Tax Alerts & Updates
The IRS has issued guidance urging taxpayers to take several important steps in advance of the 2026 federal tax filing season, which opens on January 26. Individuals are encouraged to create or access...
The IRS has confirmed that supplemental housing payments issued to members of the uniformed services in December 2025 are not subject to federal income tax. These payments, classified as “qualified ...
The IRS announced that its Whistleblower Office has launched a new digital Form 211 to make reporting tax noncompliance faster and easier. Further, the electronic option allows individuals to submit i...
The IRS has reminded taxpayers about the legal protections afforded by the Taxpayer Bill of Rights. Organized into 10 categories, these rights ensure taxpayers can engage with the IRS confidently and...
The Financial Crimes Enforcement Network (FinCEN) has amended the Anti-Money Laundering/Countering the Financing of Terrorism (AML/CFT) Program and Suspicious Activity Report (SAR) Filing Requirements...
For purposes of calculating the 2026 intangible personal property tax on governmental leaseholds, Florida has issued a valuation factor table. In Florida, all governmental leasehold estates or related...
In her 2026 State of the State Address, New York Gov. Kathy Hochul has announced a proposal to establish a sales tax exemption for electricity sold at electric vehicle (EV) charging stations. News Re...
The IRS issued frequently asked questions (FAQs) addressing the new deduction for qualified overtime compensation added by the One, Big, Beautiful Bill Act (OBBBA). The FAQs provide general information to taxpayers and tax professionals on eligibility for the deduction and how the deduction is determined.
The IRS issued frequently asked questions (FAQs) addressing the new deduction for qualified overtime compensation added by the One, Big, Beautiful Bill Act (OBBBA). The FAQs provide general information to taxpayers and tax professionals on eligibility for the deduction and how the deduction is determined.
General Information
The FAQs explain what constitutes qualified overtime compensation for purposes of the deduction, including overtime compensation required under section 7 of the Fair Labor Standards Act (FLSA) that exceeds an employee’s regular rate of pay. The FAQs also describe which individuals are covered by and not exempt from the FLSA overtime requirements.
FLSA Overtime Eligibility
The FAQs address how individuals, including federal employees, can determine whether they are FLSA overtime-eligible. For federal employees, eligibility is generally reflected on Standard Form 50 and administered by the Office of Personnel Management, subject to certain exceptions.
Deduction Amount and Limits
The FAQs explain that the deduction is limited to a maximum amount of qualified overtime compensation per return and is subject to phase-out based on modified adjusted gross income. Special filing and identification requirements also apply to claim the deduction.
Reporting and Calculation Rules
The FAQs describe how qualified overtime compensation is reported for tax purposes, including special reporting rules for tax year 2025 and required separate reporting by employers for tax years 2026 and later. The FAQs also outline methods taxpayers may use to calculate the deduction if separate reporting is not provided.
FS-2026-1
Proposed regulations regarding the deduction for qualified passenger vehicle loan interest (QPVLI) and the information reporting requirements for the receipt of interest on a specified passenger vehicle loan (SPVL), Code Sec. 163(h)(4), as added by the One Big Beautiful Bill Act (P.L. 119-21), provides that for tax years beginning after December 31, 2024, and before January 1, 2029, personal interest does not include QPVLI. Code Sec. 6050AA provides that any person engaged in a trade or business who, in the course of that trade or business, receives interest from an individual aggregating $600 or more for any calendar year on an SPVL must file an information return reporting the receipt of the interest.
Proposed regulations regarding the deduction for qualified passenger vehicle loan interest (QPVLI) and the information reporting requirements for the receipt of interest on a specified passenger vehicle loan (SPVL), Code Sec. 163(h)(4), as added by the One Big Beautiful Bill Act (P.L. 119-21), provides that for tax years beginning after December 31, 2024, and before January 1, 2029, personal interest does not include QPVLI. Code Sec. 6050AA provides that any person engaged in a trade or business who, in the course of that trade or business, receives interest from an individual aggregating $600 or more for any calendar year on an SPVL must file an information return reporting the receipt of the interest.
Qualified Personal Vehicle Loan Interest
QPVLI is deductible by an individual, decedent's estate, or non-grantor trust, including a with respect to a grantor trust or disregarded entity deemed owned by the individual, decedent's estate, or non-grantor trust. The deduction for QPVLI may be taken by taxpayers who itemize deductions and those who take the standard deduction. Lease financing would not be considered a purchase of an applicable passenger vehicle (APV) and, thus, would not be considered a SPVL. QPVLI would not include any amounts paid or accrued with respect to lease financing.
Indebtedness will qualify as an SPVL only to the extent it is incurred for the purchase of an APV and for any other items or amounts customarily financed in an APV purchase transaction and that directly relate to the purchased APV, such as vehicle service plans, extended warranties, sales, and vehicle-related fees. Indebtedness is an SPVL only if it was originally incurred by the taxpayer, with an exception provided for a change in obligor due to the obligor's death. Original use begins with the first person that takes delivery of a vehicle after the vehicle is sold, registered, or titled and does not begin with the dealer unless the dealer registers or titles the vehicle to itself.
Personal use is defined to mean use by an individual other than in any trade or business, except for use in the trade or business of performing services as an employee, or for the production of income. An APV is considered purchased for personal use if, at the time of the indebtedness is incurred, the taxpayer expects the APV will be used for personal use by the taxpayer that incurred the indebtedness, or by certain members of that taxpayer's family and household, for more than 50 percent of the time. Rules with respect to interest that is both QPVLI and interest otherwise deductible under Code Sec. 163(a) or other Code section are provided and intended to provide clarity and to prevent taxpayers from claiming duplicative interest deductions. The $10,000 limitation of Code Sec. 163(h)(4)(C)(i) applies per federal tax return. Therefore, the maximum deduction on a joint return is $10,000. If two taxpayers have a status of married filing separately, the $10,000 limitation would apply separately to each return.
Information Reporting Requirements
If the interest recipient receives from any individual at least $600 of interest on an SPVL for a calendar year, the interest recipient would need to file an information return with the IRS and furnish a statement to the payor or record on the SPVL. Definitions of terms used in the proposed rules are provided in Prop. Reg. §1.6050AA-1(b).
Assignees of the right to receive interest payments from the lender of record are permitted to rely on the information in the contract if it is sufficient to satisfy its information reporting obligations. The assignee may choose to make arrangements to obtain information regarding personal use from the obligor, lender of record, or by other means. The written statement provided to the payor of record must include the information that was reported to the IRS and identify the statement as important tax information that is being furnished to the IRS and state that penalties may apply for overstated interest deductions.
Effective Dates and Requests for Comments
The regulations are proposed to apply to tax years in which taxpayers may deduct QPVLI pursuant to Code Sec. 163(h)(4). Taxpayers may rely on the proposed regulations under Code Sec. 163 with respect to indebtedness incurred for the purchase of an APV after December 31, 2024, and on or before the regulations are published as final regulations, so long as the taxpayer follows the proposed regulations in their entirety and in a consistent manner. Likewise, interest recipients may rely on the proposed regulations with respect to indebtedness incurred for the purchase of an APV after December 31, 2024, and on or before the date the regulations are published as final regulations, so long as the taxpayer follows the proposed regulations in their entirety and in a consistent manner.
Written or electronic comments must be received by February 2, 2026. A public hearing is scheduled for February 24, 2026.
Proposed Regulations, NPRM REG-113515-25
IR 2025-129
The IRS has released interim guidance to apply the rules under Regs. §§1.168(k)-2 and 1.1502-68, with some modifications, to the the acquisition date requirement for property qualifying for 100 percent bonus depreciation under Code Sec. 168(k)(1), as amended by the One Big Beautiful Bill Act (OBBBA) (P.L. 119-21). In addition, taxpayers may apply modified rules under to the elections to claim 100-percent bonus depreciation on specified plants, the transitional election to apply the bonus rate in effect in 2025, prior to the enactment of OBBBA, and the addition of qualified sound recording productions to qualified property under Code Sec, 168(k)(2). Proposed regulations for Reg. §1.168(k)-2 and Reg. §1.1502-68 are forthcoming.
The IRS has released interim guidance to apply the rules under Regs. §§1.168(k)-2 and 1.1502-68, with some modifications, to the the acquisition date requirement for property qualifying for 100 percent bonus depreciation under Code Sec. 168(k)(1), as amended by the One Big Beautiful Bill Act (OBBBA) (P.L. 119-21). In addition, taxpayers may apply modified rules under to the elections to claim 100-percent bonus depreciation on specified plants, the transitional election to apply the bonus rate in effect in 2025, prior to the enactment of OBBBA, and the addition of qualified sound recording productions to qualified property under Code Sec, 168(k)(2). Proposed regulations for Reg. §1.168(k)-2 and Reg. §1.1502-68 are forthcoming.
Under OBBBA qualified property acquired and specified plants planted or grafted after January 19, 2025, qualify for 100 percent bonus depreciation. When determining whether such property meets the acquisition date requirements, taxpayers may generally apply the rules under Regs. §§1.168(k)-2 and 1.1502-68 by substituting “January 19, 2025” for “September 27, 2017” and “January 20, 2025” for “September 28, 2017” each place it appears. In addition taxpayers should substitute “100 percent” for “the applicable percentage” each place it appears, except for the examples provided in Reg. § 1.168(k)-2(g)(2)(iv). Specifically, these rules apply to the acquisition date (Reg. § 1.168(k)-2(b)(5) and Reg. §1.1502-68(a) through (d)) and the component election for components of larger self-constructed property (Reg. § 1.168(k)-2(c)).
With regards to the Code Sec. 168(k)(5) election to claim 100-percent bonus depreciation on specified plants, taxpayer may follow the rules set forth in Reg. § 1.168(k)-2(f)(2). Taxpayers making the transitional election to apply the lower bonus rate in effect in 2025, prior to the enactment of OBBBA may follow Reg. § 1.168(k)-2(f)(3) after substituting “January 19, 2025” for “September 27, 2017”, “January 20, 2025” for “September 28, 2017”, and “40 percent” (“60 percent” in the case of Longer production period property or certain noncommercial aircrafts) for “50 percent”, and applicable Form 4562, Depreciation and Amortization,” for “2017 Form 4562, “Depreciation and Amortization,” each place it appears .
For qualified sound recording productions acquired before January 20, 2025, in a tax year ending after July 4, 2025, taxpayers should apply the rules under Reg. § 1.168(k)-2 as though a qualified sound recording production (as defined in Code Sec. 181(f)) is included in the list of qualified property provided in Reg. § 1.168(k)-2(b)(2)(i). If electing out of bonus depreciation for a qualified sound recording production under Code Sec. 168(k)(7) a taxpayer should follow the rules under Reg. § 1.168(k)-2(f)(1) as if the definition of class of property is expanded to each separate production of a qualified sound recording production.
Taxpayers may rely on this guidance for property placed in service in tax years beginning before the date the forthcoming proposed regulations are published in the Federal Register.
The IRS released the optional standard mileage rates for 2026. Most taxpayers may use these rates to compute deductible costs of operating vehicles for:
- business,
- medical, and
- charitable purposes
Some members of the military may also use these rates to compute their moving expense deductions.
The IRS released the optional standard mileage rates for 2026. Most taxpayers may use these rates to compute deductible costs of operating vehicles for:
- business,
- medical, and
- charitable purposes
Some members of the military may also use these rates to compute their moving expense deductions.
2026 Standard Mileage Rates
The standard mileage rates for 2026 are:
- 72.5 cents per mile for business uses;
- 20.5 cents per mile for medical uses; and
- 14 cents per mile for charitable uses.
Taxpayers may use these rates, instead of their actual expenses, to calculate their deductions for business, medical or charitable use of their own vehicles.
FAVR Allowance for 2026
For purposes of the fixed and variable rate (FAVR) allowance, the maximum standard automobile cost for vehicles places in service after 2026 is:
- $61,700 for passenger automobiles, and
- $61,700 for trucks and vans.
Employers can use a FAVR allowance to reimburse employees who use their own vehicles for the employer’s business.
2026 Mileage Rate for Moving Expenses
The standard mileage rate for the moving expense deduction is 20.5 cents per mile. To claim this deduction, the taxpayer must be:
- a member of the Armed Forces of the United States,
- on active military duty, and
- moving under an military order and incident to a permanent change of station
The Tax Cuts and Jobs Act of 2017 suspended the moving expense deduction for all other taxpayers until 2026.
Unreimbursed Employee Travel Expenses
For most taxpayers, the Tax Cuts and Jobs Act suspended the miscellaneous itemized deduction for unreimbursed employee travel expenses. However, certain taxpayers may still claim an above-the-line deduction for these expenses. These taxpayers include:
- members of a reserve component of the U.S. Armed Forces,
- state or local government officials paid on a fee basis, and
- performing artists with relatively low incomes.
Notice 2025-5, is superseded.
The IRS issued frequently asked questions (FAQs) addressing the limitation on the deduction for business interest expense under Code Sec. 163(j). The FAQs provide general information to taxpayers and tax professionals and reflect statutory changes made by the Tax Cuts and Jobs Act, the CARES Act, and the One, Big, Beautiful Bill.
The IRS issued frequently asked questions (FAQs) addressing the limitation on the deduction for business interest expense under Code Sec. 163(j). The FAQs provide general information to taxpayers and tax professionals and reflect statutory changes made by the Tax Cuts and Jobs Act, the CARES Act, and the One, Big, Beautiful Bill.
General Information
The FAQs explain the Code Sec. 163(j) limitation, identify taxpayers subject to the limitation, and describe the gross receipts test used to determine whether a taxpayer qualifies as an exempt small business.
Excepted Trades or Businesses
The FAQs address trades or businesses that are excepted from the Code Sec. 163(j) limitation, including electing real property trades or businesses, electing farming businesses, regulated utility trades or businesses, and services performed as an employee.
Determining the Section 163(j) Limitation Amount
The FAQs explain how to calculate the Code Sec. 163(j) limitation, including the definitions of business interest expense and business interest income, the computation of adjusted taxable income, and the treatment of disallowed business interest expense carryforwards.
CARES Act Changes
The FAQs describe temporary modifications to Code Sec. 163(j) made by the CARES Act, including increased adjusted taxable income percentages and special rules and elections applicable to partnerships and partners for taxable years beginning in 2019 and 2020.
One, Big, Beautiful Bill Changes
The FAQs outline amendments made by the One, Big, Beautiful Bill, including changes affecting the calculation of adjusted taxable income for tax years beginning after Dec. 31, 2024, and the application of Code Sec. 163(j) before interest capitalization provisions for tax years beginning after Dec. 31, 2025.
The IRS issued frequently asked questions (FAQs) addressing updates to the Premium Tax Credit. The FAQs clarified changes to repayment rules, the removal of outdated provisions and how the IRS will treat updated guidance.
The IRS issued frequently asked questions (FAQs) addressing updates to the Premium Tax Credit. The FAQs clarified changes to repayment rules, the removal of outdated provisions and how the IRS will treat updated guidance.
Removal of Repayment Limitations
For tax years beginning after December 31, 2025, limitations on the repayment of excess advance payments of the Premium Tax Credit no longer applied.
Previously Applicable Provisions
Premium Tax Credit rules that applied only to tax years 2020 and 2021 were no longer applicable and were removed from the FAQs.
Updated FAQs
The FAQs were updated throughout for minor style clarifications, topic updates and question renumbering.
Reliance on FAQs
The FAQs were issued to provide general information to taxpayers and tax professionals and were not published in the Internal Revenue Bulletin.
Legal Authority
If an FAQ was inconsistent with the law as applied to a taxpayer’s specific circumstances, the law controlled the taxpayer’s tax liability.
Penalty Relief
Taxpayers who reasonably and in good faith relied on the FAQs were not subject to penalties that included a reasonable cause standard for relief, to the extent reliance resulted in an underpayment of tax.
The IRS issued guidance providing penalty relief to individuals and corporations that make a valid Code Sec. 1062 election to defer taxes on gains from the sale of qualified farmland. Taxpayers who opt to pay their applicable net tax liability in four annual installments will not be penalized under sections 6654 or 6655 for underpaying estimated taxes in the year of the sale.
The IRS issued guidance providing penalty relief to individuals and corporations that make a valid Code Sec. 1062 election to defer taxes on gains from the sale of qualified farmland. Taxpayers who opt to pay their applicable net tax liability in four annual installments will not be penalized under sections 6654 or 6655 for underpaying estimated taxes in the year of the sale.
The relief permits these taxpayers to exclude 75 percent of the deferred tax from their estimated tax calculations for that year. However, 25 percent of the tax liability must still be paid by the return due date for the year of the sale. The IRS emphasized that this waiver applies automatically if the taxpayer qualifies and does not self-report the penalty.
Taxpayers who have already reported a penalty or receive an IRS notice can request abatement by filing Form 843, noting the relief under Notice 2026-3. This measure aligns with the policy objectives of the One, Big, Beautiful Bill Act of 2025, which introduced section 1062 to support farmland continuity by facilitating sales to qualified farmers. The IRS also plans to update relevant forms and instructions to reflect the changes, ensuring clarity for those seeking relief.
The IRS has extended the transition period provided in Rev. Rul. 2025-4, I.R.B. 2025-6, for states administering paid family and medical leave (PFML) programs and employers participating in such programs with respect to the portion of medical leave benefits a state pays to an individual that is attributable to employer contributions, for an additional year.
The IRS has extended the transition period provided in Rev. Rul. 2025-4, I.R.B. 2025-6, for states administering paid family and medical leave (PFML) programs and employers participating in such programs with respect to the portion of medical leave benefits a state pays to an individual that is attributable to employer contributions, for an additional year.
The IRS found that states with PMFL statuses have requested that the transition period be extended for an additional year or that the effective date be amended because the required changes cannot occur within the current timeline. For this reason, calendar year 2026 will be regarded as an additional transition period for purposes of IRS enforcement and administration with respect to the following components:
-
For medical leave benefits a state pays to an individual in calendar year 2026,with respect to the portion of the medical leave benefits attributable to employer contributions, (a) a state or an employer is not required to follow the income tax withholding and reporting requirements applicable to third-party sick pay, and (b)consequently, a state or employer would not be liable for any associated penalties under Code Sec. 6721 for failure to file a correct information return or under Code Sec. 6722 for failure to furnish a correct payee statement to the payee; and
-
For medical leave benefits a state pays to an individual in calendar year 2026, with respect to the portion of the medical leave benefits attributable to employer contributions, (a) a state or an employer is not required to comply with § 32.1 and related Code sections (as well as similar requirements under § 3306) during thecalendar year; (b) a state or an employer is not required to withhold and pay associatedtaxes; and (c) consequently, a state or employer would not be liable for any associated penalties.
This notice is effective for medical leave benefits paid from states to individuals during calendar year 2026.
Addressing health care will be the key legislative priority a 2026 starts, leaving little chance that Congress will take up any significant tax-related legislation in the coming election year, at least until health care is taken care of.
Addressing health care will be the key legislative priority a 2026 starts, leaving little chance that Congress will take up any significant tax-related legislation in the coming election year, at least until health care is taken care of.
Top legislative staff from the tax writing committees in Congress (House Ways and Means Committee and Senate Finance Committee) were all in basic agreement during a January 7, 2026, panel discussion at the 2026 D.C. Bar Tax Conference that health care would be tackled first.
“I will say that my judgement, and this is not the official party line, by that my judgement is that a deal on health care is going to have to unlock before there’s a meaningful tax vehicle,” Andrew Grossman, chief tax counsel for the House Ways And Means Committee Democratic staff, said, adding that it is difficult to see Democratic members working on tax extenders and other provisions when 15 million are about to lose their health insurance.
Sean Clerget, chief tax counsel for the Ways and Means GOP staff, added that “our view’s consistent with what Andrew [Grossman] said, adding that committee chairman Jason Smith (R-Mo.) “would be very open to having a tax vehicle whether or not there’s a health care deal, but obviously we need bipartisan cooperation to move something like that. And so, Andrew’s comments are sort of very important to the outlook on this.”
Even some of the smaller items that may have bipartisan support could be held up as the parties work to find common ground on health care legislation.
“It’s hard to see some of the smaller tax items that are hanging out there getting over the finish line without a deal on health, Sarah Schaefer, chief tax advisor to the Democratic staff of the Senate Finance Committee, said. “And I think our caucus will certainly hold out for that.”
Randy Herndon, deputy chief tax counsel for the Finance Committee Republican staff, added that he agreed with Clerget and said that Finance Committee Chairman Mike Crapo (R-Idaho) would be “open to a tax vehicle absent any health care deal, but understand, again, the bipartisan cooperation that would be required.”
No Planned OBBBA Part 2
Clerget said that currently there no major reconciliation bill on the horizon to follow up on the One Big Beautiful Bill Act, but “I’ve always thought that if there were to be a second reconciliation bill, it would need to be very narrow for a very specific purpose, rather than a large kind of open, multicommittee, big bill.”
Herndon added that Chairman Crapo’s “current focus is on pursuing potential bipartisan priorities in the Finance Committee jurisdiction,” noting that a lot of the GOP priorities were addressed in the OBBBA “and our members are very invested in seeing that through the implementation process.”
Of the things we can expect the committees to work on, Herndon identified areas ripe for legislative activity in the coming year, including crypto and tax administration bills and other focused issues surrounding affordability, but GOP members will more be paying attention to the implementation of OBBBA.
Schaefer said that Finance Committee Democrats will maintain a focus on the child tax credit as well as working to get reinstated clean energy credits that were allowed to expire.
Clerget said that of the things that could happen on this legislative calendar is on the taxation of digital assets, stating that “I think there’s a lot of interest in establishing clear tax rules in the digital asset space.… I think we have a good prospect of getting bipartisan cooperation on the tax side of digital assets.”
He also said there has been a lot of bipartisan cooperation on tax administration in 2025, suggesting that the parties could keep working on improving the taxpayer experience in 2026.
By Gregory Twachtman, Washington News Editor
The Fifth Circuit Court of Appeals held that a "limited partner" in Code Sec. 1402(a)(13) is a limited partner in a state-law limited partnership that has limited liability. The court rejected the "passive investor" rule followed by the IRS and the Tax Court in Soroban Capital Partners LP (Dec. 62,310).
The Fifth Circuit Court of Appeals held that a "limited partner" in Code Sec. 1402(a)(13) is a limited partner in a state-law limited partnership that has limited liability. The court rejected the "passive investor" rule followed by the IRS and the Tax Court in Soroban Capital Partners LP (Dec. 62,310).
Background
A limited liability limited partnership operated a business consulting firm, and was owned by several limited partners and one general partner. For the tax years at issue, the limited partnership allocated all of its ordinary business income to its limited partners. Based on the limited partnership tax exception in Code Sec. 1402(a)(13), the limited partnership excluded the limited partners’ distributive shares of partnership income or loss from its calculation of net earnings from self-employment during those years, and reported zero net earnings from self-employment.
The IRS adjusted the limited partnership's net earnings from self-employment, and determined that the distributive share exception in Code Sec. 1402(a)(13) did not apply because none of the limited partnership’s limited partners counted as "limited partners" for purposes of the statutory exception. The Tax Court upheld the adjustments, stating it was bound by Soroban.
Limited Partners and Self Employment Tax
Code Sec. 1402(a)(13) excludes from a partnership's calculation of net earnings from self-employment the distributive share of any item of income or loss of a limited partner, as such, other than guaranteed payments in Code Sec. 707(c) to that partner for services actually rendered to or on behalf of the partnership to the extent that those payments are established to be in the nature of remuneration for those services.
In Soroban, the Tax Court determined that Congress had enacted Code Sec. 1402(a)(13) to exclude earnings from a mere investment, and intended for the phrase “limited partners, as such” to refer to passive investors. Thus, the Tax Court there held that the limited partner exception of Code Sec. 1402(a)(13) did not apply to a partner who is limited in name only, and that determining whether a partner is a limited partner in name only required an inquiry into the limited partner's functions and roles.
Passive Investor Treatment
Here, the Fifth Circuit rejected the interpretation that "limited partner" in Code Sec. 1402(a)(13) refers only to passive investors in a limited partnership. Reviewing the text of the statute, the court determined that dictionaries at the time of Code Sec. 1402(a)(13)’s enactment defined "limited partner" as a partner in a limited partnership that has limited liability and is not bound by the obligations of the partnership. Also, longstanding interpretation by the Social Security Administration and the IRS had confirmed that a "limited partner" is a partner with limited liability in a limited partnership. IRS partnership tax return instructions had for decades defined "limited partner" as one whose potential personal liability for partnership debts was limited to the amount of money or other property that the partner contributed or was required to contribute to the partnership.
The Fifth Circuit determined that the interpretation of "limited partner" as a mere "passive investor" in a limited partnership is wrong. The court stated that the passive-investor interpretation makes little sense of the "guaranteed payments" clause in Code Sec. 1402(a)(13), and that the text of the statute contemplates that "limited partners" would provide actual services to the partnership and thus participate in partnership affairs. A strict passive-investor interpretation that defined "limited partner" in a way that prohibited him from providing any services to the partnership would make the "guaranteed payments" clause superfluous.
Further, the court stated that had Congress wished to only exclude passive investors from the tax, it could have easily written the exception to do so, but it did not do so in Code Sec. 1402(a)(13). Additionally, the passive investor interpretation would require the IRS to balance an infinite number of factors in performing its "functional analysis test," and would make it more complicated for limited partners to determine their tax liability.
The Fifth Circuit rejected the Tax Court's conclusion in Soroban that by adding the words "as such" in Code Sec. 1402(a)(13), Congress had made clear that the limited partner exception applies only to a limited partner who is functioning as a limited partner. Adding "as such" did not restrict or narrow the class of limited partners, and does not upset the ordinary meaning of "limited partner."
Vacating and remanding an unreported Tax Court opinion.
The Internal Revenue Service is looking toward automated solutions to cover the recent workforce reductions implemented by the Trump Administration, Department of the Treasury Secretary Bessent told a House Appropriations subcommittee.
The Internal Revenue Service is looking toward automated solutions to cover the recent workforce reductions implemented by the Trump Administration, Department of the Treasury Secretary Bessent told a House Appropriations subcommittee.
During a May 6, 2025, oversight hearing of the House Appropriations Financial Services and General Government Subcommittee, Bessent framed the current employment level at the IRS as “bloated” and is using the workforce reduction as a means to partially justify the smaller budget the agency is looking for.
“We are just taking the IRS back to where it was before the IRA [Inflation Reduction Act] bill substantially bloated the personnel and the infrastructure,” he testified before the committee, adding that “a large number of employees” took the option for early retirement.
When pressed about how this could impact revenue collection activities, Bessent noted that the agency will be looking to use AI to help automate the process and maintain collection activities.
“I believe, through smarter IT, through this AI boom, that we can use that to enhance collections,” he said. “And I would expect that collections would continue to be very robust as they were this year.”
He also suggested that those hired from the supplemental funding from the IRA to enhance enforcement has not been effective as he pushed for more reliance on AI and other information technology resources.
There “is nothing that shows historically that by bringing in unseasoned collections agents … results in more collections or high-end collections,” Bessent said. “It would be like sending in a junior high school student to try to a college-level class.”
Another area he highlighted where automation will cover workforce reductions is in the processing of paper returns and other correspondence.
“Last year, the IRS spent approximately $450 million on paper processing, with nearly 6,500 full-time staff dedicated to the task,” he said. “Through policy changes and automation, Treasury aims to reduce this expense to under $20 million by the end of President Trump’s second term.”
Bessent’s testimony before the committee comes in the wake of a May 2, 2025, report from the Treasury Inspector General for Tax Administration that highlighted an 11-percent reduction in the IRS workforce as of February 2025. Of those who were separated from federal employment, 31 percent of revenue agents were separated, while 5 percent of information technology management are no longer with the agency.
When questioned about what the IRS will do to ensure an equitable distribution of enforcement action, Bessent stated that the agency is “reviewing the process of who is audited at the IRS. There’s a great deal of politicization of that, so we are trying to stop that, and we are also going to look at distribution of who is audited and why they are audited.”
Bessent also reiterated during the hearing his support of making the expiring provisions of the Tax Cuts and Jobs Act permanent.
By Gregory Twachtman, Washington News Editor
A taxpayer's passport may be denied or revoked for seriously deliquent tax debt only if the taxpayer's tax liability is legally enforceable. In a decision of first impression, the Tax Court held that its scope of review of the existence of seriously delinquent tax debt is de novo and the court may hear new evidence at trial in addition to the evidence in the IRS's administrative record.
A taxpayer's passport may be denied or revoked for seriously deliquent tax debt only if the taxpayer's tax liability is legally enforceable. In a decision of first impression, the Tax Court held that its scope of review of the existence of seriously delinquent tax debt is de novo and the court may hear new evidence at trial in addition to the evidence in the IRS's administrative record.
The IRS certified the taxpayer's tax liabilities as "seriously delinquent" in 2022. For a tax liability to be considered seriously delinquent, it must be legally enforceable under Code Sec. 7345(b).
The taxpayer's tax liabilities related to tax years 2005 through 2008 and were assessed between 2007 and 2010. The standard collection period for tax liabilities is ten years after assessment, meaning that the taxpayer's liabilities were uncollectible before 2022, unless an exception to the statute of limitations applied. The IRS asserted that the taxpayer's tax liabilities were reduced to judgment in a district court case in 2014, extending the collections period for 20 years from the date of the district court default judgment. The taxpayer maintained that he was never served in the district court case and the judgment in that suit was void.
The Tax Court held that its review of the IRS's certification of the taxpayer's tax debt is de novo, allowing for new evidence beyond the administrative record. A genuine issue of material fact existed whether the taxpayer was served in the district court suit. If not, his tax debts were not legally enforceable as of the 2022 certification, and the Tax Court would find the IRS's certification erroneous. The Tax Court therefore denied the IRS's motion for summary judgment and ordered a trial.
A. Garcia Jr., 164 TC No. 8, Dec. 62,658
The IRS has reminded taxpayers that disaster preparation season is kicking off soon with National Wildfire Awareness Month in May and National Hurricane Preparedness Week between May 4 and 10. Disasters impact individuals and businesses, making year-round preparation crucial.
The IRS has reminded taxpayers that disaster preparation season is kicking off soon with National Wildfire Awareness Month in May and National Hurricane Preparedness Week between May 4 and 10. Disasters impact individuals and businesses, making year-round preparation crucial. In 2025, FEMA declared 12 major disasters across nine states due to storms, floods, and wildfires. Following are tips from the IRS to taxpayers to help ensure record protection:
- Store original documents like tax returns and birth certificates in a waterproof container;
- keep copies in a separate location or with someone trustworthy. Use flash drives for portable digital backups; and
- use a phone or other devices to record valuable items through photos or videos. This aids insurance or tax claims. IRS Publications 584 and 584-B help list personal or business property.
Further, reconstructing records after a disaster may be necessary for tax purposes, insurance or federal aid. Employers should ensure payroll providers have fiduciary bonds to protect against defaults, as disasters can affect timely federal tax deposits.
A decedent's estate was not allowed to deduct payments to his stepchildren as claims against the estate.
A decedent's estate was not allowed to deduct payments to his stepchildren as claims against the estate.
A prenuptial agreement between the decedent and his surviving spouse provided for, among other things, $3 million paid to the spouse's adult children in exchange for the spouse relinquishing other rights. Because the decedent did not amend his will to include the terms provided for in the agreement, the stepchildren sued the estate for payment. The tax court concluded that the payments to the stepchildren were not deductible claims against the estate because they were not "contracted bona fide" or "for an adequate and full consideration in money or money's worth" (R. Spizzirri Est., Dec. 62,171(M), TC Memo 2023-25).
The bona fide requirement prohibits the deduction of transfers that are testamentary in nature. The stepchildren were lineal descendants of the decedent's spouse and were considered family members. The payments were not contracted bona fide because the agreement did not occur in the ordinary course of business and was not free from donative intent. The decedent agreed to the payments to reduce the risk of a costly divorce. In addition, the decedent regularly gave money to at least one of his stepchildren during his life, which indicated his donative intent. The payments were related to the spouse's expectation of inheritance because they were contracted in exchange for her giving up her rights as a surviving spouse. As a results, the payments were not contracted bona fide under Reg. §20.2053-1(b)(2)(ii) and were not deductible as claims against the estate.
R.D. Spizzirri Est., CA-11
The Financial Crimes Enforcement Network (FinCEN) has removed the requirement that U.S. companies and U.S. persons must report beneficial ownership information (BOI) to FinCEN under the Corporate Transparency Act.
The Financial Crimes Enforcement Network (FinCEN) has removed the requirement that U.S. companies and U.S. persons must report beneficial ownership information (BOI) to FinCEN under the Corporate Transparency Act. This interim final rule is consistent with the Treasury Department's recent announcement that it was suspending enforcement of the CTA against U.S. citizens, domestic reporting companies, and their beneficial owners, and that it would be narrowing the scope of the BOI reporting rule so that it applies only to foreign reporting companies.
The interim final rule amends the BOI regulations by:
- changing the definition of "reporting company" to mean only those entities that are formed under the law of a foreign country and that have registered to do business in any U.S. State or Tribal jurisdiction by filing of a document with a secretary of state or similar office (these entities had formerly been called "foreign reporting companies"), and
- exempting entities previously known as "domestic reporting companies" from BOI reporting requirements.
Under the revised rules, all entities created in the United States (including those previously called "domestic reporting companies") and their beneficial owners are exempt from the BOI reporting requirement, including the requirement to update or correct BOI previously reported to FinCEN. Foreign entities that meet the new definition of "reporting company" and do not qualify for a reporting exemption must report their BOI to FinCEN, but are not required to report any U.S. persons as beneficial owners. U.S. persons are not required to report BOI with respect to any such foreign entity for which they are a beneficial owner.
Reducing Regulatory Burden
On January 31, 2025, President Trump issued Executive Order 14192, which announced an administration policy "to significantly reduce the private expenditures required to comply with Federal regulations to secure America’s economic prosperity and national security and the highest possible quality of life for each citizen" and "to alleviate unnecessary regulatory burdens" on the American people.
Consistent with the executive order and with exemptive authority provided in the CTA, the Treasury Secretary (in concurrence with the Attorney General and the Homeland Security Secretary) determined that BOI reporting by domestic reporting companies and their beneficial owners "would not serve the public interest" and "would not be highly useful in national security, intelligence, and law enforcement agency efforts to detect, prevent, or prosecute money laundering, the financing of terrorism, proliferation finance, serious tax fraud, or other crimes."The preamble to the interim final rule notes that the Treasury Secretary has considered existing alternative information sources to mitigate risks. For example, under the U.S. anti-money laundering/countering the financing of terrorism regime, covered financial institutions still have a continuing requirement to collect a legal entity customer's BOI at the time of account opening (see 31 CFR 1010.230). This will serve to mitigate certain illicit finance risks associated with exempting domestic reporting companies from BOI reporting.
BOI reporting by foreign reporting companies is still required, because such companies present heightened national security and illicit finance risks and different concerns about regulatory burdens. Further, the preamble points out that the policy direction to minimize regulatory burdens on the American people can still be achieved by exempting foreign reporting companies from having to report the BOI of any U.S. persons who are beneficial owners of such companies.
Deadlines Extended for Foreign Companies
When the interim final rule is published in the Federal Register, the following reporting deadlines apply:
- Foreign entities that are registered to do business in the United States before the publication date of the interim final rule must file BOI reports no later than 30 days from that date.
- Foreign entities that are registered to do business in the United States on or after the publication date of the interim final rule have 30 calendar days to file an initial BOI report after receiving notice that their registration is effective.
Effective Date; Comments Requested
The interim final rule is effective on the date of its publication in the Federal Register.
FinCEN has requested comments on the interim final rule. In light of those comments, FinCEN intends to issue a final rule later in 2025.
Written comments must be received on or before the date that is 60 days after publication of the interim final rule in the Federal Register.
Interested parties can submit comments electronically via the Federal eRulemaking Portal at http://www.regulations.gov. Alternatively, comments may be mailed to Policy Division, Financial Crimes Enforcement Network, P.O. Box 39, Vienna, VA 22183. For both methods, refer to Docket Number FINCEN-2025-0001, OMB control number 1506-0076 and RIN 1506-AB49.
An appeals court affirmed that payments made by an individual taxpayer to his ex-wife did not meet the statutory criteria for deductible alimony. The taxpayer claimed said payments were deductible alimony on his federal tax returns.
An appeals court affirmed that payments made by an individual taxpayer to his ex-wife did not meet the statutory criteria for deductible alimony. The taxpayer claimed said payments were deductible alimony on his federal tax returns.
The taxpayer’s payments were not deductible alimony because the governing divorce instruments contained multiple clear, explicit and express directions to that effect. The former couple’s settlement agreement stated an equitable division of marital property that was non-taxable to either party. The agreement had a separate clause obligating the taxpayer to pay a taxable sum as periodic alimony each month. The term “divorce or separation instrument” included both divorce and the written instruments incident to such decree.
Unpublished opinion affirming, per curiam, the Tax Court, Dec. 62,420(M), T.C. Memo. 2024-18.
J.A. Martino, CA-11
The IRS has issued the luxury car depreciation limits for business vehicles placed in service in 2025 and the lease inclusion amounts for business vehicles first leased in 2025.
The IRS has issued the luxury car depreciation limits for business vehicles placed in service in 2025 and the lease inclusion amounts for business vehicles first leased in 2025.
Luxury Passenger Car Depreciation Caps
The luxury car depreciation caps for a passenger car placed in service in 2025 limit annual depreciation deductions to:
- $12,200 for the first year without bonus depreciation
- $20,200 for the first year with bonus depreciation
- $19,600 for the second year
- $11,800 for the third year
- $7,060 for the fourth through sixth year
Depreciation Caps for SUVs, Trucks and Vans
The luxury car depreciation caps for a sport utility vehicle, truck, or van placed in service in 2025 are:
- $12,200 for the first year without bonus depreciation
- $20,200 for the first year with bonus depreciation
- $19,600 for the second year
- $11,800 for the third year
- $7,060 for the fourth through sixth year
Excess Depreciation on Luxury Vehicles
If depreciation exceeds the annual cap, the excess depreciation is deducted beginning in the year after the vehicle’s regular depreciation period ends.
The annual cap for this excess depreciation is:
- $7,060 for passenger cars and
- $7,060 for SUVS, trucks, and vans.
Lease Inclusion Amounts for Cars, SUVs, Trucks and Vans
If a vehicle is first leased in 2025, a taxpayer must add a lease inclusion amount to gross income in each year of the lease if its fair market value at the time of the lease is more than:
- $62,000 for a passenger car, or
- $62,000 for an SUV, truck or van.
The 2025 lease inclusion tables provide the lease inclusion amounts for each year of the lease.
The lease inclusion amount results in a permanent reduction in the taxpayer’s deduction for the lease payments.
The Treasury and IRS have provided an optional safe harbor allowing employers to exclude the following amounts from their gross receipts solely for determining eligibility for the employee retention credit.
The Treasury and IRS have provided an optional safe harbor allowing employers to exclude the following amounts from their gross receipts solely for determining eligibility for the employee retention credit:
- the amount of the forgiveness of a Paycheck Protection Program (PPP) Loan;
- the amount of any Shuttered Venue Operators Grants under the Economic Aid to Hard-Hit Small Businesses, Non-Profits, and Venues Act; and
- the amount of any Restaurant Revitalization Grants under the American Rescue Plan Act of 2021 (ARP) ( P.L. 117-2).
Certain employers may be eligible for an employee retention credit against applicable federal employment taxes if their gross receipts for a calendar quarter decline by a certain percentage as compared to a prior calendar quarter. For most employers, gross receipts are defined by Code Sec. 448(c). For tax-exempt employers, gross receipts are defined by Code Sec. 6033.
Applying Safe Harbor Consistently
Employers must apply the safe harbor consistently in order to exclude these amounts from gross receipts for determining employee retention credit eligibility. An employer consistently applies the safe harbor by:
- excluding these amounts from its gross receipts for each calendar quarter in which gross receipts are relevant to determining eligibility to claim the employee retention credit; and
- applying the safe harbor to all employers treated as a single employer under the aggregation rules.
An employer must also retain in its records substantiating support for the credit claimed, including the use of the safe harbor.
If an employer revokes its safe harbor election, it must adjust all employment tax returns affected by the revocation.
Claiming the Employee Retention Credit
Employers claim the employee retention credit on their employment tax return, generally Form 941, Employers Quarterly Federal Tax Return, or on an adjusted employment tax return, generally Form 941-X, Adjusted Employer’s Quarterly Federal Tax Return or Claim for Refund. An employer is not required to apply the safe harbor.
The safe harbor does not permit the exclusion of these amounts from gross receipts for any other federal tax purpose.
Effect on Other Documents
This guidance updates and amplifies Notice 2021-20, I.R.B. 2021-11, 922, Notice 2021-23, I.R.B. 2021-16, 1113, and Notice 2021-49, I.R.B. 2021-34.
An estate was allowed a marital deduction because the decedent’s marriage was valid in the country of celebration. The decedent, who was Jewish, obtained a religious divorce under rabbinical law in New York from his first wife after a New York court had declared his Mexican divorce invalid, which resulted in the declaration that his marriage to a second wife was null and void. The decedent traveled to Israel and married his third wife in an Orthodox Jewish ceremony. The Israeli marriage certificate noted that the decedent was free to marry because he was divorced. The government claimed that because the divorce was not valid under state law, no marital deduction was allowed because the property did not pass to the decedent’s surviving spouse.
An estate was allowed a marital deduction because the decedent’s marriage was valid in the country of celebration. The decedent, who was Jewish, obtained a religious divorce under rabbinical law in New York from his first wife after a New York court had declared his Mexican divorce invalid, which resulted in the declaration that his marriage to a second wife was null and void. The decedent traveled to Israel and married his third wife in an Orthodox Jewish ceremony. The Israeli marriage certificate noted that the decedent was free to marry because he was divorced. The government claimed that because the divorce was not valid under state law, no marital deduction was allowed because the property did not pass to the decedent’s surviving spouse.
Marriage Was Valid in New York
Under New York law, the marriage was valid since it was recognized in Israel unless it was contrary to public policy or violated "positive law." Because Code Sec. 2056(a) focuses on the identity of the surviving spouse, the initial question was whether the decedent and the surviving spouse were validly married, and not whether the religious divorce was valid. Under Israeli law, the decedent was validly divorced and could remarry. Thus, for purposes of New York law, the marriage was not bigamous and not contrary to public policy. New York divorce law was not violated by the finding because that law was not broken by a New York resident marrying outside of the state and recognizing a non-New York marriage was not equivalent to ruling on the divorce’s validity. However, the ruling was narrowly focused on whether the New York Court of Appeals would recognize the Israeli marriage, which was not contested by the prior spouse and left undisturbed by the lower courts.
A business can deduct only ordinary and necessary expenses. Further, the amount allowable as a deduction for business meal and entertainment expenses, whether incurred in-town or out-of-town is generally limited to 50 percent of the expenses. (A special exception that raises the level to 80 percent applies to workers who are away from home while working under Department of Transportation regulations.)
A business can deduct only ordinary and necessary expenses. Further, the amount allowable as a deduction for business meal and entertainment expenses, whether incurred in-town or out-of-town is generally limited to 50 percent of the expenses. (A special exception that raises the level to 80 percent applies to workers who are away from home while working under Department of Transportation regulations.)
Related expenses, such as taxes, tips, and parking fees must be included in the total expenses before applying the 50-percent reduction. The 50-percent reduction is made only after determining the amount of the otherwise allowable deductions. However, allowable deductions for transportation costs to and from a business meal are not reduced.
The 50-percent deduction limitation also applies to meals and entertainment expenses that are reimbursed under an accountable plan to a taxpayer's employees. In that case, it doesn't matter if the taxpayer reimburses the employees for 100 percent of the expenses.
Employee-only meals. If the value of any property or service provided to an employee is so minimal that accounting for the property or service would be unreasonable or administratively impracticable, it is a de minimis fringe benefit that is excluded for income and employment tax purposes. Such benefits that are food-related may include occasional parties or picnics, occasional supper money due to overtime work, and employer-furnished coffee and doughnuts.
A subsidized eating facility can be a de minimis fringe if it is located on or near the business premises and the revenue derived from it normally equals or exceeds direct operating costs. Further, if more than one-half of the employees are furnished meals for the convenience of the employer, all meals provided on the premises are treated as furnished for the convenience of the employer. Therefore, the meals are fully deductible by the employer, instead of possibly being subject to the 50-percent limit on business meal deductions, and excludable by the employees.
Facilitated by the speed, ubiquity, and anonymity of the Internet, criminals are able to easily steal valuable information such as Social Security numbers and use it for a variety of nefarious purposes, including filing false tax returns to generate refunds from the IRS. The victims are often unable to detect the crime until it is too late, generally after the IRS receives the legitimate tax return from the actual taxpayer. By that time the first return has often been long accepted and the refund processed. Because of the ease, speed, and difficulty involved in policing cybercrime, identity theft has grown rapidly. One estimate from the National Taxpayer Advocate Service has calculated that individual identity theft case receipts have increased by more than 666 percent from fiscal year (FY) 2008 to FY 2012.
Facilitated by the speed, ubiquity, and anonymity of the Internet, criminals are able to easily steal valuable information such as Social Security numbers and use it for a variety of nefarious purposes, including filing false tax returns to generate refunds from the IRS. The victims are often unable to detect the crime until it is too late, generally after the IRS receives the legitimate tax return from the actual taxpayer. By that time the first return has often been long accepted and the refund processed. Because of the ease, speed, and difficulty involved in policing cybercrime, identity theft has grown rapidly. One estimate from the National Taxpayer Advocate Service has calculated that individual identity theft case receipts have increased by more than 666 percent from fiscal year (FY) 2008 to FY 2012.
There is, however, another dangerous facet of identity theft that costs the government, taxpayers, and businesses millions of dollars each year. That is business identity theft, which like its consumer counterpart involves the theft or impersonation of a business's identity. To add insult to injury, business identity theft can have crippling federal tax consequences. The following article summarizes the problem of business taxpayer identity theft, the methods employed by thieves, and the means by which you can protect your business.
Business v. individual identity theft
Businesses generally deal with larger transactions, have larger account balances and credit lines than individual taxpayers, and can set up and accept merchant credit card payments with numerous banks. Business information regarding tax identification numbers, profit margins and revenues, officers, and even officer salaries are often public and easily accessed. At the same time remedies and enforcement tend to focus more on individual identity theft. Thus, business identity theft can be more lucrative and arguably less dangerous to engage in than individual taxpayer identity theft.
Methods used
Only some of the many business identity theft schemes relate to tax. Nevertheless, such schemes can be devastating for businesses, resulting in massive employment tax liabilities for fictitious wages or huge deficiencies in reported income. Identity thieves can use a business's employer identification number (EIN) to initiate merchant card payment schemes, file false tax returns, and even generate hundreds of fake Form W-2s in furtherance of more individual taxpayer identity theft.
How they do it
Business identity theft can require less effort than individual identity theft because less information is required to establish a business or open a line of credit than is required of individuals. In general, the thief needs to obtain the business's EIN, which is easy to acquire. Common sources for an EIN include:
- Filings made to the Securities and Exchange Commission (SEC) such as the Form 10-K, which includes the EIN on its first page;
- Public databases that enable users to search for business entities sometimes also display the employer's EIN;
- Websites specifically designed to search for EINs, such as EINFinder.com;
- Business websites sometimes openly display the EIN; and
- Forms W-2, W-9, or 1099.
Once a thief has the EIN, he or she may file reports with various state Secretaries of State to change registered business addresses, registered agents' names, or even appoint new officers. In some cases the thief will apply for a line of credit using this new information. Since the official Secretary of State records display the changed information, potential creditors will not be alerted to the fraud. In one case, however, criminals changed the names of a business's officers by filing with the Secretary of State's office and then sold the whole business to a third party. In the end, however, once an identity thief has established a business name, EIN, and address information, he or she has all the basic tools necessary to perpetrate business identity theft.
Best practices
Businesses should review their banks' policies and recommendations regarding fraud protection. They should know what security measures are being offered and, if commercially reasonable, take them. In a recent U.S. district court case from Missouri, the court found that a bank was not liable for a fraudulent $440,000 wire transfer because it had offered the business a commercially reasonable security procedure, and the business had rejected it. The decision cited Uniform Commercial Code Article 4A-202(b), as adopted by the Missouri Code. Many other states have also adopted the UCC, meaning victimized businesses might find themselves without recourse against their banks in the event of a large fraudulent wire transfer.
Other easy preventative measures that businesses can take include monitoring their financial accounts on a daily basis. They should follow up immediately on any suspicious activity. Businesses should also enroll in email alerts so that they would immediately be apprised of any change in your account name, address, or other information.
A business should also monitor the information on its business registration frequently, whether or not the business is active or inactive. Often businesses that close do not go through the formal dissolution process, which terminates all of the corporate authority. They instead let the charter be forfeited by the Secretary of State. These forfeited charters may be easily reinstated and hijacked by identity thieves.
After fraud occurs
If it is too late, and a fraudulent transaction has occurred in your business's name, take immediate action by contacting your bank, creditors, check verification companies, and credit reporting companies. Report the crime to your local law enforcement authorities and your state's secretary of state business division. Finally, whenever possible, memorialize all correspondence in writing and keep it in your records.
If you'd like more information on how you can take steps to safeguard your personal or business "identity" through safeguarding your tax and other financial accounts, please contact this office.
Vacation homes offer owners tax breaks similar-but not identical-to those for primary residences. Vacation homes also offer owners the opportunity to earn tax-advantaged and even tax-free income. This combination of current income and tax breaks, combined with the potential for long-term appreciation, can make a second home an attractive investment.
Vacation homes offer owners tax breaks similar-but not identical-to those for primary residences. Vacation homes also offer owners the opportunity to earn tax-advantaged and even tax-free income. This combination of current income and tax breaks, combined with the potential for long-term appreciation, can make a second home an attractive investment.
Homeowners can deduct mortgage interest they pay on up to $1 million of "acquisition indebtedness" incurred to buy their primary residence and one additional residence. If their total mortgage indebtedness exceeds $1 million, they can still deduct the interest they pay on their first $1 million. If one mortgage carries a substantially higher rate than the second, it makes sense to deduct the higher interest first to maximize deductions.
Vacation homeowners don't need to buy an actual house (or even a condominium) to take advantage of second-home mortgage interest deductions. They can deduct interest they pay on a loan secured by a timeshare, yacht, or motorhome so long as it includes sleeping, cooking, and toilet facilities.
Gains from selling a vacation home are generally taxed as short-term or long-term capital gains. While gain on the sale of a principal residence can be excludable, gain on the sale of a vacation home is not. Recent rules limit the amount of prior gain on a vacation residence that can be sheltered if a vacation home is converted into a primary residence.
Vacation home rentals. Many vacation home owners rent vacation homes to draw income and help finance the cost of owning the home. These rentals are taxed under one of three sets of rules depending on how long the homeowner rents the property.
- Income from rentals totaling not more than 14 days per year is nontaxable.
- Income from rentals totaling more than 14 days per year is taxable and is generally reported on Schedule E (Form 1040), Supplemental Income and Loss. Homeowners who rent their properties for more than 14 days can deduct a portion of their mortgage interest, property taxes, maintenance, utilities, and other expenses to offset that income. That deduction depends on how many days they use the residence personally versus how many days they rent it.
- Owners who use their home personally for less than 14 days and less than 10% of the total rental days can treat the property as true "rental" property if certain rules are followed.
If you are considering the purchase of a vacation home, our offices can help compute your true, "after-tax" cost of ownership in determining whether such a purchase makes sense.
Vacation homes offer owners many tax breaks similar to those for primary residences. Vacation homes also offer owners the opportunity to earn tax-advantaged and even tax-free income from a certain level of rental income. The value of vacation homes are also on the rise again, offering an investment side to ownership that can ultimately be realized at a beneficial long-term capital gains rate.
Vacation homes offer owners many tax breaks similar to those for primary residences. Vacation homes also offer owners the opportunity to earn tax-advantaged and even tax-free income from a certain level of rental income. The value of vacation homes are also on the rise again, offering an investment side to ownership that can ultimately be realized at a beneficial long-term capital gains rate.
Homeowners can deduct mortgage interest they pay on up to $1 million of "acquisition indebtedness" incurred to buy their primary residence and one additional residence. If their total mortgage indebtedness exceeds $1 million, they can still deduct the interest they pay on their first $1 million. If one mortgage carries a substantially higher rate than the second, it makes sense to deduct the higher interest first to maximize deductions.
Vacation homeowners don't need to buy an actual house (or even a condominium) to take advantage of second-home mortgage interest deductions. They can deduct interest they pay on a loan secured by a timeshare, yacht, or motor home so long as it includes sleeping, cooking, and toilet facilities.
Capital gain on vacation properties. Gains from selling a vacation home are generally taxed as long-term capital gains on Schedule D. As with a primary residence, basis includes the property's contract price (including any mortgage assumed or taken "subject to"), nondeductible closing costs (title insurance and fees, surveys and recording fees, transfer taxes, etc.), and improvements. "Adjusted proceeds" include the property's sale price, minus expenses of sale (real estate commissions, title fees, etc.). The maximum tax on capital gain is now 20 percent, with an additional 3.8 percent net investment tax depending upon income level. There's no separate exclusion that applies when selling a vacation home as there is up to $500,000 for a primary residence.
Vacation home rentals. Many vacation home owners rent those homes to draw income and help finance the cost of owning the home. These rentals are taxed under one of three sets of rules depending on how long the homeowner rents the property.
- Income from rentals totaling not more than 14 days per year is nontaxable.
- Income from rentals totaling more than 14 days per year is taxable and is generally reported on Schedule E of Form 1040. Homeowners who rent their properties for more than 14 days can deduct a portion of their mortgage interest, property taxes, maintenance, utilities, and other expenses to offset that income. That deduction depends on how many days they use the residence personally versus how many days they rent it.
- Owners who use their home personally for less than 14 days and less than 10% of the total rental days can treat the property as true "rental" property, which entitled them to a greater number of deductions.
When starting a business or changing an existing one there are several types of business entities to choose from, each of which offers its own advantages and disadvantages. Depending on the size of your business, one form may be more suitable than another. For example, a software firm consisting of one principal founder and several part time contractors and employees would be more suited to a sole proprietorship than a corporate or partnership form. But where there are multiple business members, the decision can become more complicated. One form of business that has become increasingly popular is called a limited liability company, or LLC.
When starting a business or changing an existing one there are several types of business entities to choose from, each of which offers its own advantages and disadvantages. Depending on the size of your business, one form may be more suitable than another. For example, a software firm consisting of one principal founder and several part time contractors and employees would be more suited to a sole proprietorship than a corporate or partnership form. But where there are multiple business members, the decision can become more complicated. One form of business that has become increasingly popular is called a limited liability company, or LLC.
The LLC combines several favorable characteristics of a traditional partnership, in which all members are entitled to participate in the management and operation of the business, with those of a corporation, in which the owners, directors, and shareholders are generally shielded from liability for the corporation's debts. The means that in an LLC, just as in a corporation, the personal assets of the business owners' would generally be protected if the business failed, lost a lawsuit, or faced some other catastrophe. Members are only liable to the extent of their capital contribution to the business. In addition, members can fully participate in the management of the business without endangering their limited liability status.
When filing season begins, the profits (or losses) from the LLC pass through to its members, who pay tax on any income when filing their individual returns. In other words, income from the LLC is taxed at the individual tax rates. Income from corporations, on the other hand is taxed twice, once at the corporate entity level and again when distributed to shareholders. Because of this, more tax savings often results if a business formed as an LLC rather than a corporation.
Taxpayers should note, however, that Congress recently increased the top marginal individual income tax rate to 39.6 percent, has placed a .09 percent additional Medicare tax on wages over $200,000 (single taxpayers), and has imposed a 3.8 percent net investment income tax on higher-income taxpayers. At the same time, there is strong talk among members of both political parties of lowering the corporate rate from the current 35 percent to something around 28 or 25 percent to make the United States more competitive with foreign nations. If this happens, many highly profitable LLC businesses may need to rethink their situation and consider switching to a corporate form.
Forming an LLC involves many requirements, but the benefits can be substantial. Please call our offices if you have any questions.
Individual Retirement Accounts (IRAs) are popular retirement savings vehicles that enable taxpayers to build their nest egg slowly over the years and enjoy tax benefits as well. But what happens to that nest egg when the IRA owner passes away?
Individual Retirement Accounts (IRAs) are popular retirement savings vehicles that enable taxpayers to build their nest egg slowly over the years and enjoy tax benefits as well. But what happens to that nest egg when the IRA owner passes away?
The answer to that question depends on who inherits the IRA. Surviving spouses are subject to different rules than other beneficiaries. And if there are multiple beneficiaries (for example if the owner left the IRA assets to several children), the rules can be complicated. But here are the basics:
Spouses
Upon the IRA owner's death, his (or her) surviving spouse may elect to treat the IRA account as his or her own. That means that the surviving spouse could name a beneficiary for the assets, continue to contribute to the IRA, and would also avoid having to take distributions. This might be a good option for surviving spouses who are not yet near retirement age and who wish to avoid the extra 10-percent tax on early distributions from an IRA.
A surviving spouse may also rollover the IRA funds into another plan, such as a qualified employer plan, qualified employee annuity plan (section 403(a) plan), or other deferred compensation plan and take distributions as a beneficiary. Distributions would be determined by the required minimum distribution (RMD) rules based on the surviving spouse's life expectancy.
In the alternative, a spouse could disclaim up to 100 percent of the IRA assets. Some surviving spouses might choose this latter option so that their children could inherit the IRA assets and/or to avoid extra taxable income.
Finally, the surviving spouse could take all of the IRA assets out in one lump-sum. However, lump-sum withdrawals (even from a Roth IRA) can subject a spouse to federal taxes if he or she does not carefully check and meet the requirements.
Non-spousal inherited IRAs
Different rules apply to an individual beneficiary, who is not a surviving spouse. First of all, the beneficiary may not elect to treat the IRA has his or her own. That means the beneficiary cannot continue to make contributions.
The beneficiary may, however, elect to take out the assets in a lump-sum cash distribution. However, this may subject the beneficiary to federal taxes that could take away a significant portion of the assets. Conversely, beneficiaries may also disclaim all or part of the assets in the IRA for up to nine months after the IRA owner's death.
The beneficiary may also take distributions from the account based on the beneficiary's age. If the beneficiary is older than the IRA owner, then the beneficiary may take distributions based on the IRA owner's age.
If there are multiple beneficiaries, the distribution amounts are based on the oldest beneficiary's age. Or, in the alternative, multiple beneficiaries can split the inherited IRA into separate accounts, and the RMD rules will apply separately to each separate account.
The rules applying to inherited IRAs can be straightforward or can get complicated quickly, as you can see. If you have just inherited an IRA and need guidance on what to do next, let us know. Likewise, if you are an IRA owner looking to secure your savings for your loved ones in the future, you can save them time and trouble by designating your beneficiary or beneficiaries now. Please contact our office with any questions.
Most people are familiar with tax withholding, which most commonly takes place when an employer deducts and withholds income and other taxes from an employee's wages. However, many taxpayers are unaware that the IRS also requires payors to withhold income tax from certain reportable payments, such as interest and dividends, when a payee's taxpayer identification number (TIN) is missing or incorrect. This is known as "backup withholding."
Backup Withholding in General
A payor must deduct, withhold, and pay over to the IRS a backup withholding tax on any reportable payments that are not otherwise subject to withholding if:
- the payee fails to furnish a TIN to the payor in the manner required;
- the IRS or a broker notifies the payor that the TIN provided by the payee is incorrect;
- the IRS notifies the payor that the payee failed to report or underreported the prior year's interest or dividends; or
- the payee fails to certify on Form W-9, Request for Taxpayer Identification Number and Certification, that he or she is not subject to withholding for previous underreporting of interest or dividend payments.
The backup withholding rate is equal to the fourth lowest income tax rate under the income tax rate brackets for unmarried individuals, which is currently 28 percent.
Only reportable payments are subject to backup withholding. Backup withholding is not required if the payee is a tax-exempt, governmental, or international organization. Similarly, payments of interest made to foreign persons are generally not subject to information reporting; therefore, these payees are not subject to backup withholding. Additionally, a payor is not required to backup withhold on reportable payments for which there is documentary evidence, under the rules on interest payments, that the payee is a foreign person, unless the payor has actual knowledge that the payee is a U.S. person. Furthermore, backup withholding is not required on payments for which a 30 percent amount was withheld by another payor under the rules on foreign withholding.
Reportable Payments
Reportable payments generally include the following types of payments of more than $10:
- Interest;
- Dividends;
- Patronage dividends (payments from farmers' cooperatives) paid in money;
- Payments of $600 or more made in the course of a trade or business;
- Payments for a nonemployee's services provided in the course of a trade or business;
- Gross proceeds from transactions reported by a broker or barter exchange;
- Cash payments from certain fishing boat operators to crew members that represent a share of the proceeds of the catch; and
- Royalties.
Reportable payments also include payments made after December 31, 2011, in settlement of payment card transactions.
Failure to Furnish TIN
Payees receiving reportable payments through interest, dividend, patronage dividend, or brokerage accounts must provide their TIN to the payor in writing and certify under penalties of perjury that the TIN is correct. Payees receiving other reportable payments must still provide their TIN to the payor, but they may do so orally or in writing, and they are not required to certify under penalties of perjury that the TIN is correct.
A payee who does not provide a correct taxpayer identification number (TIN) to the payer is subject to backup withholding. A person is treated as failing to provide a correct TIN if the TIN provided does not contain the proper number of digits --nine --or if the number is otherwise obviously incorrect, for example, because it contains a letter as one of its digits.
The IRS compares TINs provided by taxpayers with records of the Social Security Administration to check for discrepancies and notifies the bank or the payer of any problem accounts. The IRS has requested banks and other payers to notify their customers of these discrepancies so that correct TINs can be provided and the need for backup withholding avoided.
Information reporting continues to expand as Congress seeks to close the tax gap: the estimated $350 billion difference between what taxpayers owe and what they pay. Despite the recent rollback of expanded information reporting for business payments and rental property expense payments, the trend is for more - not less - information reporting of various transactions to the IRS.
Transactions
A large number of transactions are required to be reported to the IRS on an information return. The most common transaction is the payment of wages to employees. Every year, tens of millions of Forms W-2 are issued to employees. A copy of every Form W-2 is also provided to the IRS. Besides wages, information reporting touches many other transactions. For example, certain agricultural payments are reported on Form 1099-G, certain dividends are reported on Form 1099-DIV, certain IRA distributions are reported on Form 1099-R, certain gambling winnings are reported on Form W-2G, and so on. The IRS receives more than two billion information returns every year.
Valuable to IRS
Information reporting is valuable to the IRS because the agency can match the information reported by the employer, seller or other taxpayer with the information reported by the employee, purchaser or other taxpayer. When information does not match, this raises a red flag at the IRS. Let's look at an example:
Silvio borrowed funds to pay for college. Silvio's lender agreed to forgive a percentage of the debt if Silvio agreed to direct debit of his monthly repayments. This forgiveness of debt was reported by the lender to Silvio and the IRS. However, when Silvio filed his federal income tax return, he forgot, in good faith, to report the forgiveness of debt. The IRS was aware of the transaction because the lender filed an information return with the IRS.
Expansion
In recent years, Congress has enacted new information reporting requirements. Among the new requirements are ones for reporting the cost of employer-provided health insurance to employees, broker reporting of certain stock transactions and payment card reporting (all discussed below).
Employer-provided health insurance. The Patient Protection and Affordable Care Act requires employers to advise employees of the cost of employer-provided health insurance. This information will be provided to employees on Form W-2.
This reporting requirement is optional for all employers in 2011, the IRS has explained. There is additional relief for small employers. Employers filing fewer than 250 W-2 forms with the IRS are not required to report this information for 2011and 2012. The IRS may extend this relief beyond 2012. Our office will keep you posted of developments.
Reporting of employer-provided health insurance is for informational purposes only, the IRS has explained. It is intended to show employees the value of their health care benefits so they can be more informed consumers.
Broker reporting. Reporting is required for most stock purchased in 2011 and all stock purchased in 2012 and later years, the IRS has explained. The IRS has expanded Form 1099-B to include the cost or other basis of stock and mutual fund shares sold or exchanged during the year. Stock brokers and mutual fund companies will use this form to make these expanded year-end reports. The expanded form will also be used to report whether gain or loss realized on these transactions is long-term (held more than one year) or short-term (held one year or less), a key factor affecting the tax treatment of gain or loss.
Payment card reporting. Various payment card transactions after 2010 must be reported to the IRS. This reporting does not affect individuals using a credit or debit card to make a purchase, the IRS has explained. Reporting will be made by the payment settlement entities, such as banks. Payment settlement entities are required to report payments made to merchants for goods and services in settlement of payment card and third-party payment network transactions.
Roll back
In 2010, Congress expanded information reporting but this time there was a backlash. The PPACA required businesses and certain other taxpayers to file an information return when they make annual purchases aggregating $600 or more to a single vendor (other than a tax-exempt vendor) for payments made after December 31, 2011. The PPACA also repealed the long-standing reporting exception for payments made to corporations. The Small Business Jobs Act of 2010 required information reporting by landlords of certain rental property expense payments of $600 or more to a service provider made after December 31, 2011.
Many businesses, especially small businesses, warned that compliance would be costly. After several failed attempts, Congress passed legislation in April 2011 (H.R. 4, the Comprehensive 1099 Taxpayer Protection Act) to repeal both expanded business information reporting and rental property expense reporting.
The future
In April 2011, IRS Commissioner Douglas Shulman described his vision for tax collection in the future in a speech in Washington, D.C. Information reporting is at the center of Shulman's vision.
Shulman explained that the IRS would get all information returns from third parties before taxpayers filed their returns. Taxpayers or their professional return preparers would then access that information, online, and download it into their returns. Taxpayers would then add any self-reported and supplemental information to their returns, and file their returns with the IRS. The IRS would embed this core third-party information into its pre-screening filters, and would immediately reject any return that did not match up with its records.
Shulman acknowledged that this system would take time and resources to develop. But the trend is in favor of more, not less, information reporting.
A limited liability company (LLC) is a business entity created under state law. Every state and the District of Columbia have LLC statutes that govern the formation and operation of LLCs.
The main advantage of an LLC is that in general its members are not personally liable for the debts of the business. Members of LLCs enjoy similar protections from personal liability for business obligations as shareholders in a corporation or limited partners in a limited partnership. Unlike the limited partnership form, which requires that there must be at least one general partner who is personally liable for all the debts of the business, no such requirement exists in an LLC.
A second significant advantage is the flexibility of an LLC to choose its federal tax treatment. Under IRS's "check-the-box rules, an LLC can be taxed as a partnership, C corporation or S corporation for federal income tax purposes. A single-member LLC may elect to be disregarded for federal income tax purposes or taxed as an association (corporation).
LLCs are typically used for entrepreneurial enterprises with small numbers of active participants, family and other closely held businesses, real estate investments, joint ventures, and investment partnerships. However, almost any business that is not contemplating an initial public offering (IPO) in the near future might consider using an LLC as its entity of choice.
Deciding to convert an LLC to a corporation later generally has no federal tax consequences. This is rarely the case when converting a corporation to an LLC. Therefore, when in doubt between forming an LLC or a corporation at the time a business in starting up, it is often wise to opt to form an LLC. As always, exceptions apply. Another alternative from the tax side of planning is electing "S Corporation" tax status under the Internal Revenue Code.
In-plan Roth IRA rollovers are a relatively new creation, and as a result many individuals are not aware of the rules. The Small Business Jobs Act of 2010 made it possible for participants in 401(k) plans and 403(b) plans to roll over eligible distributions made after September 27, 2010 from such accounts, or other non-Roth accounts, into a designated Roth IRA in the same plan. Beginning in 2011, this option became available to 457(b) governmental plans as well. These "in-plan" rollovers and the rules for making them, which may be tricky, are discussed below.
In-plan Roth IRA rollovers are a relatively new creation, and as a result many individuals are not aware of the rules. The Small Business Jobs Act of 2010 made it possible for participants in 401(k) plans and 403(b) plans to roll over eligible distributions made after September 27, 2010 from such accounts, or other non-Roth accounts, into a designated Roth IRA in the same plan. Beginning in 2011, this option became available to 457(b) governmental plans as well. These "in-plan" rollovers and the rules for making them, which may be tricky, are discussed below.
Designated Roth account
401(k) plans and 403(b) plans that have designated Roth accounts may offer in-plan Roth rollovers for eligible rollover distributions. Beginning in 2011, the option became available to 457(b) governmental plans, allowing the plan to adopt an amendment to include designated Roth accounts to then offer in-plan Roth rollovers.
In order to make an in-plan Roth IRA rollover from a non-Roth account to the plan, the plan must have a designated Roth account option. Thus, if a 401(k) plan does not have a Roth 401(k) contribution program in place at the time the rollover contribution is made, the rollover generally cannot be made (however, a plan can be amended to allow new in-service distributions from the plan's non-Roth accounts conditioned on the participant rolling over the distribution in an in-plan Roth direct rollover). Not only may plan participants make an in-plan rollover, but a participant's surviving spouse, beneficiaries and alternate payees who are current or former spouses are also eligible.
Eligible amounts
To be eligible for an in-plan rollover, the amount to be rolled over must be eligible for distribution to you under the terms of the plan and must be otherwise eligible for rollover (i.e. an eligible rollover distribution). Generally, any vested amount that is held in 401(k) plans or 403(b) plans (or 457(b) plans) is eligible for an in-plan Roth rollover. Moreover, the distribution must satisfy the general distribution requirements that otherwise apply.
Direct rollover or 60-day rollover
An in-plan Roth rollover may be accomplished two ways: either through a direct rollover (wherein the plan's administrator directly transfers funds from the non-Roth account to the participant's designated Roth account) or through a 60-day rollover. With an in-plan Roth direct rollover, the plan trustee transfers an eligible rollover distribution from a participant's non-Roth account to the participant's designated Roth account in the same plan. With an-plan Roth 60-day rollover, the participant deposits an eligible rollover distribution within 60 days of receiving it from a non-Roth account into a designated Roth account in the same plan.
If you opt for the 60-day rollover option, the amounts rolled over are subject to 20 percent mandatory withholding.
Taxation
Taxpayers generally include the taxable amount (fair market value minus your basis in the distribution) of an in-plan Roth rollover in gross income for the tax year in which the rollover is received.
If you have questions about making an in-plan Roth IRA rollover, please contact our office.
Often, timing is everything or so the adage goes. From medicine to sports and cooking, timing can make all the difference in the outcome. What about with taxes? What are your chances of being audited? Does timing play a factor in raising or decreasing your risk of being audited by the IRS? For example, does the time when you file your income tax return affect the IRS's decision to audit you? Some individuals think filing early will decrease their risk of an audit, while others file at the very-last minute, believing this will reduce their chance of being audited. And some taxpayers don't think timing matters at all.
Often, timing is everything or so the adage goes. From medicine to sports and cooking, timing can make all the difference in the outcome. What about with taxes? What are your chances of being audited? Does timing play a factor in raising or decreasing your risk of being audited by the IRS? For example, does the time when you file your income tax return affect the IRS's decision to audit you? Some individuals think filing early will decrease their risk of an audit, while others file at the very-last minute, believing this will reduce their chance of being audited. And some taxpayers don't think timing matters at all.
What your return says is key
If it's not the time of filing, what really increases your audit potential? The information on your return, your income bracket and profession--not when you file--are the most significant factors that increase your chances of being audited. The higher your income the more attractive your return becomes to the IRS. And if you're self-employed and/or work in a profession that generates mostly cash income, you are also more likely to draw IRS attention.
Further, you may pique the IRS's interest and trigger an audit if:
- You claim a large amount of itemized deductions or an unusually large amount of deductions or losses in relation to your income;
- You have questionable business deductions;
- You are a higher-income taxpayer;
- You claim tax shelter investment losses;
- Information on your return doesn't match up with information on your 1099 or W-2 forms received from your employer or investment house;
- You have a history of being audited;
- You are a partner or shareholder of a corporation that is being audited;
- You are self-employed or you are a business or profession currently on the IRS's "hit list" for being targeted for audit, such as Schedule C (Form 1040) filers);
- You are primarily a cash-income earner (i.e. you work in a profession that is traditionally a cash-income business)
- You claim the earned income tax credit;
- You report rental property losses; or
- An informant has contacted the IRS asserting you haven't complied with the tax laws.
DIF score
Most audits are generated by a computer program that creates a DIF score (Discriminate Information Function) for your return. The DIF score is used by the IRS to select returns with the highest likelihood of generating additional taxes, interest and penalties for collection by the IRS. It is computed by comparing certain tax items such as income, expenses and deductions reported on your return with national DIF averages for taxpayers in similar tax brackets.
E-filed returns. There is a perception that e-filed returns have a higher audit risk, but there is no proof to support it. All data on hand-written returns end up in a computer file at the IRS anyway; through a combination of a scanning and a hand input procedure that takes place soon after the return is received by the Service Center. Computer cross-matching of tax return data against information returns (W-2s, 1099s, etc.) takes place no matter when or how you file.
Early or late returns. Some individuals believe that since the pool of filed returns is small at the beginning of the filing season, they have a greater chance of being audited. There is no evidence that filing your tax return early increases your risk of being audited. In fact, if you expect a refund from the IRS you should file early so that you receive your refund sooner. Additionally, there is no evidence of an increased risk of audit if you file late on a valid extension. The statute of limitations on audits is generally three years, measured from the due date of the return (April 18 for individuals this year, but typically April 15) whether filed on that date or earlier, or from the date received by the IRS if filed after April 18.
Amended returns. Since all amended returns are visually inspected, there may be a higher risk of being examined. Therefore, weigh the risk carefully before filing an amended return. Amended returns are usually associated with the original return. The Service Center can decide to accept the claim or, if not, send the claim and the original return to the field for examination.