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Interview with Team Who Wrote Net Investment Income Tax

Bob Keebler interviews David Kirk and Adrienne Mikolshek, part of the team who wrote the Net Investment Income Tax regulations, to help members understand the new IRS Form 8960, Net Investment Income Tax for Individuals, Estates and Trusts and the draft instructions. Access more resources in the Planning After ATRA and NIIT Toolkit, including more podcasts, a customizable letter to send to clients to illustrate why it is important that they meet with you and new charts by Bob Keebler as well as webcast recordings and Forefield Advisor alerts/videos and the complete four-volume set of The CPA’s Guide to Financial & Estate Planning, recently updated for ATRA and NIIT and much more.

Interview with David Kirk and Adrienne Mikolashek

 

This podcast was originally recorded Jan. 8.

Transcript:

SARAH BRADLEY:  On behalf of the AICPA Personal Financial Planning Division, this is Sarah Bradley and I'm joined by David Kirk, Adrienne Mikolashek and Bob Keebler to discuss the draft of the instructions for Form 8960, Net Investment Income Tax for Individuals, Estates and Trusts.

David and Adrienne are both attorneys serving in the Pass Throughs and Special Industries Division of the Office of Chief Counsel at the Internal Revenue Service and are part of the team who wrote these regulations.

Bob Keebler is a partner with Keebler and Associates.  His practice includes family wealth transfer planning and preservation planning, charitable giving, retirement distribution planning and estate administration.  And Bob, I'll let you take it away.

ROBERT S. KEEBLER, CPA:  Thank you, Sarah and good afternoon everyone.  We are truly honored to have with us David Kirk and Adrienne Mikolashek, who wrote these regulations.  They have been very involved with the practitioner community trying to make this work. 

This area, the NIIT investment income tax, touches literally every code section that affects S corporations, partnerships and individuals, so the very broad registration project.  David and Adrienne, thank you for being with us today.

DAVID H. KIRK:  You're welcome.

ADRIENNE M. MIKOLASHEK, JD:  Thank you.

ROBERT S. KEEBLER, CPA:  I thought what we would do is start with, on page 4 there's some introductory questions and we'll go through these.  Maybe, Adrienne, you can take the first few and then we'll go over to Dave.

But Adrienne, big picture, who needs to know what's in these rules under 1411?  Who needs to understand these regulations, the forms?  Is it just CPAs or is it broader than that? 

ADRIENNE M. MIKOLASHEK, JD:  Oh, I think it's much broader than that.  I think to try even to pick up the form 8960, to try to do a calculation for the net investment income tax without understanding the statute and the regulations, you're putting yourself and your clients at a severe disadvantage.

The form and the instructions, while intended to try to pull a lot of information from the 1040 or 1041, there are an awful lot of nuances within the regulations themselves, which may not necessarily translate when you're working with just the form or the software that you're filing your taxes under.  So I think you would -- I think everyone, you know, CPAs, lawyers, planners, everybody needs to go in, familiarize themselves with the regulations so they can try to catch what needs to be addressed for their particular circumstances.

ROBERT S. KEEBLER, CPA:  No, what are some of the highlights when we look at maybe the final regulations and the instructions for form 8960?  In no particular order, what do you think are some of the most important things we need to be thinking about?

ADRIENNE M. MIKOLASHEK, JD:  Well, right out of the gate, I mean, one of the things that -- the first paragraph you'll see on the front page of the instructions for the form 8960 is the language with regard to reliance.  You know, 2013 is kind of that black hole since the final regulations don't apply until the tax year 2014, and the proposed regulations under -- from 2012 didn't apply until 2014. 

2013 is kind of this ala carte.  But the form 8960 and its instructions were based off of the final regulations that were issued in December of last year as well as the 2013 proposed regulations that were also issued in December of last year.

We needed a starting point and that is -- we looked at as the best place to go and certainly allows taxpayers -- the window into 2014, but because of the reliance language in the final regulations, also lets them fill out the form based on the regulations as they exist going forward.

I think the other thing to pay attention to is there are going to be areas within the instructions for the form 8960 and some lines on the form that you may not fill out for the first year.  They're not yet relevant.  For instance, the net operating losses, recoveries -- when you've paid something in a prior year -- and the capital loss carry forward. 

But the intent -- we firmly could have left them out, added them in the future, but that seemed pointless if you're going to draft a product that was going to be something that would be used not just for 2013, but years forward, you want -- we wanted the practitioners to be able to see kind of how we were looking at those, to be able to plan for the future if they needed to so do, and make decisions for their clients that would be appropriate.

I want to make a plug as well.  This is a draft set of instructions.  We very much want to hear what works, what doesn't work, from those with boots on the ground who are filling the form out and if there's some confusion, if there are things that they think we didn't address correctly.  Please do provide comments sooner rather than later, because this is something that we're trying to finalize.  This is a 2013 form and the 2014 form I believe is already in the works in terms of construction and making modifications to what we currently have out in draft.

So please do comment.  We welcome them.  Hopefully from the final regulations people see that we do look at them and obviously take them into consideration.

ROBERT S. KEEBLER, CPA:  Now, from a pure reliance perspective, the proposed regulations issued in November of 2012 are reliance regulations if a practitioner or client wants them to be for the year beginning January 1, 2013, through December 31, 2013.  So if there's something in the proposed regulations that you like you can rely on that, correct?

ADRIENNE M. MIKOLASHEK, JD:  Most definitely.  Actually, one of the better examples I can come up with, maybe because it's just a near and dear to my heart section, is the disposition of partnerships and S corporation interest, both proposed regulations, one in the 2013 and one in the 2012 proposed regulations. 

If you really liked what we came out with originally and you wanted to do an asset-by-asset determination to try to figure out how much gain or loss you have for NII purposes, and you wanted to use the 2013 proposed regulations, you certainly can.

However, if you like to do the activity-by-activity approach, you can rely on the 2013 proposed regulation.  And then for other pieces you can go back to the finals and rely on the final regulation.

ROBERT S. KEEBLER, CPA:  So, reliance is one -- is one big issue.  What else do you think came out of the instructions or the final regs that practitioners should focus on?  Maybe some of that we'll come back to in our presentation.  But I just want to spend a moment and make sure that we highlight the most important things.

DAVID H. KIRK:  So, I mean, are you looking for -- I mean, we are going to talk about self-rental, we are going to talk a little bit about real estate pro.  A lot of these areas hotly discussed during the evolution of this project are -- might not be readily apparent from the four corners of a page of the instructions.  So how net losses are allowed now and they weren't in the proposed registration and may not in final.  But from the four corners of the 8960 itself, you can't tell what used to be and what is now.

And so a lot of the very controversial issues or hotly contested traders -- netting gains and losses from trade is another one -- you don't -- there's -- that's ancient history now.  And so a lot of the -- those items were glitches that were try to have been smoothed out to make the 8960 and compliance in general much, much, much more manageable.

ADRIENNE M. MIKOLASHEK, JD:  And I think that's another reason why people need to be familiar with the regulation and can't just pick up the form.  I know David has said in many public forums that the form doesn't look like the regulation.  But at the same time, he's the first to point out you can't fill out the form without knowing what the regulations say.

The form is meant to go hand-in-hand with various schedules and attachments to the 1040 or the 1041, but a lot of that isn't even going to make sense.  As David pointed out, you won't know these changes if you haven't looked at the regulations.

ROBERT S. KEEBLER, CPA:  Thank you.  Let's jump up to an area that's been on the front burner for many practitioners, and that's self-rental.  Simplistically, is it safe to say that self-rentals are not subject to the net for either rentals to a trader business in which the taxpayer materially participates? 

ADRIENNE M. MIKOLASHEK, JD:  Yes, I think that is safe to say.  To the extent that you have income, it is going to be non-passive and will not be subject to the net investment income tax. 

ROBERT S. KEEBLER, CPA:  So what if, Adrienne, I own 100% of the building and 15% of the architecture firm where I work?  Are we still good?

ADRIENNE M. MIKOLASHEK, JD:  Yes.  The self-rental does not require you to have mirror ownership.  It requires you to materially participate and have an ownership interest in the property that's being rented to.  And that's under the 469-2F6 regulations.

DAVID H. KIRK:  Now, your -- so in her instance, Bob, you own the building so you're getting the $10,000 of rent for the year, but economically you are bearing the burden of only 15% of the deduction, because you own 15% of your architectural firm.  Right?

ROBERT S. KEEBLER, CPA:  Right.

DAVID H. KIRK:  But for NIIT purposes, whatever, you get to exclude the entire $10,000 and all the expenses go with it.

ROBERT S. KEEBLER, CPA:  Okay.

DAVID H. KIRK:  That is -- that's for rental.  But for self-charged interest, which is somewhat similar, mathematically is different, because you are only allowed to exclude the portion of the deduction that you bear.  So Bob, in your case, you would be able to exclude $1,500 of the $10,000 that you received and that you would still be paying NIIT on $8,500.  So there is self-charge rental, self-charge interest, often thought of hand-in-hand.  But mechanically they operate differently.

ROBERT S. KEEBLER, CPA:  No, that's very helpful.  Now, the next bullet point, am I right?  When you report this -- and I hope everybody that's listening has a copy of form 8960 handy.  You basically would report all of your rental income, including self-rental, on line 4A, and then you'll make a negative adjustment, a contrary income item if you will, on line 4B. 

So if my self-rental was $500 and then I would include that and then subtract it out, is that pretty much how you'd want that reported?

ADRIENNE M. MIKOLASHEK, JD:  Yes, that's correct. 

ROBERT S. KEEBLER, CPA:  And is it necessary to put a statement supporting the self-rental or how do you see that happening?

DAVID H. KIRK:  So what I would envision happening and this is really up to the software developers what software programs you use, is I would expect if I'm an accountant and I'm preparing a tax return, I would expect that I would somehow, when entering the items into schedule E directly, somehow check a box, make a notation, something like that.  So whatever is on schedule E pulled out and a work paper or a worksheet or something is going to be printed out in your software package as part of the review copy or taxpayer copy or whatever, that is going to show the deduct.  Bob, in your case it would be $10,000.

I would see $10,000 on schedule E as my net number coming over onto line 4A because it sucks directly out of schedule E, and then I would see deduct self-charge rental attributable to Bob's architecture minus $10,000 and line 4C being zero. 

And if I have lots of different things going on, because if you have an S corporation you're also going to have your 15%.  Your K1 is also going to be on schedule E.  So if you have income from that, I would also see a deduct from your schedule E for Bob's K1 from architecture. 

So my software I would expect to have a laundry list of things reported there and -- but we didn't do a schedule or anything like that, unlike line 5B, 5C, some of the other ones.  But that's how we envision it happening.

ROBERT S. KEEBLER, CPA:  Thank you, David.  Let's go up to the next question, away from self-rental probably to an area that's even more difficult, and that is regrouping.

Now, under the regs, the election to regroup your activities under the fresh start must be made in the first year you're subject to the NIIT.  First off, let's just talk for a moment about what that means.

ADRIENNE M. MIKOLASHEK, JD:  Well, and in that -- there are two components to that.  First, you must have net investment income.  So anyone who has a checking account or an interest bearing savings account is going to have net investment income.  Okay?  But you don't owe the tax unless you're over one of the thresholds.  So for a married, filing joint couple that would be $250,000. 

So it's at that time that that couple needs to decide whether or not they want to regroup their activities, because they have the interest in their savings account and they have the money over the threshold amount.  They would then be subject to the net investment income tax.

DAVID H. KIRK:  It has nothing to do though with whether the activity itself that is subject to the regrouping has any income on it or not.  Okay?  That's the important part, is that this is almost like hypnotism.  Right?  When you -- when the person snaps their fingers you cluck like a chicken.  That the moment that you pick up the 8960 for the first time and attach it to your return for the first time, that is when you get to do it. 

ADRIENNE M. MIKOLASHEK, JD:  So in my example, I had interest in the savings account.  That has nothing to do necessarily with your passive activities.  But that's going to be the year that your client would want to consider whether or not they want to do the fresh start for regrouping.

If they wait and they go five years with just interesting from their mutual funds and other accounts, and then suddenly in year six they have income from a passive activity, and they try to regroup then, they're going to be five years behind the curve and they won't be able to take advantage of the fresh start because it's already gone by them.

DAVID H. KIRK:  Yes, so people that are sort of indifferent about their activities maybe because they don't have -- maybe you have an S corporation and you've run out of basis -- the 1366D suspending losses, 704D losses that are suspended due to at-risk, and nothing is coming into the 469 gauntlet to ever spit out onto their schedule E at all, or 8682 and ever land on line 4A, this is your one year, that year in which you attach this to your return for the first time.

Now, here's the kicker though, is it can be done in 2013 or 2014.  It's your first year.  So legally, it's the first year, which is 2014, because that gives you the ability to do it.  But you can apply the regulations to do it in '13 if you want to.  If you don't want to, then you can wait in '14 and kind of see how this all pans out.  That's okay. 

But if you do something in '13 you're stuck with that.  You don't get a second regrouping again in '14.  So you get one bite at the apple. 

ROBERT S. KEEBLER, CPA:  Okay.  Got it.  Let me just -- oh, go ahead, David.

DAVID H. KIRK:  No, no, I -- so the other thing is, say in 2013 I have -- I sell my business or something like that and I have AGI that's relatively high.  I don't -- I don't regroup.  Well, in '14/'15 I don't have AGI high enough, so I'm not subject to it.  2016, that is my first year post -- basically December 31 of '13, so after 2014, which I am subject to it, so I could regroup in 2016 if I didn't do it '13. 

[00:17:45]

ROBERT S. KEEBLER, CPA:  Good.  No, now I think I get it.  Let me -- the instructions state -- I just want to be redundant here.  The instructions state that the determination of whether you met the NIIT applicable income threshold, the $250,000 for a married couple and have met the net investment income criterias made without regard to the effective regrouping. 

Let's say that my income was $251,000 but I had -- basically I wasn't able to use my passive losses because I hadn't grouped properly.  And then I group properly and I can use a passive loss of $11,000, which would take my income down to $240,000.  I'm still able to make those grouping elections, right?  I mean, we don't end up in a simultaneous equation, is that correct?

ADRIENNE M. MIKOLASHEK, JD:  Yeah.

DAVID H. KIRK:  Yeah.  You sort of have the time traveler's dilemma, a paradox, whatever it is that you have, where you test before.  You walk in and you say, "Okay, I'm going to pick up the 8960 and this would be my tax."  Bob, in your situation at $251,000 you are filing the 8960 for the first time and you are picking up the instructions that tell that this is your one chance to regroup.

And if you regroup then that form goes away.  So you could be in a situation where you are perpetually not in NII and you would never ever trigger the ability to regroup without that one little provision in there.  It's almost like one of these back to the future things.

ROBERT S. KEEBLER, CPA:  Now, let me ask you a question, which is a difficult one.  If you have -- so someone dies.  Their executor is now managing all this real estate and everyone agrees -- and let's just stipulate -- that they are material participant.  Can they regroup?  Does death give you -- does that 1041 instead of a 1040 possibly give you the opportunity to make a new election?

DAVID H. KIRK:  I mean, you have a separate taxpayer, and though generally you don't want to go around trying to kill people in order to regroup, the idea is -- no, you have a separate taxpayer.  The estate is not bound to what happens for the decedent. 

ROBERT S. KEEBLER, CPA:  And would the same thing apply to a transfer to a non-grantor trust between lifetimes?

DAVID H. KIRK:  I think so.  I can't say that I've looked into that, but I can't see why not.

ROBERT S. KEEBLER, CPA:  Right.  Again, we have a new taxpayer and that's all I was trying to more or less get at.  Now, so the regrouping -- I think we understand that now and my example here is prior regrouping you have a million dollars in passive income from 10 different activities.  And then under this fresh start, you can group all those together and with the regrouping basically, you can create yourself in a situation where you're now a real estate professional.

How do you make that regrouping election on form 8960?  How do we tell the service in a way that we will perfect this election that that's what we're doing?

ADRIENNE M. MIKOLASHEK, JD:  Well, first of all, you don't make it on the form 8960.  I mean, you've got to follow -- to regroup, and remember you're not regrouping just for 1411 purposes.  You're making a decision that's going to affect both income, as well as the net investment income tax implications. 

So in this particular instance, you're going to regroup and you're going to follow the revenue procedure 2010-13 to tell the service, "This was my grouping.  This is my new grouping," and that you're availing yourself of the fresh start under, what is it, 1.469-11. 

DAVID H. KIRK:  Something, yes. 

ADRIENNE M. MIKOLASHEK, JD:  And that you're using that as your opportunity to and basis for regrouping.  Without that regulation, you would have needed to show a change in circumstances to support it.  But there is nothing you're going to report on the 8960.  This is something that you're going to take on for both income tax, as well as for the net investment income tax.  So basically, you're following the income tax rules. 

ROBERT S. KEEBLER, CPA:  Thank you, Adrienne.  Let's just for a moment, before we transition of this, let's spend a moment on real estate professionals.  What are we -- with the real estate professional safe harbor question, let's say that we're allowed to do that.  How is that going to work mechanically?  So you're already a real estate professional.  You get to the 500 hours.  We basically -- what do we do then? 

ADRIENNE M. MIKOLASHEK, JD:  What do you do then for 8960 purposes?

ROBERT S. KEEBLER, CPA:  Right.  For 8960 purposes, that would be an separate election autonomous from the 469 elections where we would be falling within this 1411 safe harbor. 

DAVID H. KIRK:  It's not really an elective regime.  So what -- okay, so when you have the real estate pro, it depends on where you are in your own personal real estate life cycle, whether your schedule E is kicking off losses or whether your depreciation is burned out and whether you have income.  But those items are reported on schedule E as non-passive income or loss.  You know, however many K1s you have or whatever it is.  That's going to flow naturally onto line 4A.

The instructions say on line 4B basically wipe that number out.  Now if you had a $1 million loss, then you have a $1 million add back to wipe yourself and bring 4C to 0.  If you had $900,000 of net income from your rental real estate activity and did you meet your safe harbor, then you put a $900,000 deduct and you net to 0. 

That also applies to -- but it doesn't only apply to the operating income.  The rental income itself, it also applies to the items reported on 4797 or the schedule D for the sales of property that are in that rental activity.  That's going to be a deduct on line 5B. 

ROBERT S. KEEBLER, CPA:  Thank you, David.  Let's jump over to the deduction recoveries question.  First of all, what is a deduction recovery?  I mean, I think everybody kind of knows this a little bit from itemized deductions with state income taxes, but let's talk about it conceptually.  What is it from an accounting perspective? 

DAVID H. KIRK:  It is a -- I mean, from this instance for 1411 purposes, a deduction recovery is when you have basically overpaid something.  And because you are a tax-based -- or a cash basis taxpayer, you deducted it in the prior year and you got it back. 

Now the state and local income tax is the easiest one for people to relate to.  But the interesting part about it is that for certain people that are in perpetual AMT because they live in certain states with very high income tax rates or have particular tax situations, they are never really worried about the recovery because they never got any benefit of the state tax deduction anyway.

But think about a rental property that you have.  If you have your townhouse and you sell it halfway through the year, well, when I sell it, I'm going to go and tell Allstate that I sold it and they're going to refund 5/12ths of my premium because I have five months left on my home owners insurance or my landlord insurance.  That's a recovery to the extent I deducted the full one-year premium out last year.

So the idea was that, well, even though that recovery is not rent because it's not for the tangible use -- it's not for the use of tangible property -- it is a recovery of an item that was deducted for NIIT purposes in a prior year.  Does that -- does that kind of give you a framework of what we were trying to get at?

ROBERT S. KEEBLER, CPA:  I think I understand that.  Now so basically on the state income tax side, if I deduct it -- forgetting the AMT.  Assume my income is high enough where there are no AMT issues.  I deduct $100,000 of state income taxes on form 8960 and later it turns out that -- I’m on a cash basis and all my allocations are right.  But later it turns out that I get $15,000 of that back. I 'm going to then have to turn around and pick that up, again, as a recovery on 8960.  Does that sound right?

DAVID H. KIRK:  Basically, yeah.  I mean, if you -- if your total liability though was a $1 million and you're getting a refund of 15, then -- well, it's not -- the fact that you put 10% on your 8960 in a prior year would basically ballpark would tell me that at the most you should probably pick up about 10% of your recovery.

ROBERT S. KEEBLER, CPA:  And what line am I going to pick that up on?  Am I going to -- I know I'm going to work on part 2 of form 8960, but where does the service expect me to report that?

DAVID H. KIRK:  Well, here is the quirky part, is that just like when you have a recovery of state income taxes, you report the recovery on the front page of your 1040.  I know some people in the past, for better or for worse, have actually put the recovery as a deduct on their schedule A line 5 as just a minus amount to just kind of net out with what their current withholding was on their W2 or whatnot.  That's not exactly right, but the point is when you've gotten your recovery, your $15,000, assuming that that's all NII money, that that's actually going to go on line 7, which is the other modifications in income side.

The reason that we had to put it there was there is a programming -- a computer issue that lines 9A, B, C and 10 cannot be a negative number.  And --

ROBERT S. KEEBLER, CPA:  I see.  Okay. 

DAVID H. KIRK:  And so if you had a massive refund from the prior year because you sold your business and you have that liquidity event of a lifetime where, you know, you were $15 million of income and then the next year you're only at $200,000, it's possible that your income -- your tax refund could be larger than the amount of your actual deduction in the following year.

In that instance, if you were to net them out on line 9D for state taxes, it would produce a negative -- a negative amount and smoke would start coming out of the system.  It wouldn’t let you e-file and things like that.

ROBERT S. KEEBLER, CPA:  I see.  So basically, we're going to put that part 1, line 7 of form 8960.  Now let's get into what I consider to be -- they're not the most difficult intellectual issues, but certainly, from a mechanical, mathematical perspective, sections 67 and 68, we have limitations on itemized deductions.  Basically, the 2% limitation under section 67 and the 3% PEASE limitation under 68. 

David, could you explain how the section 67 limitation/68 limitation are going to work when we try to integrate this with the net investment income tax?

DAVID H. KIRK:  So what you'll see in the instructions themselves are -- we developed sort of an elaborate schedule of your 67 and 68 limitations on pages 15 and 16 of the -- of the instructions. 

The reason we had to do that, as I explained briefly before is that no -- none of the lines for the deductions can be negative.  So if -- for example, it would have been very simple if we would have followed the example in the regulations under 1411-4(f)(7), I believe it is, where we talk about 67 and 68 limitations because what they basically said was you lose X number of deduction dollars' worth. 

If I had a state tax amount of $100,000 and through the section 68 limitation I lost $13,000 of that, I would expect my NII deduction to be $87,000.  But since line 10 cannot be negative, where else do I put it?  I have to bake in that -13,000 directly onto line 9B.  So I needed to develop a chart, or basically these tables, to show how I go about doing that.

You know, what happened -- under the final regs, for example, you can deduct investment advisory fees.  You know, your Merrill Lynch, your Smith Barney, whatever that is and tax prep fees.  Well, which amounts of those are going to be allowed because what happens if one of those are recovered or refunded in another year?  You need to reply the recovery rule.

I know that those are both subject to the 67 limitation and they get a haircut, but I need to apportion that haircut between all the items subject to 67 and then I need to do the same thing to section 68 and apportion the haircut, if any, amongst the items so that in a future year I know whether I received a benefit and if so how much for purposes of the recovery.

Now life would have been a lot easier if we could just put the amount of income lost or the amount of deduction lost on line 10 as a negative, just as a lump-sum number.  That doesn't work because it can't be negative.  The other problem we had was that line 11 says, "Add basically lines 9 and 10 together."

For those who have spent too much time doing 1040s will know that if you look at your schedule A when you had a section 68 limitation taxpayer, that if you were to sum up all of their deductions going down the right side, so the total taxes, the total charitables, the total all that all the way down to the bottom, that wouldn't necessarily equal the number that's reported on the bottom right corner of the schedule A and that's carried over to the back of the 1040 because working behind the scenes is your section 68 limitation. 

It was possible that the sum of all of your deductions on your schedule A was $110,000, but you lost 4,000 somehow because of the section 68 limitation, so the only thing it would show is $110,000.  But our problem is that if it did that behind-the-scenes calc, that we'd want line 11 to show a hundred-and-whatever thousand --

ADRIENNE M. MIKOLASHEK, JD:  110.

DAVID H. KIRK:  Well, I want it to show the net amount, so yeah, the 106.  But if I put 110 summed up on the other lines, I wouldn't match, and again, the smoke would start coming out. 

ROBERT S. KEEBLER, CPA:  No, I think I get it.  Let's just be overly simplistic.  But if someone's income for PEP and PEASE purposes was below the PEP and PEASE limitation of just about $300,000, but they were over 250 for NIIT, so they're in that gap, then you're just going to take the numbers directly from the itemized deduction sheet for after you apportion them.  If all of the activity was interest income, all subject to the NIIT, you'd be able to just take those numbers directly off schedule A, but that's never going to happen.  So that's why we have this mechanism we've built in here where you can adjust -- first of all, you have to adjust for what portion of your income is attributed -- or you have to match up your investment interest expense with your NIIT and then more importantly, when you go -- when you're into PEP and -- when you're into the PEASE limitation or into section 67, we're going to have to go through this schedule you put together.

I have actually programmed that schedule with an Excel spreadsheet.  It works very well.  But practitioners are going to have to be able to analyze that on their own to make sure their software is working right, at least for this first year.  I mean, I think this is a difficult calculation and if there are 200 tax prep software packages out there, I would be very surprised if all 200 of them get it right coming out of the blocks. 

DAVID H. KIRK:  I mean, the reason that we did this, and the reason we spent so much time doing these schedules, they might look unnecessary, but basically what we tried to do is create work papers for the tax practitioner community that could be able to do this and/or even definitely for the software developers because this is the type of thing where they would be trying to do. 

I remember being tortured when I was little on schedule D calc.  Do one of these with all the preferential rates by hand.  And you know, that's what we were trying to do here. 

ROBERT S. KEEBLER, CPA:  No, this has been very helpful.  I think everybody should be grateful for your hard work.  Let's talk a little bit about lost deductions.  How are the NOL lost deductions going to work under the NIIT, and how do we report those losses on form 8960?

ADRIENNE M. MIKOLASHEK, JD:  Well, the last deductions under the NIIT, they're vintages.  You've got to calculate the net operating loss on an annual basis and you've got to come up with a fraction for that particular vintage.  So the fraction for year one is going to be different possibly from year two.  And you're going to eat away at each one of those as you are going to use them for 1411 purposes. 

You know, in terms of -- what?  Go ahead.

DAVID H. KIRK:  No.  We give an example in there about an NOL and showing the vintages and showing how each year is different, has a different percentage and how it's eaten away.  When you report it, you report it as a negative amount on line 7, I believe it is.  Because for better or for worse, what we tried to do is throw everything on line 7 that was meant to be either above-the-line items, items of income, loss, deduction, gain, whatever, that is above the line, not schedule A, and reserve for the second part, part 2 of the form for basically schedule A-type items.

Now there are some sort of minor exceptions to that, but that's conceptually what we tried to do. 

ROBERT S. KEEBLER, CPA:  I think that's very helpful.  In conclusion, two more questions.  When do you anticipate the release of the final 8960?  I mean, what we have been working with now is a draft.  Is it going to change a lot, and probably out within the next three or four weeks?  I guess it has to be. 

ADRIENNE M. MIKOLASHEK, JD:  In terms of crystal ball an exact date, I don't think either one of us have that.  You know, everyone recognizes that the filing season here is quickly upon us, and those of you that are working on returns are probably already gathering your information.  A lot of the -- it was waiting on the final regulations to come out.

I think both of us can tell you, although with not immense certainty, we don't anticipate the form to change. What you're seeing in the draft is what we expect it to look like.

ROBERT S. KEEBLER, CPA:  Thank you, Adrienne.  Dave and Adrienne, on behalf of the AICPA, everyone at the AICPA wants to thank you, not just for being here today, but for everything that you've done in the past several years because there are a lot of reg projects out there.  Very rarely are the lawyers at the service who are working on these projects so open to listening to the practitioner community and really hearing the needs of our clients and what is going to work as a practical matter to kind of bring that to fruition by complying with the laws. 

So a sincere thank you on behalf of everyone at the AICPA, and thank you for being with us today. 

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