2019. The AFR under Section 7520 for the month of January is 3.4%. The rates for December of 3.6% or November of 3.6% also may be used. The highest AFR is beneficial for charitable deductions of remainder interests. The lowest AFR is best for lead trusts and life estate reserved agreements. With a gift annuity, if the annuitant desires greater tax-free payments the lowest AFR is preferable. During 2019, pooled income funds in existence less than three tax years must use a 2.2% deemed rate of return.