Reflecting on the 2024 tax filing season, the IRS released major filing numbers for the season. The agency highlighted a variety of improvements that dramatically expanded service for mill...
The IRS has wrapped up the 2024 Dirty Dozen campaign, with a warning to taxpayers to beware of promoters selling bogus tax avoidance strategies. Promoters have been peddling elaborate bogus...
The IRS released statistics that showed 1,644 tax and money-laundering cases related to COVID fraud, totaling $9 billion investigated by the Criminal Investigation (CI). CI is the law enforce...
The IRS updated frequently asked questions (FAQ) on New, Previously Owned and Qualified Commercial Clean Vehicle Credits. These FAQs provide guidance on how the Inflation Reduction Act of 2022 r...
KPMG TaxNewsFlash - United StatesMarch 20, 2024The IRS today released Notice 2024-31 [PDF 156 KB] providing the adjustments to the limitation on housing expenses, under section 911, for specifi...
The IRS has issued an announcement that addresses the federal income tax treatment of amounts paid for the purchase of energy efficient property and improvements. Taxpayers who receive rebates...
Other than a planned repurposing of Inflation Reduction Act supplemental funding, the Internal Revenue Service saw no other cuts as the President signed off on the resolution to keep the federa...
The Employment Development Department (EDD) issued a release that informing that employers in San Diego and Ventura directly hit by emergencies can request an extension of up to two months to file the...
Taxpayers received about $659 million in refunds during fiscal year 2023, representing a 2.7 percent increase in the amount of refunded to taxpayers in the previous fiscal year.
Taxpayers received about $659 million in refunds during fiscal year 2023, representing a 2.7 percent increase in the amount of refunded to taxpayers in the previous fiscal year.
The refunds were on nearly $4.7 trillion in gross revenues collected by the Internal Revenue Service, which represents about 96 percent of the funding that supports federal government operations, the agency reported in its annual Data Book for fiscal year 2023, which was released April 18, 2024. This is down from more than $4.9 trillion in gross tax revenues in FY 2022.
Business income taxes declined in 2023 to nearly $457 billion in FY 2023 from nearly $476 billion in the previous fiscal year. Individual and estate and trust income taxes declined to nearly $2.6 trillion from just over $2.9 trillion. Employment taxes, estate and trust taxes, and excise and gift taxes all grew fiscal year-over-year.
More than 271.4 million tax returns and other forms were processed during FY 2023, the IRS reported. Of those, 163.1 million were individual tax returns. The report describes the 2023 filing season as "successful".
Paid prepared filed more than 84 million individual tax returns electronically, and taxpayers file nearly 2.9 million returns using the IRS Free File program, the agency reported.
The Taxpayer Advocate Service reported it resolved 219,251 cases in FY 2023. The top five case types included:
- Processing amended returns (36,171)
- Pre-refund wage verification hold (26,052)
- Decedent account refunds (12,695)
- Identity theft (11,915)
- Earned Income Tax Credit (10,507)
On the compliance side, the IRS reported that for all returns from tax years 2013 through 2021, it examined 0.44 percent of individual returns filed and 0.74 percent of corporate returns filed. Additionally, the agency examined 8.7 percent of taxpayers filing individual returns reporting total positive income of $10 million or more. Isolating tax year 2019 (the most recent year outside the statute of limitations period), the examination rate was 11.0 percent.
In FY 2023, the IRS said it "closed 582,944 tax return audits, resulting in $31.9 billion in recommended additional tax." Additionally, the agency “completed 2,584 criminal investigations” across three areas:
- 1,052 illegal-source financial crimes cases
- 979 legal-source tax crime cases
- 553 narcotics-related financial crimes cases
On the collections side, the IRS in FY 2024 collected more than $104.1 billion in unpaid assessments on returns filed with additional tax due, netting about $68.3 billion after credit transfers. It also assessed more than $25.6 billion in additional taxes for returns not filed timely and collected nearly $2.8 billion with delinquent returns.
By Gregory Twachtman, Washington News Editor
The IRS announced that final regulations related to required minimum distributions (RMDs) under Code Sec. 401(a)(9) will apply no earlier than the 2025 distribution calendar year. In addition, the IRS has provided transition relief for 2024 for certain distributions made to designated beneficiaries under the 10-year rule. The transition relief extends similar relief granted in 2021, 2022, and 2023.
The IRS announced that final regulations related to required minimum distributions (RMDs) under Code Sec. 401(a)(9) will apply no earlier than the 2025 distribution calendar year. In addition, the IRS has provided transition relief for 2024 for certain distributions made to designated beneficiaries under the 10-year rule. The transition relief extends similar relief granted in 2021, 2022, and 2023.
SECURE Act Changes
The Setting Every Community Up for Retirement Enhancement Act of 2019 (SECURE Act) (P.L. 116-94) changed the RMD rules for employees and IRA owners who died after December 31, 2019. Under Code Sec. 401(a)(9)(H)(i), if an employee in a defined contribution plan or IRA owner has a designated beneficiary, the 5-year distribution period has been lengthened to 10 years, and the 10-year rule applies regardless of whether the employee dies before the required beginning date. Proposed regulations would interpret the 10-year rule to require the beneficiary of an employee who died after his required beginning date to continue to take an annual RMD beginning in the first calendar year after the employee’s death. This aspect of the 10-year rule differs from the 5-year rule, which required no RMD until the end of the 5-year period. Thus, the IRS provided transition relief for 2021, 2022, and 2023.
Guidance for Specified RMDs for 2024
Under the transition guidance, a defined contribution plan will not be treated as having failed to satisfyCode Sec. 401(a)(9) for failing to make an RMD in 2024 that would have been required under the proposed regulations. The relief also applies to an individual who would have been liable for an excise tax under Code Sec. 4974. The guidance applies to any distribution that, under the interpretation included in the proposed regulations, would be required to be made under Code Sec. 401(a)(9) in 2024 under a defined contribution plan or IRA that is subject to the rules of Code Sec. 401(a)(9)(H) for the year in which the employee (or designated beneficiary) died if that payment would be required to be made to:
- a designated beneficiary of an employee or IRA owner under the plan if the employee or IRA owner died in 2020, 2021, 2022 or 2023, and on or after the employee’s (or IRA owner’s) required beginning date and the designated beneficiary is not using the lifetime or life expectancy payments exception under Code Sec. 401(a)(9)(B)(iii); or
- a beneficiary of an eligible designated beneficiary if the eligible designated beneficiary died in 2020, 2021, 2022, or 2023, and that eligible designated beneficiary was using the lifetime or life expectancy payments exception under Code Sec. 401(a)(9)(B)(iii).
Applicability Date of Final Regulations
The IRS has announced that final regulations regarding RMDs under Code Sec. 401(a)(9) and related provisions are anticipated to apply for determining RMDs for calendar years beginning on or after January 1, 2025.
The IRS, in connection with other agencies, have issued final rules amending the definition of "short term, limited duration insurance" (STLDI), and adding a notice requirement to fixed indemnity excepted benefits coverage, in an effort to better distinguish the two from comprehensive coverage.
The IRS, in connection with other agencies, have issued final rules amending the definition of "short term, limited duration insurance" (STLDI), and adding a notice requirement to fixed indemnity excepted benefits coverage, in an effort to better distinguish the two from comprehensive coverage.
Comprehensive coverage is health insurance which is subject to certain federal consumer protections. Both STLDI and fixed indemnity excepted benefits coverage generally provide limited benefits at lower premiums than comprehensive coverage, and enrollment is typically available at any time rather than being restricted to open and special enrollment periods. However, the government is concerned about the financial and health risks that consumers face if they use either form of coverage as a substitute for comprehensive coverage, particularly as a long-term substitute. Consumers who do not understand key differences between STLDI, fixed indemnity excepted benefits coverage, and comprehensive coverage may unknowingly take on significant financial and health risks if they purchase STLDI or fixed indemnity excepted benefits coverage under the misunderstanding that such products provide comprehensive coverage.
The Definition of STLDI
STLDI is a type of health insurance coverage sold by health insurance issuers that is primarily designed to fill temporary gaps in coverage that may occur when an individual is transitioning from one plan or coverage to another (for example, due to application of a waiting period for employer coverage). Because STLDI falls outside of "individual health insurance coverage," it is generally exempt from the Federal individual market consumer protections and requirements for comprehensive coverage. This can be an issue because individuals who enroll in STLDI are often not aware that they will not be guaranteed these key consumer protections.
Under the definition in the final rules, STLDI is health insurance coverage provided pursuant to a policy, certificate, or contract of insurance that has an expiration date specified in the policy, certificate, or contract of insurance that is no more than three months after the original effective date of the policy, certificate, or contract of insurance, and taking into account any renewals or extensions, has a duration no longer than four months in total. For purposes of this definition, a renewal or extension includes the term of a new STLDI policy, certificate, or contract of insurance issued by the same issuer to the same policyholder within the 12-month period beginning on the original effective date of the initial policy, certificate, or contract of insurance.
STLDI issuers must display a notice on the first page (in either paper or electronic form, including on a website) of the policy, certificate, or contract of insurance, and in any marketing, application, and enrollment materials (including reenrollment materials) provided to individuals at or before the time an individual has the opportunity to enroll or reenroll in the coverage, in at least 14-point font. A sample notice has been provided by the agencies.
Fixed Indemnity Insurance
Federal consumer protections and requirements for comprehensive coverage do not apply to any individual coverage or any group health plan in relation to its provision of certain types of benefits, known as "excepted benefits." Like other forms of excepted benefits, fixed indemnity excepted benefits coverage does not provide comprehensive coverage. Rather, its primary purpose is to provide income replacement benefits. Benefits under this type of coverage are paid in a fixed cash amount following the occurrence of a health-related event, such as a period of hospitalization or illness. In addition, benefits are provided at a pre-determined level regardless of any health care costs incurred by a covered individual with respect to the health-related event. Although a benefit payment may equal all or a portion of the cost of care related to an event, it is not necessarily designed to do so, and the benefit payment is made without regard to the amount of health care costs incurred.
In an effort to give consumers an informed choice, the final rules adopt the requirement of a consumer notice that must be provided when offering fixed indemnity excepted benefits coverage in the group market and update the existing notice for such coverage offered in the individual market. The final rule does not address any other provision of the 2023 proposed rules (NPRM REG-120730-21) relating to fixed indemnity excepted benefits coverage.
Effective Date
The final rules apply to new STLDI policies sold or issued on or after September 1, 2024. For fixed indemnity coverage, plans and issuers will be required to comply with the notice provisions for plan years (in the individual market, coverage periods) beginning on or after January 1, 2025.
NPRM REG-120730-21 is modified.
The Tax Court has ruled against the IRS's denial of a conservation easement deduction by declaring a Treasury regulation to be invalid under the enactment requirements of the Administrative Procedure Act (APA).
The Tax Court has ruled against the IRS's denial of a conservation easement deduction by declaring a Treasury regulation to be invalid under the enactment requirements of the Administrative Procedure Act (APA).
An LLC conveyed a conservation easement of land to a foundation that was properly registered with the county clerk. The deed conveyed the easement in perpetuity, allowing for extinguishment only in cases where the conservation purposes became impossible to accomplish or if the property were to be condemned by the local government through eminent domain. The LLC then timely filed Form 1065, U.S. Return of Partnership Income, claiming a $14.8 million deduction under Code Sec. 170(h) for conveyance of the easement, and included with the return Form 8283, Noncash Charitable Contributions.
The IRS disallowed the deduction stating the conservation purpose of the easement was not "protected in perpetuity" as required by Code Sec. 170(h)(5)(A) and, specifically, by operation of Reg. § 1.170A-14(g)(6)(ii). The LLC contended that Reg. § 1.170A-14(g)(6)(ii) is procedurally invalid under the APA and that the deed therefore need not comply with its requirements.
The Tax Court decided to reverse its prior position regarding the validity of this regulation in Oakbrook Land Holdings, LLC, (154 TC 180, Dec. 61,663; aff’d, CA-6, 2022-1 USTC ¶50,128). Despite the fact the Sixth Circuit affirmed this earlier opinion, the Eleventh Circuit had reversed the Tax Court on the same issue. This case is situated in the Tenth Circuit, which had not ruled on this issue.
The Tax Court agreed with the LLC’s argument that Reg. § 1.170A14(g)(6)(ii) is invalid because the concerns expressed in significant comments filed during the rulemaking process were inadequately responded to by the Treasury Department in the final regulation’s "basis and purpose" statement, in violation of the APA’s procedural requirements.
Four judges dissented, arguing there is no substantial basis for reversing their opinion of only four years prior, and that invalidating a regulation for failing to include a statement of basis and purpose should not occur when the basis and purpose are "obvious."
Valley Park Ranch, LLC, 162 TC —, No. 6, Dec. 62,442
For purposes of the energy investment credit, the IRS released 2024 application and allocation procedures for the environmental justice solar and wind capacity limitation under the low-income communities bonus credit program. Many of the procedures reiterate the rules in Reg. §1.48(e)-1 and Rev. Proc. 2023-27, but some special rules are also provided.
For purposes of the energy investment credit, the IRS released 2024 application and allocation procedures for the environmental justice solar and wind capacity limitation under the low-income communities bonus credit program. Many of the procedures reiterate the rules in Reg. §1.48(e)-1 and Rev. Proc. 2023-27, but some special rules are also provided.
The guidance superseded Rev. Proc. 2023-27 for the 2024 program year only.
Submitting an Application
The IRS will publicly announce the opening and closing dates for the 2024 Program year application period on the Department of Energy (DOE) landing page for the Program (Program Homepage) at https://www.energy.gov/justice/low-income-communities-bonus-credit-program. DOE will not accept new application submissions for the 2024 Program year after 11:59 PM ET on the date the application period closes. The owner of the solar or wind facility is the person who must apply for an allocation and is the recipient of any awarded allocation.
An applicant must apply for an allocation of Capacity Limitation through DOE online Program portal system (Portal) at https://eco.energy.gov/ejbonus/s/. Applicants must register in the Portal before they can begin the application process; and they must create a login.gov account before accessing the Portal. The Program Homepage includes an Applicant User Guide.
Identifying Category and Sub-Reservation
In addition to the other information detailed below, the application must identify the relevant facility category:
- -- Category 1: Project Located in a Low-Income Community (and the application must also specify whether the facility is a behind the meter (BTM) or front of the meter (FTM) facility),
- -- Category 2: Project Located on Indian Land,
- -- Category 3: Qualified Low-Income Residential Building Project, or
- -- Category 4: Qualified Low-Income Economic Benefit Project.
An applicant may submit only one application for the 2024 program year. Thus, if an applicant wishes to change its chosen category (or its Category 1 sub-reservation), it must withdraw its first application and submit a second one. Otherwise, any application submitted after the first application is treated as a duplicate application.
Application Contents
The application must contain all required information, documentation, and attestations submitted under penalties of perjury by a person who has personal knowledge of the relevant facts. That person must also be legally authorized to bind the applicant entity for federal income tax purposes, to communicate with DOE about the application, and to receive notifications, letters, and other communications from DOE and the IRS.
The guidance details the required information regarding the applicant and the facility, as well as the required documentation. The guidance also describes the information that must be submitted if an applicant wants to be considered under the additional ownership criteria or the additional geographic criteria. The DOE may require additional information in its publicly available written procedures.
DOE Review and Selection
DOE will review applications and provide a recommendation to the IRS. If the DOE identifies an error in the application, such as missing or incorrect information or documentation, it will notify the applicant through the Portal. The applicant will have 12 business days to correct the information; otherwise, DOE will treat the application as withdrawn.
Once the application period opens for the 2024 Program year, all applications submitted during the first 30 days are treated as submitted at the same time. DOE will publicly announce on the Program Homepage the opening and closing dates of this 30-day period. If applications during this period exhaust the available allocation for a category, DOE will conduct an allocation lottery. After the 30-day period, DOE will review applications in the order they are submitted until the available capacity in the identified category is allocated.
Receiving an Allocation and Claiming the Bonus Credit
After the IRS receives the DOE recommendation, it will award an allocation or reject the application. The IRS will send final decision letters through the Portal, which will identify the amount of any allocation awarded. However, an allocation is not a final determination that the facility is eligible for the bonus credit.
The owner of a facility that receives an allocation must use the Portal to report the date the facility is placed in service. The guidance details the additional information the owner must provide with the notification. After the facility is placed in service, and the owner submits the additional documentation and attestations, the owner is notified that it may claim the bonus credit.
After the IRS awards all the Capacity Limitation within each facility category, or the 2024 Program year is closed, DOE will stop reviewing applications. At the end of the 2024 Program year, no further action will be taken on applications that were not awarded an allocation. DOE will publicly announce on the Program Homepage when the 2024 Program year closes.
Effect on Other Documents
Rev. Proc. 2023-27, I.R.B. 2023-35, 655, is superseded solely with respect to the 2024 program year.
The IRS has provided a limited waiver of the addition to tax under Code Sec. 6655 for underpayments of estimated income tax related to application of the corporate alternative minimum tax (CAMT), as amended by the Inflation Reduction Act (P.L. 117-169).
The IRS has provided a limited waiver of the addition to tax under Code Sec. 6655 for underpayments of estimated income tax related to application of the corporate alternative minimum tax (CAMT), as amended by the Inflation Reduction Act (P.L. 117-169).
The Inflation Reduction Act added a new corporate AMT under Code Sec. 55, beginning after December 31, 2022, based on a corporation's adjusted financial statement income. Code Sec. 6655 generally requires corporations to pay estimated income taxes quarterly, with an addition to tax for failure to make sufficient and timely payments. The quarterly estimated tax payments must add up to 100 percent of the income tax due.
Estimated Taxes
The IRS waived the addition to tax under Code Sec. 6655 that is attributable to a corporation’s CAMT liability for the installment of estimated tax that is due on or before April 15, 2024, or May 15, 2024 (in the case of a fiscal year taxpayer with a taxable year beginning in February 2024). Accordingly, a corporate taxpayer’s required installment of estimated tax that is due on or before April 15, 2024, or on or before May 15, 2024 (in the case of a fiscal year taxpayer with a taxable year beginning in February 2024), need not include amounts attributable to its CAMT liability under Code Sec. 55 to prevent the imposition of an addition to tax under Code Sec. 6655. However, if a corporation fails to pay its CAMT liability, other Code sections may apply. For instance, additions to tax under Code Sec. 6651 could be imposed.
Instructions to Form 2220
The instructions to Form 2220, Underpayment of Estimated Tax by Corporations, will be modified to clarify that no addition to tax will be imposed under Code Sec. 6655 based on a corporation’s failure to make estimated tax payments of its CAMT liability for any covered CAMT year. Taxpayers may exclude such amounts when calculating the amount of its required annual payment on Form 2220. Affected taxpayers must still file Form 2220 with their income tax return, even if they owe no estimated tax penalty.
Applicability Date
The waiver of the addition to tax imposed by Code Sec. 6655 applies to the installment of estimated tax that is due on or before April 15, 2024, or on or before May 15, 2024 (in the case of a fiscal year taxpayer with a taxable year beginning in February 2024).
The IRS has issued proposed regulations that would provide guidance on the application of the new excise tax on repurchases of corporate stock made after December 31, 2022 (NPRM REG-115710-22). Another set of proposed rules would provide guidance on the procedure and administration for the excise tax (NPRM REG-118499-23).
The IRS has issued proposed regulations that would provide guidance on the application of the new excise tax on repurchases of corporate stock made after December 31, 2022 (NPRM REG-115710-22). Another set of proposed rules would provide guidance on the procedure and administration for the excise tax (NPRM REG-118499-23).
Code Sec. 4501 and IRS Guidance
Beginning in 2023, Code Sec. 4501 subjects a covered corporation to an excise tax equal to one percent of the fair market value of its stock that is repurchased by the corporation during the tax year. A covered corporation for this purpose is any domestic corporation the stock of which is traded on an established securities market.
Repurchase includes stock redemptions and economically similar transactions as determined by the IRS. The amount of repurchase subject to the tax is reduced by the value of new stock issued to the public or employees during the year. Repurchase of the covered corporation’s stock by its specified affiliate (a more-than-50-percent owned domestic subsidiary or partnership) also subjects the covered corporation to the excise tax.
The excise tax does not apply if the total amount of stock repurchases during the year is less than $1 million and in certain other situations.
Notice 2023-2, 2023-3 I.R.B. 374, provides initial guidance regarding the application of the excise tax. It describes rules expected to be provided in forthcoming proposed regulations for determining the amount of stock repurchase excise tax owed, along with anticipated rules for reporting and paying any liability for the tax.
Proposed Operative Rules under Code Sec. 4501 (NPRM REG-115710-22)
The proposed regulations would provide general rules regarding the application and computation of the stock repurchase excise tax, the statutory exceptions, and the application of Code Sec. 4501(d). Specifically, the proposed regulations would provide guidance addressing the following:
- Certain issues related to the effective date and transition relief, including:
- repurchases before January 1, 2023, are not taken into account for purposes of applying the de minimis exception;
- in the case of a covered corporation that has a tax year that both begins before January 1, 2023, and ends after December 31, 2022, that covered corporation may apply the netting rule to reduce the fair market value of the covered corporation’s repurchases during that tax year by the fair market value of all issuances of its stock during the entirety of that tax year;
- contributions to an employer-sponsored retirement plan during the 2022 portion of a tax year beginning before January 1, 2023, and ending after December 31, 2022, should be taken into account for purposes of Code Sec. 4501(e)(2);
- the date of repurchase for a regular-way sale of stock on an established securities market is the trade date.
- Definition of stock and the application of the excise tax to various types of stock, options, and financial instruments. The proposed regulations generally would maintain the definition of "stock" from Notice 2023-2, but would exclude "additional tier 1 preferred stock"; therefore, unless the limited-scope exception regarding additional tier 1 preferred stock applies, the stock repurchase excise tax would apply to preferred stock in the same manner as to common stock.
- Rules for valuation of stock. Generally, the proposed regulations would adopt the valuation approach of Notice 2023-2 that the fair market value of stock repurchased or issued is the market price of the stock on the date the stock is repurchased or issued, respectively.
- Rules for timing of issuances and repurchases. The approach that stock generally should be treated as repurchased when tax ownership of the stock transfers to the covered corporation or to the specified affiliate (as appropriate) would generally be retained.
- Rules regarding becoming or ceasing to be a covered corporation and determining specified affiliate status.
- Rules regarding Code Sec. 301 distributions, and complete and partial liquidations.
- Treatment of taxable transactions, including LBOs and other taxable "take private" transactions.
- Treatment of Code Sec. 304 transactions, reorganizations, and Code Sec. 355 transactions.
- Application of the statutory exceptions, including repurchase as part of a reorganization, contributions to employer-sponsored retirement plans, the de minimis exception, repurchases by dealers in securities, repurchases by RICs and REITs, and the dividend exception.
- Application of the netting rule (the adjustment for stock issued by a covered corporation, including stock issued or provided to employees of a covered corporation or its specified affiliate).
- Considerations for mergers and acquisitions with post-closing price adjustments and troubled companies.
- Application of Code Sec. 4501(d).
Applicability Dates of Proposed Operative Rules
The proposed regulations, other than the proposed regulations under Code Sec. 4501(d), would generally apply to repurchases of stock of a covered corporation occurring after December 31, 2022, and during tax years ending after December 31, 2022, and to issuances and provisions of stock of a covered corporation occurring during tax years ending after December 31, 2022. However, certain rules that were not described in Notice 2023-2 would apply to repurchases, issuances, or provisions of stock of a covered corporation occurring after April 12, 2024, and during tax years ending after April 12, 2024.
Except as described below, so long as a covered corporation consistently follows the provisions of the proposed regulations, the covered corporation may rely on these proposed regulations with respect to (1) repurchases of stock of the covered corporation occurring after December 31, 2022, and on or before the date of publication of final regulations in the Federal Register, and (2) issuances and provisions of stock of the covered corporation occurring during tax years ending after December 31, 2022, and on or before the date of publication of final regulations in the Federal Register.
In addition, so long as a covered corporation consistently follows the provisions of Notice 2023-2 corresponding to the rules in the proposed regulations, the covered corporation may choose to rely on Notice 2023-2 with respect to (1) repurchases of stock of a covered corporation occurring after December 31, 2022, and on or before April 12, 2024, and (2) issuances and provisions of stock of a covered corporation occurring during taxable years ending after December 31, 2022, and on or before April 12, 2024.
A covered corporation that relies on the provisions of Notice 2023-2 corresponding to the proposed rules with respect to (1) repurchases occurring after December 31, 2022, and on or before April 12, 2024, and (2) issuances and provisions of stock of a covered corporation occurring during tax years ending after December 31, 2022, and on or before April 12, 2024, may also choose to rely on the provisions of the proposed regulations with respect to (1) repurchases occurring after April 12, 2024, and on or before the date of publication of final regulations in the Federal Register, and (2) issuances and provisions of stock of a covered corporation occurring after April 12, 2024, and on or before the date of publication of final regulations in the Federal Register.
Special applicability dates are provided for the proposed rules under Code Sec. 4501(d).
Rules Regarding Procedure and Administration (NPRM REG-118499-23)
The IRS has also proposed regulations with guidance on the manner and method of reporting and paying the stock repurchase excise tax. These proposed regulations provide requirements for return and recordkeeping, the time and place for filing the return and paying the tax, and tax return preparers.
Consistent with Notice 2023-2, the proposed regulations add rules on procedure and administration in proposed subpart B of the proposed Stock Repurchase Excise Tax Regulations (26 CFR part 58) under Code Secs. 6001, 6011, 6060, 6061, 6065, 6071, 6091, 6107, 6109, 6151, 6694, 6695, and 6696.
In addition to requiring the excise tax to be reported on IRS Form 720, Quarterly Federal Excise Tax Return, the proposed regulations include items relevant to tax forms other than Form 720 (such as Form 1120, U.S. Corporation Income Tax Return, and Form 1065, U.S. Return of Partnership Income) to assist in identifying transactions subject to the tax.
Applicability Date of Proposed Procedural Rules
Proposed Reg. §58.6001-1 would be applicable to repurchases, adjustments, or exceptions required to be shown in any stock repurchase excise tax return required to be filed after the date of publication of final regulations in the Federal Register.
The rest of the proposed regulations would be applicable to stock repurchase excise tax returns and claims for refund required to be filed after the date of publication of final regulations in the Federal Register.
Effect on Other Documents
Notice 2023-2, 2023-3 I.R.B. 374, is obsoleted for repurchases, issuances, and provisions of stock of a covered corporation occurring after April 12, 2024.
Requests for Comments
Written or electronic comments and requests for a public hearing with respect to the proposed operative rules must be received by the date that is 60 days after April 12, 2024, the date of publication in the Federal Register. Comments and requests for a public hearing on the proposed procedural rules must be received by the date that is 30 days after publication in the Federal Register.
The IRS has released the 2021-2022 special per diem rates. Taxpayers use the per diem rates to substantiate certain expenses incurred while traveling away from home.
The IRS has released the 2021-2022 special per diem rates. Taxpayers use the per diem rates to substantiate certain expenses incurred while traveling away from home. These special per diem rates include:
- the special transportation industry meal and incidental expenses (M&IE) rates;
- the rate for the incidental expenses only deduction; and
- the rates and list of high-cost localities for purposes of the high-low substantiation method.
Transportation Industry Special Per Diem Rates
The special M&IE rates for taxpayers in the transportation industry are:
- $69 for any locality of travel in the continental United States (CONUS); and
- $74 for any locality of travel outside the continental United States (OCONUS).
Incidental Expenses Only Rate
The rate is $5 per day for any CONUS or OCONUS travel for the incidental expenses only deduction.
High-Low Substantiation Method
For purposes of the high-low substantiation method, the 2021-2022 special per diem rates are:
- $296 for travel to any high-cost locality; and
- $202 for travel to any other locality within CONUS.
The amount treated as paid for meals is:
- $74 for travel to any high-cost locality; and
- $64 for travel to any other locality within CONUS.
Instead of the meal and incidental expenses only substantiation method, taxpayers may use:
- $74 for travel to any high-cost locality; and
- $64 for travel to any other locality within CONUS.
Taxpayers using the high-low method must comply with Rev. Proc. 2019-48, I.R.B. 2019-51, 1390. That procedure provides the rules for using a per diem rate to substantiate the amount of ordinary and necessary business expenses paid or incurred while traveling away from home.
The IRS and the Treasury Department have issued guidance to employers about reporting the amount of qualified sick and family leave wages paid to employees for leave taken in 2021 on Form W-2, Wage and Tax Statement.
The IRS and the Treasury Department have issued guidance to employers about reporting the amount of qualified sick and family leave wages paid to employees for leave taken in 2021 on Form W-2, Wage and Tax Statement. Further, the notice provides guidance under recent legislation, including: the Families First Coronavirus Response Act (FFCRA) ( P.L. 116-127), as amended by the COVID-Related Tax Relief Act of 2020 (Division N of P.L. 116-260) and the American Rescue Plan Act of 2021 ( P.L. 117-2). Employers are required to report these amounts to employees either on Form W-2, Box 14, or in a separate statement provided with the Form W-2. The wage amount that the notice requires employers to report on Form W-2 will provide employees who are also self-employed with the information necessary to determine the amount of any sick and family leave equivalent credits they may claim in their self-employed capacities.
Reporting Requirements
The guidance requires eligible employers to report to employees the amount of qualified sick leave wages and qualified family leave wages paid to the employees under (i) sections 7001 or 7003 of the Families First Act for leave provided during the period beginning January 1, 2021, through March 31, 2021, and (ii) Code Secs. 3131 and 3132 for leave provided during the period beginning April 1, 2021, through September 30, 2021. Moreover, eligible employers have separate reporting requirements for (i) leave provided to employees during the period beginning January 1, 2021, through March 31, 2021, under the Families First Act; and (ii) leave provided to employees during the period beginning April 1, 2021, through September 30, 2021, under Code Secs. 3131 and 3132.
Specific Reporting Instructions
Qualified leave wages paid in 2021 under the Families First Act and Code Secs. 3131 and 3132 are to be reported in Box 1 of Form W-2. To the extent that qualified leave wages are social security wages or Medicare wages, they must also be included in Box 3 (up to the social security wage base) and Box 5, respectively.
In addition to the regular reporting requirements, employers must report the following types and amounts of the wages that were paid, with each amount separately reported either in Box 14 of Form W-2 or on a separate statement to the employee:
- the total amount of qualified sick leave wages paid for reasons described in paragraphs (1), (2), or (3) of section 5102(a) of the Emergency Paid Sick Leave Act (EPSLA) with respect to leave provided to employees during the period beginning on January 1, 2021, through March 31, 2021 (sick leave wages subject to the $511 per day limit);
- the total amount of qualified sick leave wages paid for reasons described in paragraphs (4), (5), or (6) of section 5102(a) of EPSLA with respect to leave provided to employees during the period beginning on January 1, 2021, through March 31, 2021 (sick leave wages subject to the $200 per day limit);
- the total amount of qualified family leave wages paid to the employee under the Emergency Family and Medical Leave Expansion Act (EFMLEA) with respect to leave provided to employees during the period beginning on January 1, 2021, through March 31, 2021;
- the total amount of qualified sick leave wages paid for reasons described in paragraphs (1), (2), or (3) of section 5102(a) of section 5102(a) of EPSLA with respect to leave provided to employees during the period beginning on April 1, 2021, through September 30, 2021;
- the total amount of qualified sick leave wages paid for reasons described in paragraphs (4), (5), or (6) of section 5102(a) of EPSLA with respect to leave provided to employees during the period beginning on April 1, 2021, through September 30, 2021;
- the total amount of qualified family leave wages paid to the employee under EFMLEA with respect to leave provided to employees during the period beginning on April 1, 2021, through September 30, 2021.
Model Language for Employee Instructions
As part of the Instructions for Employee, under the instructions for Box 14, for the Forms W-2, or in a separate statement sent to the employee, the employer may provide additional information about qualified sick leave wages and qualified family leave wages, and explain that these wages may limit the amount of the qualified sick leave equivalent or qualified family leave equivalent credits to which the employee may be entitled with respect to any self-employment income. The guidance provides model language for employee instructions.
Self-Employment Tax Reporting
If taxpayers have self-employment income in addition to wages paid by an employer, and they intend to claim any qualified sick leave or qualified family leave equivalent credits, they must report the qualified sick leave or qualified family leave wages on Form 7202, Credits for Sick Leave and Family Leave for Certain Self-Employed Individuals, included with their income tax return. The self-employed taxpayer may have to reduce (but not below zero) any qualified sick leave or qualified family leave equivalent amounts by these qualified leave wages.
The IRS reminded taxpayers that their website (www.irs.gov) provides millions of visitors with the answers they need to fit their busy summer schedules.
The IRS reminded taxpayers that their website ( www.irs.gov) provides millions of visitors with the answers they need to fit their busy summer schedules. Taxpayers who requested an extension to October 15 or missed the May 17 deadline can still prepare and e-file tax returns for free with the IRS Free File tool. Further, taxpayers can view, download or print tax products, and do the following:
Use the "File" tab on the home page for most federal income tax needs. Access the Interactive Tax Assistant tool that can answer many tax law questions.
See their tax account with the View Your Account tool. With this, they can find information such as a payoff amount, the balance for each tax year owed, up to 24 months of their payment history and key information from their current tax year return as originally filed.
Use the Get Transcript tool to view, print or download their tax transcripts after the IRS has processed the return.
Find the most up-to-date information about tax refunds using the Where's My Refund? tool on the IRS website and on the official IRS mobile app, IRS2Go. Taxpayers can start checking on the status of their refund 24 hours after the IRS acknowledges receipt of an e-filed return.
Additionally, many pages on the IRS website are now available in Spanish, Vietnamese, Russian, Korean, Haitian, Creole, and Chinese—simplified and traditional. Earlier this year, the agency posted a Spanish language version of Form 1040 PDF and the related instructions.
Assistive Technology
Moreover, at the online Alternative Media Center (AMC), taxpayers can find a variety of accessible products like screen reading software, refreshable Braille displays, and screen magnifying software. These products include tax forms, instructions, and publications that can be downloaded or viewed online as Section 508 compliant PDF, HTML, eBraille, text, and large print. However, every product is not available in all formats. For example, tax forms are not available as HTML. To request paper copies of tax forms, instructions or publications in Braille or large print, taxpayers must call the tax form telephone number at 800-829-3676.
Coronavirus Tax Relief Information
Further, the IRS has published ready-to-use articles, e-posters, videos, and much more on the website about Economic Impact Payments, the Recovery Rebate Credit, and the Advance Child Tax Credit. The IRS placed a special emphasis on partnering with organizations that work with groups focusing on veterans, homeless and low-income taxpayers as well as non-English speaking audiences to share information. In all, the IRS worked with thousands of partners across the country reaching organizations representing hundreds of millions of taxpayers.
IRS Tax Withholding Estimator
Finally, the IRS Tax Withholding Estimator helps employees assess their income tax, credits, adjustments and deductions and determine whether they need to change their withholding by submitting a new Form W-4, Employee's Withholding Allowance Certificate. However, taxpayers should remember that, if needed, they should submit their new W-4 to their employer, not the IRS.
The IRS reminds taxpayers that May includes National Hurricane Preparedness Week and National Wildfire Awareness Month. It urges taxpayers to create or review emergency preparedness plans for surviving natural disasters.
The IRS reminds taxpayers that May includes National Hurricane Preparedness Week and National Wildfire Awareness Month. It urges taxpayers to create or review emergency preparedness plans for surviving natural disasters.
The IRS advises taxpayers to do the following:
- Secure key documents such as tax returns, birth certificates, deeds, titles and insurance policies inside waterproof containers in a secure space. Keep duplicates of these documents with a trusted person outside the area of the taxpayer. Scan these documents for backup storage on electronic media such as a flash drive.
- Take current photos or videos of a home or business’s contents, especially expensive and high value items. The IRS disaster-loss workbooks in IRS Pub. 584-B can help individuals and businesses compile lists of belongings or business equipment.
- Employers who use payroll service providers should ask the provider if it has a fiduciary bond in place. The bond could protect the employer in the event of default by the payroll service provider.
- Reconstructing records after a disaster may be required for tax purposes, getting federal assistance or insurance reimbursement. Taxpayers who have lost some or all their records during a disaster can visit IRS’s Reconstructing Records webpage as one of their first steps.
The termination date for an empowerment zone designation under Code Sec. 1391 is generally deemed to extend until December 31, 2025. However, the state or local government that nominated the zone may decline the deemed extension.
The termination date for an empowerment zone designation under Code Sec. 1391 is generally deemed to extend until December 31, 2025. However, the state or local government that nominated the zone may decline the deemed extension.
Empowerment Zone Designation Termination Dates
Empowerment zone designations generally continue until the termination date selected by the government that nominated the zone (the designated termination date), or the termination date established by legislation (the statutory termination date).
The statutory termination date has been extended multiple times, with each extension deemed to extend the designated termination date as well. Most recently, the Taxpayer Certainty and Disaster Tax Relief Act of 2020 ( P.L. 116-260) extended the statutory termination date to December 31, 2025. Thus, the designated termination dates for all empowerment zones are also deemed to be extended to December 31 2025.
A state or local government may decline the extension via a written notification to the IRS by May 25, 2021. The notification must be faxed to Bruce Chang, CC:ITA:B07, at (855) 576-2341.
Rev. Proc. 2020-16, I.R.B. 2020-27, 10, is obsoleted for tax years beginning after 2020.
IRS Commissioner Charles "Chuck" Rettig told Congress on February 23 that the backlog of 20 million unopened pieces of mail is gone.
IRS Commissioner Charles "Chuck" Rettig told Congress on February 23 that the backlog of 20 million unopened pieces of mail is gone.
"There were trailers in June filled (with unopened paper returns). There are none today," Rettig said in an appearance before the House Appropriations Committee Financial Services Subcommittee.
When there was a delay in getting to a return, Rettig said that a taxpayer was credited on the date the mail was received, not the day the payment was processed.
The IRS leader stated that virtual currency, which is designed to be anonymous, has probably significantly increased the amount of money taxpayers owed but have not paid since the last formal figure of $381 billion was estimated in 2013.
To close the gap between money owed and money paid, Rettig said there has to be an increase in guidance as well as enforcement. "The two go together," said Rettig, who pointed out that the IRS must support the people who are working to get their tax payments right as well as working against those who are trying to thwart the agency’s efforts.
Rettig cited high-income/high-wealth taxpayers, including high-income non-filers, as high enforcement priorities. "We have not pulled back enforcement efforts for higher income individuals during the pandemic. We can be impactful," said Rettig. He added that the IRS is using artificial intelligence and other information technology (IT) advances to catch wealthy tax law and tax rule breakers. "Our advanced data and analytic strategies allow us to catch instances of tax evasion that would not have been possible just a few years ago," said the IRS leader.
Rettig contended that the agency’s IT improvement efforts are being hampered by a shortage of funding. According to Rettig, three years into a six-year business modernization plan, the IRS has received half of the money it requested from Congress for the initiative.
One of the impacts of the pandemic on the IRS and the taxpayers and tax professionals it serves, said Rettig, is the average length of phone calls has risen to 17 minutes from 12 minutes because the issues have been more complex.
On another issue related to COVID-19, Rettig said the IRS has been diligently working to alert taxpayers and tax professionals to scams related to COVID-19, especially calls and email phishing attempts tied to the Economic Impact Payments (EIPs). He said people can reduce the chances of missing their EIP payments through lost, stolen or thrown-away debit cards by filing their tax returns electronically.
The Commissioner told the panel that the delay in starting the tax filing season this year will not add to any additional delays to refunds on returns claiming the Earned Income Tax Credit (EITC) or the Additional Child Tax Credit (ACTC).
Rettig also noted that taxpayers who interact with an IRS representative now have access to over-the-phone interpreter services in more than 350 languages.
The IRS has released new Form 7202, Credits for Sick Leave and Family Leave for Certain Self-Employed Individuals. The form allows eligible self-employed individuals to calculate the amount to claim for qualified sick and family leave tax credits under the Families First Coronavirus Response Act (FFCRA) ( P.L. 116-127). They can claim the credits on their 2020 Form 1040 for leave taken between April 1, 2020, and December 31, 2020, and on their 2021 Form 1040 for leave taken between January 1, 2021, and March 31, 2021.
The IRS has released new Form 7202, Credits for Sick Leave and Family Leave for Certain Self-Employed Individuals. The form allows eligible self-employed individuals to calculate the amount to claim for qualified sick and family leave tax credits under the Families First Coronavirus Response Act (FFCRA) ( P.L. 116-127). They can claim the credits on their 2020 Form 1040 for leave taken between April 1, 2020, and December 31, 2020, and on their 2021 Form 1040 for leave taken between January 1, 2021, and March 31, 2021.
The FFCRA allows eligible self-employed individuals who, due to COVID-19, are unable to work or telework for reasons relating to their own health or to care for a family member, to claim the refundable tax credits. The credits are equal to either a qualified sick leave or family leave equivalent amount, depending on circumstances. To be eligible for the credits, self-employed individuals must:
- conduct a trade or business that qualifies as self-employment income; and
- be eligible to receive qualified sick or family leave wages under the Emergency Paid Sick Leave Act as if the taxpayer was an employee.
For IRS frequently asked questions on the credits, go to https://www.irs.gov/newsroom/covid-19-related-tax-credits-for-required-paid-leave-provided-by-small-and-midsize-businesses-faqs. The FAQs include a special section on provisions related to self-employed individuals.
The IRS is urging employers to take advantage of the newly-extended employee retention credit (ERC), which makes it easier for businesses that have chosen to keep their employees on the payroll despite challenges posed by COVID-19. The Taxpayer Certainty and Disaster Tax Relief Act of 2020 (Division EE of P.L. 116-260), which was enacted December 27, 2020, made a number of changes to the ERC previously made available under the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) ( P.L. 116-136), including modifying and extending the ERC, for six months through June 30, 2021.
The IRS is urging employers to take advantage of the newly-extended employee retention credit (ERC), which makes it easier for businesses that have chosen to keep their employees on the payroll despite challenges posed by COVID-19. The Taxpayer Certainty and Disaster Tax Relief Act of 2020 (Division EE of P.L. 116-260), which was enacted December 27, 2020, made a number of changes to the ERC previously made available under the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) ( P.L. 116-136), including modifying and extending the ERC, for six months through June 30, 2021.
Eligible employers can now claim a refundable tax credit against the employer share of Social Security tax equal to 70-percent of the qualified wages they pay to employees after December 31, 2020, through June 30, 2021. Qualified wages are limited to $10,000 per employee per calendar quarter in 2021. Thus, the maximum ERC amount available is $7,000 per employee per calendar quarter, for a total of $14,000 in 2021.
Effective January 1, 2021, employers are eligible if they operate a trade or business during January 1, 2021, through June 30, 2021, and experience either:
- a full or partial suspension of the operation of their trade or business during this period because of governmental orders limiting commerce, travel or group meetings due to COVID-19; or
- a decline in gross receipts in a calendar quarter in 2021 where the gross receipts for that calendar quarter are less than 80% of the gross receipts in the same calendar quarter in 2019 (to be eligible based on a decline in gross receipts in 2020, the gross receipts were required to be less than 50-percent of those in the same 2019 calendar quarter).
In addition, effective January 1, 2021, the definition of "qualified wages" for the ERC has been changed:
- For an employer that averaged more than 500 full-time employees in 2019, qualified wages are generally those wages paid to employees that are not providing services because operations were fully or partially suspended or due to the decline in gross receipts.
- For an employer that averaged 500 or fewer full-time employees in 2019, qualified wages are generally those wages paid to all employees during a period that operations were fully or partially suspended or during the quarter that the employer had a decline in gross receipts, regardless of whether the employees are providing services.
The IRS points out that, retroactive to the enactment of the CARES Act on March 27, 2020, the law now allows employers who received Paycheck Protection Program (PPP) loans to claim the ERC for qualified wages that are not treated as payroll costs in obtaining forgiveness of the PPP loan.
PPP Loan Forgiveness
In a recent posting on its webpage (see "Didn’t Get Requested PPP Loan Forgiveness? You Can Claim the Employee Retention Credit for 2020 on the 4th Quarter Form 941"), the IRS has clarified that, under section 206(c) of the 2020 Taxpayer Certainty Act, an employer that is eligible for the ERC can claim the credit even if the employer received a Small Business Interruption Loan under the PPP. Accordingly, eligible employers can claim ERS on any qualified wages that are not counted as payroll costs in obtaining PPP loan forgiveness. Note, however, that any wages that could count toward eligibility for ERC or PPP loan forgiveness can be applied to either program, but not to both programs.
If an employer received a PPP loan and included wages paid in the 2nd and/or 3rd quarter of 2020 as payroll costs in support of an application to obtain forgiveness of the loan (rather than claiming ERC for those wages), and the employer's request for forgiveness was denied, the employer an claim the ERC related to those qualified wages on its 4th quarter 2020 Form 941, Employer's Quarterly Federal Tax Return. An employer can could report on its 4th quarter Form 941 any ERC attributable to health expenses that are qualified wages that it did not include in its 2nd and/or 3rd quarter Form 941.
Employers that choose to use this limited 4th quarter procedure must:
- Add the ERC attributable to these 2nd and/or 3rd quarter qualified wages and health expenses on line 11c or line 13d (as relevant) of their original 4th quarter Form 941 (along with any other ERC for qualified wages paid in the 4th quarter).
- Include the amount of these qualified wages paid during the 2nd and/or 3rd quarter (excluding health plan expenses) on line 21 of its original 4th quarter Form 941 (along with any qualified wages paid in the 4th quarter).
- Enter the same amount on Worksheet 1, Step 3, line 3a (in the 941 Instructions).
- Include the amount of these health plan expenses from the 2nd and/or 3rd quarter on line 22 of the 4th quarter Form 941 (along with any health expenses for the 4th quarter).
- Enter the same amount on Worksheet 1, Step 3, line 3b.
The IRS recognized that it might be difficult to implement these special procedures so late in the timeframe to file 4th quarter returns. Therefore, employers can instead choose the regular process of filing an adjusted return or claim for refund for the appropriate quarter to which the additional ERC relates using Form 941-X.
More Information
For more information on the employee retention credit, the IRS urges taxpayers to visit its "COVID-19-Related Employee Retention Credits: How to Claim the Employee Retention Credit FAQs" webpage (at https://www.irs.gov/newsroom/covid-19-related-employee-retention-credits-how-to-claim-the-employee-retention-credit-faqs).
The IRS has adopted previously issued proposed regulations ( REG-106808-19) dealing with the 100 percent bonus depreciation deduction. In addition, some clarifying changes have been made to previously issued final regulations ( T.D. 9874). Changes to the proposed and earlier final regulations are largely in response to various comments submitted by practitioners, and generally relate to:
The IRS has adopted previously issued proposed regulations ( REG-106808-19) dealing with the 100 percent bonus depreciation deduction. In addition, some clarifying changes have been made to previously issued final regulations ( T.D. 9874). Changes to the proposed and earlier final regulations are largely in response to various comments submitted by practitioners, and generally relate to:
- the definition of qualified used property;
- the election to claim bonus depreciation on components acquired or self-constructed after September 27, 2017, for larger self-constructed property for which manufacture, construction, or production began before September 28, 2017;
- application of the mid-quarter convention;
- clarifications to the definition of qualified improvement property, predecessor, and class of property; and
- clarifications to the rules for consolidated groups
The rules for consolidated groups have also been moved from Proposed Reg. §1.168(k)-2(b)(3)(v) to new Reg. §1.1502-68.
Used Property
The 2019 final regulations provide that in determining whether the taxpayer or a predecessor had a depreciation interest in property prior to its acquisition, only the five calendar years immediately prior to the current placed-in-service year are considered. The latest IRS regulations clarify that the five calendar years immediately prior to the current calendar year in which the property is placed in service by the taxpayer, and the portion of such current calendar year before the placed-in-service date of the property without taking into account the applicable convention, are taken into account. In addition, the five-year look-back period applies separately to the taxpayer and a predecessor.
Furthermore, if the taxpayer or a predecessor, or both, have not been in existence during the entire look-back period, then only the portion of the look-back period during which the taxpayer or a predecessor, or both, have been in existence is taken into account.
Expanded Component Election
The prior regulations allow taxpayers to election to claim 100 percent bonus depreciation on components of certain larger constructed property that qualifies for bonus depreciation if the construction of the larger property began before September 28, 2017. The components must be acquired or constructed after September 27, 2017, and the larger property must be placed in service before 2020 (2021 in the case of property with a longer construction period). The final regulations remove the 2020/2021 cutoff date. In addition, the final regulations provide that eligible larger self-constructed property also includes property that is constructed for a taxpayer under a written contract that is not binding and that is entered into prior to construction for use in the taxpayer’s trade or business. The definition of a larger constructed property is also clarified.
Qualified Improvement Property
The 15-year recovery period for qualified improvement property applies only to improvements "made by the taxpayer." The final regulations clarify that an improvement is considered made by a taxpayer if the property is constructed for the taxpayer. However, qualified improvement property received by a transferee taxpayer in a nonrecognition transaction described in Code Sec. 168(i)(7) is not eligible for bonus depreciation.
Mid-Quarter Convention
The final regulations clarify that depreciable basis is not reduced by the amount of bonus deduction in determining whether the mid-quarter convention applies.
Binding Contracts
Generally, property acquired pursuant to a binding contract entered into after September 27, 2017, does not qualify for bonus depreciation at the 100 percent rate. The final regulations clarify that a contract for a sale of stock of a corporation that is treated as an asset sale as the result of a Code Sec. 336(e) election made for a disposition described in Reg. §1.336-2(b)(1) is a binding contract if enforceable under state law.
Floor Plan Financing
The IRS intends to issue guidance relating to transition relief for taxpayers with a trade or business with floor plan financing indebtedness that want to revoke elections not to claim bonus depreciation for property placed in service during 2018.
The IRS will not allow a taxpayer to limit the amount of its otherwise deductible floor plan interest in order to qualify for bonus depreciation. However, guidance will address transition relief for the 2018 tax year for taxpayers that treated Code Sec. 168(j)(1) as providing an option for a business with floor plan financing indebtedness to include or exclude its floor plan financing interest expense in determining the amount allowed as a deduction for business interest expense for the tax year.
Effective Date
In general, the regulations apply to property acquired after September 27, 2017, and placed in service during or after a tax years that begins on or after January 1, 2021. However, they may be relied on for earlier tax years.
The 2017 tax filing season launched on January 23. The IRS predicted a few speedbumps for taxpayers, especially for taxpayers who file early in anticipation of early refunds. The agency expects to receive more than 150 million individual income tax returns. The vast majority of individual income tax returns will be filed electronically and the IRS has extra safeguards in place to protect taxpayers from cybercrime.
The 2017 tax filing season launched on January 23. The IRS predicted a few speedbumps for taxpayers, especially for taxpayers who file early in anticipation of early refunds. The agency expects to receive more than 150 million individual income tax returns. The vast majority of individual income tax returns will be filed electronically and the IRS has extra safeguards in place to protect taxpayers from cybercrime.
Refunds
Traditionally, the start of the filing season is busy with the IRS processing returns from taxpayers anticipating refunds. This year is no exception but a law passed in 2015 may hold up some refunds. Over the past several months, the IRS has been alerting taxpayers to the change. The law – the Protecting Americans from Tax Hikes Act of 2015 (PATH Act) – impacts taxpayers claiming the earned income tax credit (EITC) and the additional child tax credit (ACTC).
The PATH Act generally requires that no refund will be made to a taxpayer before the 15th day of the second month following the close of that tax year, if the taxpayer claimed the EITC or ACTC on his or her return. This rule in the PATH Act applies to refunds made after December 31, 2016. So this is the first filing season impacted by the new rule.
The IRS has reported that it will begin releasing refunds affected by the PATH Act’s new rule on February 15, 2017. However, many early filers likely will not have access to their refunds until at least the week of February 27, according to the IRS. The additional delay is due to several factors, including the time needed by banks and financial institutions to process direct deposits of refunds, the agency explained.
Cybercrime
Along with the advising taxpayers about the possibility of delayed refunds, the IRS also has been stepping up its education about tax-related identity theft. Cybercriminals use a variety of tools to scam taxpayers. Identity thieves call taxpayers and claim to be IRS employees. They demand payment of nonexistent tax debts or they tell taxpayers that the IRS needs to “verify” their personal financial information. Cybercriminals also use emails and social media to trick taxpayers into revealing their personal financial information. These scams are nationwide and leave no one untouched.
The IRS has partnered with tax professionals and the tax preparation industry to protect taxpayers from cybercriminals. Tax professionals must adhere to strict IRS security standards.
Many of these protections are unseen to taxpayers. The IRS has upgraded its return processing filters to discover fraudulent returns. The agency also has safeguards built into electronic filing. Several years ago, cybercriminals breached an IRS app but, according to the agency, criminals have not succeeded in penetrating the agency’s core processing functions.
Keep in mind that cybercriminals are most active early in the filing season. Identity thieves seek to file fraudulent returns early; before taxpayers file their legitimate returns. All too often, taxpayers first learn they are victims of identity theft when the IRS rejects their return. If you have any concerns that your personal information may have been stolen or compromised, please contact our office. Together, we can work with the IRS. The IRS has a special program for victims of identity theft.
As the filing season progresses, our office will keep you posted of developments. As always, please contact us if you have any questions.
An S corporation can own an interest in another business entity. It can also be a partner in a partnership or a member of a limited liability company (LLC). An S corporation can own 80 percent or more of the stock of a C corporation, which can elect to join in the filing of a consolidated return with its affiliated C corporations. However, an S corporation is ineligible to be a member of the affiliated group and to join in the election to file a consolidated return.
An S corporation can own an interest in another business entity. It can also be a partner in a partnership or a member of a limited liability company (LLC). An S corporation can own 80 percent or more of the stock of a C corporation, which can elect to join in the filing of a consolidated return with its affiliated C corporations. However, an S corporation is ineligible to be a member of the affiliated group and to join in the election to file a consolidated return.
The primary mechanism for ownership of another entity is for an S corporation to own a subsidiary S corporation, known as a qualified Subchapter S subsidiary. The subsidiary must be otherwise eligible to be an S corporation if the parent’s shareholders directly owned the subsidiary’s stock. The parent S corporation must own the subsidiary’s stock directly and must own 100 percent of the subsidiary’s stock.
Finally, the parent must elect, on Form 8869, to treat the corporation as a qualified Subchapter S subsidiary. The election of qualified S corporation subsidiary status results in a deemed liquidation of the subsidiary into the parent. If the election later is revoked or terminates, the former subsidiary is treated as a new corporation that acquired all of its assets and assumed all of its liabilities immediately before the termination.
For tax purposes, the separate existence of the subsidiary is ignored. All the assets, liabilities and items of income, deduction or credit of the subsidiary are treated as belonging to the parent S corporation. However, the subsidiary is treated as a separate entity for employment tax liabilities paid in 2009 or later, and certain excise taxes paid in 2008 or later. If the subsidiary was a separate corporation before joining with the parent, the subsidiary remains liable for any taxes that arose during the period when it was separate.
Foreign travel expenses may be subject to allocation if the taxpayer engages in personal activities while traveling on business. A portion of the foreign travel expenses may be nondeductible if the individual engages in substantial nonbusiness activity. The allocation rules apply where the individual engages in substantial nonbusiness activity at, near, or beyond the business destination; or, when the personal destination is en route to and from the business destination.
Foreign travel expenses may be subject to allocation if the taxpayer engages in personal activities while traveling on business. A portion of the foreign travel expenses may be nondeductible if the individual engages in substantial nonbusiness activity. The allocation rules apply where the individual engages in substantial nonbusiness activity at, near, or beyond the business destination; or, when the personal destination is en route to and from the business destination.
The rules apply for travel outside the 50 states and the District of Columbia. Travel to the possessions is considered travel outside the U.S. Travel outside the U.S. does not include any travel from one point in the U.S. to another point in the United States, even though part of the trip is outside the United States.
Allocation is done on a day-to-day basis, in proportion to the number of nonbusiness days during the trip to the entire trip. Each day is considered either entirely a business day or entirely a nonbusiness day. A day spent outside the U.S. is deemed a business day, even though only part of the day was spent on business, if any of the following apply:
- The taxpayer was traveling to or returning from a destination outside the U.S. in pursuit of a trade or business.
- The taxpayer's presence outside the U.S. on that day was required at a particular place for a specific business purpose.
- During hours that are normally considered appropriate for business activity the taxpayer's principal activity was the pursuit of a trade or business.
If the trip is primarily personal in nature, travel expenses to and from the destination are not deductible, even if the taxpayer engages in business activities while at the destination.
Once the amount of travel expenses subject to the allocation and disallowance rules is determined, that amount is multiplied by a fraction, equal to the number of nonbusiness days during the trip, divided by the total number of business and nonbusiness days during the trip.
These restrictions do not apply when any of the following conditions applies:
- Travel time outside the United States do not exceed one week.
- Nonbusiness travel time is less than 25 percent of the total time.
- The individual lacks substantial control over the travel arrangements (other than the timing of the trip).
- The vacation portion of the trip is a not a major consideration of the taxpayer.
An employer must withhold income taxes from compensation paid to common-law employees (but not from compensation paid to independent contractors). The amount withheld from an employee's wages is determined in part by the number of withholding exemptions and allowances the employee claims. Note that although the Tax Code and regulations distinguish between withholding exemptions and withholding allowances, the terms are interchangeable. The amount of reduction attributable to one withholding allowance is the same as that attributable to one withholding exemption. Form W-4 and most informal IRS publications refer to both as withholding allowances, probably to avoid confusion with the complete exemption from withholding for employees with no tax liability.
An employer must withhold income taxes from compensation paid to common-law employees (but not from compensation paid to independent contractors). The amount withheld from an employee's wages is determined in part by the number of withholding exemptions and allowances the employee claims. Note that although the Tax Code and regulations distinguish between "withholding exemptions" and "withholding allowances," the terms are interchangeable. The amount of reduction attributable to one withholding allowance is the same as that attributable to one withholding exemption. Form W-4 and most informal IRS publications refer to both as withholding allowances, probably to avoid confusion with the complete exemption from withholding for employees with no tax liability.
An employee may change the number of withholding exemptions and/or allowances she claims on Form W-4, Employee's Withholding Allowance Certificate. It is generally advisable for an employee to change his or her withholding so that it matches his or her projected federal tax liability as closely as possible. If an employer overwithholds through Form W-4 instructions, then the employee has essentially provided the IRS with an interest-free loan. If, on the other hand, the employer underwithholds, the employee could be liable for a large income tax bill at the end of the year, as well as interest and potential penalties.
How allowances affect withholding
For each exemption or allowance claimed, an amount equal to one personal exemption, prorated to the payroll period, is subtracted from the total amount of wages paid. This reduced amount, rather than the total wage amount, is subject to withholding. In other words, the personal exemption amount is $4,000 for 2015, meaning the prorated exemption amount for an employee receiving a biweekly paycheck is $153.85 ($4,000 divided by 26 paychecks per year) for 2015.
In addition, if an employee's expected income when offset by deductions and credits is low enough so that the employee will not have any income tax liability for the year, the employee may be able to claim a complete exemption from withholding.
Changing the amount withheld
Taxpayers may change the number of withholding allowances they claim based on their estimated and anticipated deductions, credits, and losses for the year. For example, an employee who anticipates claiming a large number of itemized deductions and tax credits may wish to claim additional withholding allowances if the current number of withholding exemptions he is currently claiming for the year is too low and would result in overwithholding.
Withholding allowances are claimed on Form W-4, Employee's Withholding Allowance Certificate, with the withholding exemptions. An employer should have a Form W-4 on file for each employee. New employees generally must complete Form W-4 for their employer. Existing employees may update that Form W-4 at any time during the year, and should be encouraged to do so as early as possible in 2015 if they either owed significant taxes or received a large refund when filing their 2014 tax return.
The IRS provides an IRS Withholding Calculator at www.irs.gov/individuals that can help individuals to determine how many withholding allowances to claim on their Forms-W-4. In the alternative, employees can use the worksheets and tables that accompany the Form W-4 to compute the appropriate number of allowances.
Employers should note that a Form W-4 remains in effect until an employee provides a new one. If an employee does update her Form W-4, the employer should not adjust withholding for pay periods before the effective date of the new form. If an employee provides the employer with a Form W-4 that replaces an existing Form W-4, the employer should begin to withhold in accordance with the new Form W-4 no later than the start of the first payroll period ending on or after the 30th day from the date on which the employer received the replacement Form W-4.
Taxpayers who are self-employed must pay self-employment tax on their income from self-employment. The self-employment tax applies in lieu of Federal Insurance Contributions Act (FICA) taxes paid by employees and employers on compensation from employment. Like FICA taxes, the self-employment tax consists of taxes collected for Social Security and for Medicare (hospital insurance or HI).
Taxpayers who are self-employed must pay self-employment tax on their income from self-employment. The self-employment tax applies in lieu of Federal Insurance Contributions Act (FICA) taxes paid by employees and employers on compensation from employment. Like FICA taxes, the self-employment tax consists of taxes collected for Social Security and for Medicare (hospital insurance or HI).
The self-employment tax is levied and collected as part of the income tax. The tax must be taken into account in determining an individual's estimated taxes. The self-employed taxpayer is responsible for the self-employment tax, in effect paying both the employer's and the employee's share of the tax. The tax is calculated on Schedule SE, filed with the individual's income tax return, and is then reported on the Form 1040.
Self-Employment Tax Rate
The self-employment tax rate is 15.3 percent of self-employment income. This is the same overall percentage that applies to an employee's compensation. The rate combines the 12.4 percent Social Security tax and the 2.9 percent Medicare tax. Self-employed individuals can deduct one-half of the self-employment tax. (For 2011 and 2012, the Social Security tax rate was reduced from 12.4 to 10.4 percent.) If the individual's net earnings from self-employment are less than $400 (or $100 for a church employee), the individual does not owe self-employment tax.
Like FICA taxes, the 12.4 percent Social Security tax only applies to earning up to a specified threshold. For 2013, this threshold was $113,700; for 2014, the threshold is $117,000. There is no ceiling for applying the 2.9 percent Medicare tax.
Self-Employment
The tax applies to net earnings from self-employment. This is the taxpayer's gross income for the year from operating a trade or business, minus the deductions allowable to the trade or business, plus the taxpayer's distributive share of income or loss from a partnership.
A person is self-employed if he or she carries on a trade or business as a sole proprietor or independent contractor. A general partner of a partnership that carries on a trade or business is also considered to be self-employed. Self-employment does not include the performance of services by an employee. However, an employee who also carries on a separate business part-time can be self-employed with respect to the business.
Additional Medicare Tax
Effective for 2013 and subsequent years, both employees and self-employed individuals must pay an additional 0.9 percent Medicare tax if their FICA wages or self-employment income exceeds specified thresholds $250,000 for joint filers; $125,000 for married filing separately; and $200,000 for all other taxpayers. This tax is determined on Form 8959.
The American Taxpayer Relief Act of 2012, signed into law on January 2, 2013, extended the American Opportunity Tax Credit through (and including) the 2017 tax year. The credit, which is an enhanced version of the Hope tax credit for tuition, allows taxpayers to claim a credit against federal income taxes for costs of tuition and other qualified educational expenses paid for the taxpayer, his or her spouse, or a dependent claimed on the tax return who is enrolled at an eligible educational institution. An eligible educational institution would include any accredited public, nonprofit, or private college, university, vocational school, or other post-secondary institution.
The American Taxpayer Relief Act of 2012, signed into law on January 2, 2013, extended the American Opportunity Tax Credit through (and including) the 2017 tax year. The credit, which is an enhanced version of the Hope tax credit for tuition, allows taxpayers to claim a credit against federal income taxes for costs of tuition and other qualified educational expenses paid for the taxpayer, his or her spouse, or a dependent claimed on the tax return who is enrolled at an eligible educational institution. An eligible educational institution would include any accredited public, nonprofit, or private college, university, vocational school, or other post-secondary institution.
The maximum American Opportunity Tax Credit amount is $2,500 per eligible student per year, and it is available for each of the first four years of a student's post-secondary education. (This represents an increase from the Hope credit maximum amount of $1,800 for each of the first two years of post-secondary education.)
The American Opportunity Tax Credit amount is not $2,500 across the board for each claimant, however. Broken down, the maximum credit amount is more accurately stated as being 100 percent of the first $2,000 of qualified tuition and related expenses, plus 25 percent of the next $2,000 of qualified tuition and related expenses. If, by way of an example, a taxpayer had only $3,000 of total qualified tuition and other related expenses, the maximum credit amount the taxpayer could claim would be $2,250. In addition, the credit is also partially refundable if a taxpayer's total tax liability is less than the amount of the credit. Up to 40 percent of the credit amount is refundable.
The American Opportunity Tax Credit v. other educational benefits
The American Opportunity Tax Credit is one of several education tax benefits available to taxpayers, but because it cannot always be used in conjunction with these other benefits, taxpayers should compute their tax savings for each tax benefit and then decide which one claim. For example, a taxpayer cannot claim a tuition and fees tax deduction in the same taxable year that he or she claims either the American Opportunity Tax Credit or the Lifetime Learning Credit. Neither can a taxpayer claim the Lifetime Learning Credit for any student if he or she has opted to claim the American Opportunity Credit for that same student for the same tax year.
A taxpayer may, however, claim both an education tax credit and take distributions from a Coverdell Education Savings Account or a Qualified Tuition Program. The taxpayer must, however, subtract any qualified expenses used to figure the education credit from the amount of qualified expenses he or she subsequently uses to determine what portion of a distribution from a Coverdell ESA or a qualified tuition program is tax-free.
Before computing an education credit or deduction, the taxpayer should also determine whether or not the credit can be used towards those particular educational expenses. For example, the American Opportunity Tax Credit can be used not just toward tuition, but also toward expenses for books, equipment, and supplies that are required for coursework, but are not required as a condition of enrollment. The Lifetime Learning Credit on the other hand cannot be used for such expenses unless they are a condition of enrollment. However, the American Opportunity Tax credit can only be used for qualified education expenses incurred during each of the first four years of post-secondary education, whereas the Lifetime Learning Credit can be used toward graduate school expenses.
Other differences include that the American Opportunity Tax Credit can be used on a per student basis, meaning if one household has two qualified students, the tax return can claim two American Opportunity Tax Credits. But only one Lifetime Learning Credit can be claimed per return.
The American Opportunity Tax Credit, however, imposes a requirement that the student for whom the credit is claimed has no felony drug convictions. The Lifetime Learning Credit has no such requirement.
We will assume for now that the taxpayer has decided to go ahead and calculate the amount he or she can claim for an American Opportunity Tax Credit. The next question to ask is whether a taxpayer's adjusted gross income (AGI) falls beneath the phase-out limit. The credit was designed for lower- and middle- income families, meaning higher-income families generally cannot claim the credit.
Who is eligible?
A taxpayer can claim the American Opportunity Tax Credit for qualified expenses paid by the taxpayer for the post-secondary education of the taxpayer, the taxpayer's spouse, or the taxpayer's claimed dependent for the tax year for which the credit is claimed. There is a threshold on the amount of adjusted gross income (AGI) a taxpayer can have before the credit amount begins to phase out. The credit amount begins to phase out for single filers, heads of household, and qualifying widowers with AGI of $80,000 and completely phases out for these taxpayers if their AGI exceeds $90,000. The threshold range for married taxpayers who file jointly is from $160,000 to $180,000. Married taxpayers who file separately cannot claim the credit.
Computing the credit
Step One: Computing total qualified education expenses. In order to compute the amount of the American Opportunity Tax Credit a taxpayer must first add up all his or her qualified education expenses. Generally, qualified education expenses are amounts paid during the tax year toward tuition and fees required for the student's enrollment or attendance at an eligible educational institution. Often an educational institution will issue to the taxpayer a Form 1098-T, Tuition Statement, which includes the amount of tuition a taxpayer paid for that tax year. However, the IRS has warned that this amount can differ from the amount the taxpayer actually paid. For purposes of computing the credit, the IRS directs the taxpayer to use only the tuition amounts that he or she actually paid during the tax year.
Qualified education expenses do not include costs of room and board, insurance, medical expenses (including student health fees), transportation, and other similar personal, living, or family expenses. The costs associated with courses involving sports, games, or hobbies, or any noncredit course are generally not qualified education expenses unless such course or other education is part of the student's degree program. As we stated above, taxpayers calculating the American Opportunity Tax Credit can also include amounts spent on books, supplies, and equipment that are required for a course of study in their qualified education expenses.
Step Two: Adjusting the amount of qualified educational expenses. The taxpayer must subtract from his or her total qualified educational expenses amounts received as tax-free educational assistance received during the tax year that are allocable to the particular academic period in question. Tax-free educational assistance includes:
- The tax-free part of any scholarship or fellowship;
- The tax-free part of any employer-provided educational assistance;
- Tax-free veterans' educational assistance, and
- Any other educational assistance that is excludable from gross income (tax free).
"Tax-free" assistance does not include a gift, bequest, devise, or inheritance. It also does not include any portion of a scholarship or fellowship that must be included in gross income.
If after making these adjustments the amount of qualified education expenses exceeds the maximum credit of $2,500, the taxpayer can only claim $2,500. If the amount is lower than $2,500, the taxpayer can claim the whole amount. (Or less, if the taxpayer's AGI is within the phase-out range. See Step Three, below.)
Step Three: Calculating any phase-out of the credit. A taxpayer whose AGI falls within the phase out ranges must reduce his or her credit amount ratably. To do this, the taxpayer should subtract his or her AGI from the top threshold amount ($180,000 for married joint filers; $90,000 for single filers, heads of household, and qualifying widowers). Next the taxpayer must divide the difference by either $20,000 (married joint filers) or $10,000 (single filers, heads of household, and qualifying widowers). The resulting quotient should be multiplied by the total amount of qualified education expenses after adjustments for tax-free educational assistance. The product of that should be subtracted from the total amount of qualified education expenses, after adjustments. The result is the amount of the American Opportunity Tax Credit the taxpayer can claim.
For example, if a single taxpayer in 2012 had $85,670 in AGI, he or she must subtract that amount from the top threshold amount for single taxpayers ($90,000). Then he would take the difference ($4,330) and divide it by $10,000. The quotient is .433, meaning the taxpayer must reduce his American Opportunity tax credit amount by 43.3 percent. If, the amount of the taxpayer's qualified education expenses, after adjustments for scholarships, was $1,600, then the total credit amount that he could claim would be $891.20 because:
$1,600 - ($1,600 × .443) = $891.20
The refundable American Opportunity Tax Credit
If a taxpayer has a tax liability that is lower than the amount of the credit claimed, he or she may be eligible to receive a refundable tax credit of up to 40 percent of the credit amount (a maximum of $1,000). This means, that beyond just lowering a taxpayer's federal tax liability, a portion of the full credit amount will be returned to the taxpayer in cash as part of the tax refund.
Another set of rules applies for purposes of determining who is eligible for the refundable portion. Generally the rules on refundability appear to be designed to benefit to low-income households with little or no tax liability. Thus, the refundable portion rules seem to exclude from eligibility single filing students, who may have some earned income from a summer job or work-study. The rules state that a taxpayer cannot receive a refundable American Opportunity Tax Credit if the taxpayer:
- Is under age 18 at the end of the tax year; or
- Is over age 18 at the end of the tax year and has income that was less than one-half of the taxpayer's support; or
- Is between age 18 and 24 at the end of the tax year, a full-time student, and has earned income that was less than one-half of his or her support; and
- Has at least one living parent at the end of the tax year; and
- Is not filing a joint return for 2012.
If the taxpayer is eligible for the refundable portion, the taxpayer multiplies the total amount of qualified educational expenses, after adjustments, that he or she is able to claim as an American Opportunity Tax Credit by 40 percent (or .40). That product becomes refundable and is entered onto Form 1040, line 66, in the Payments section of the tax return.
The rules for computing education credits and deductions can be confusing. Please contact our offices with any questions.
Taxpayers with children should be aware of the numerous tax breaks for which they may qualify. Among them are: the dependency exemption, child tax credit, child care credit, and adoption credit. As they get older, education tax credits for higher education may be available; as is a new tax code requirement for employer-sponsored health care to cover young adults up to age 26. Employers of parents with young children may also qualify for the child care assistance credit.
Dependency Exemption
In addition to the personal exemption an individual taxpayer may take for him or herself to reduce taxable income (Line 42 on Form 1040), that taxpayer may also take an exemption for each qualifying dependent who has lived with the taxpayer for more than half of the tax year. A dependent may be a natural child, step-child, step-sibling, half-sibling, adopted child, eligible foster child, or grandchild, and generally must be under age 19, a full-time student under age 24, or have special needs. The amount of the exemption is the same as the taxpayer’s personal exemption, $3,700 for the 2011 tax year and $3,800 for the 2012 tax year.
Child Tax Credit
Parents of children who are under age 17 at the end of the tax year may qualify for a refundable $1,000 tax credit. The credit is a dollar-for-dollar reduction of tax liability, and may be listed on Line 51 of Form 1040. For every $1,000 of adjusted gross income above the threshold limit ($110,000 for married joint filers; $75,000 for single filers), the amount of the credit decreases by $50.
Child and Dependent Care Credit
If a taxpayer must pay for childcare for a child under age 13 in order to pursue or maintain gainful employment, he or she may claim up to $3,000 of his or her eligible expenses for dependent care. If one parent stays home full-time, however, no child care costs are eligible for the credit.
Adoption Credit
Taxpayers who have incurred qualified adoption expenses in 2011 may claim either a $13,360 credit against tax owed or a $13,360 income exclusion if the taxpayer has received payments or reimbursements from his or her employer for adoption expenses. For 2012, the amount of the credit will decrease to $12,650, and in 2013 to $5,000.
Higher Education Credits
There are two education-related credits available for 2012: the American Opportunity credit and the lifetime learning credit. The American Opportunity credit amount is the sum of 100 percent of the first $2,000 of qualified tuition and related expenses plus 25 percent of the next $2,000 of qualified tuition and related expenses, for a total maximum credit of $2,500 per eligible student per year. The credit is available for the first four years of a student's post-secondary education. The credit amount phases out ratably for taxpayers with modified AGI between $80,000 and $90,000 ($160,000 and $180,000 for joint filers). The lifetime learning credit is equal to 20 percent of the amount of qualified tuition expenses paid on the first $10,000 of tuition per family. The phaseout for 2012 ranges from $52,000 to $62,000 ($104,000 to $124,000 for joint filers). Parents also find tax relief in saving for college though Coverdell accounts, section 529 plans and specified U.S.. savings bonds.
Extended Health Care Coverage
Effective since September 23, 2010, the new health care law requires plans to provide coverage for children until they attain age 26. Further, effective on or after March 30, 2010, children under the age of 27 are considered dependents of a taxpayer for purposes of the general exclusion from income for reimbursements for medical care expenses of an employee, spouse, and dependents under an employer-provided accident or health plan. Therefore, a plan must provide coverage to a child who is still a dependent up to age 26; but can do so up to age 27 without income tax consequences. A child includes a son, daughter, stepson, or stepdaughter of the taxpayer; a foster child placed with the taxpayer by an authorized placement agency or by judgment, decree, or other order of any court of competent jurisdiction; and a legally adopted child of the taxpayer or a child who has been lawfully placed with the taxpayer for legal adoption.
Child Care Assistance Credit (for businesses)
Employers may take up to $150,000 of the eligible costs of providing employees with child care assistance as tax credit. These costs may include a portion of the costs of acquiring, constructing, improving, and operating a child care facility.
If you have any questions about these provisions and how they may benefit you, please contact our office.
Often, individuals end up with an unexpected tax liability on April 15. There are several options available to pay off your tax debt, stop accruing penalties and interest and secure peace of mind. Each payment method has its advantages and disadvantages depending on your financial, and personal, circumstances, and each option should be discussed with a tax professional prior to making a decision. Our office would be glad to answer any questions you have about each payment method.
Stop accruing interest and penalties
Remember, if you filed on time but were unable to pay the entire amount, or any amount, showing as due on your return when you filed, and you have an outstanding balance with Uncle Sam, you are incurring interest and a "failure to pay" penalty imposed by the IRS. The failure to pay penalty is one-half of one percent (0.5%) owed for each month, or part of a month, that your tax remains unpaid after the due date. The late payment penalty can climb to a maximum of 25 percent on the amount actually shown as due on the return, even if you paid some of the tax debt off when you filed your return. This is the reason why it is imperative that you pay off your tax debt as quickly as possible, under a plan that avoids this steep penalty.
Here are some of the most common payment options available to taxpayers who still have an outstanding balance with the IRS:
Pay by credit card. Depending on your situation, paying the balance of your tax liability with a credit card (or by another form of personal loan) may be the best option in order to stop accruing interest and penalties for failing to pay the entire amount due. If this is an option, make sure you use a card with the lowest interest rate and the lowest account balance. The IRS has contracted with two private, third-party servicers that process credit card tax payments, and both (Official Payments Corporation and Link2Gov Corporation) accept most major credit cards such as American Express, Visa, and MasterCard. Additionally, you can use a credit card regardless of whether you filed your return electronically or by mail. Finally, be mindful that interest on a credit card or other personal loan to pay off your taxes is non-deductible.
Apply for an installment plan. The IRS offers taxpayers the ability to apply for an installment agreement plan. There are many requirements and rules regarding the installment plan method, which a tax professional can discuss with you. A request for an installment plan is made by filing Form 9465 with the IRS. Although there is a fee for apply for the agreement of approximately $105, this amount is deducted from your first payment upon approval of your request. However, even if your request is granted, you will continue to be charged interest on any tax not paid by the due date. But, the late payment penalty will generally be half the usual rate (i.e. 2 percent, instead of 4 percent per month).
Offer in compromise. In some situations, the IRS may allow you to strike a deal by accepting an offer-in-compromise (OIC). In general, an OIC allows you to make a one-time lump sum payment to the IRS that is less than the total amount of the taxes you owe. However, if your tax debt can be fully paid through an installment agreement or by other means, in most cases you may not be eligible for an OIC. Additionally, the amount of tax you propose to pay must reasonably reflect the liability you actually owe to have any success of being accepted by the IRS. You must include a $150 application fee with your OIC request, which is made on Form 656. If the IRS accepts your offer, this amount goes towards reducing your tax liability.
These are only some of the common options available to taxpayers who remain saddled with unpaid tax debt. Each available payment option should be discussed with a tax professional. Our office can help you understand your options and choose a payment method that is best for you, personally and financially.
No. Even though trash pickup and neighborhood oversight provided by a governmental entity such as a town or county can be figured into the amount of deductible property taxes paid by a homeowner, a payment to a nongovernmental entity is not a deductible tax.
A tax is commonly defined as an enforced contribution, exacted on persons or property pursuant to legislative authority in the exercise of a governmental body's taxing power. A tax is imposed and collected for the purpose of raising revenue to be used for public or governmental purposes. Trash collection, for public health reasons, is among those permitted uses.
To be deductible as a tax, a payment must be made to a governmental body, or to certain public benefit corporations created under governmental authority for public purposes. Payments that are for the same purposes as a tax but that are made to a nongovernmental organization are not deductible.
Amounts paid to a cooperative or condominium association and allocable to governmental property taxes imposed on common areas or on a particular unit are deductible as property taxes. However, as with taxes paid into escrow under a mortgage account, amounts paid to associations for taxes are not deductible until the association or other entity remits payment of those taxes to the governmental entity.
Whether a particular contribution or charge is treated as a tax depends on its true nature. Merely designating a required payment in the levying statute as a tax is not determinative for federal tax purposes. For example, a New York State renter's tax paid by renters under the New York Real Property Tax Law is not a tax but is considered merely a part of rental payments.
Do you know where your 401(k) plan funds are? Errors can and do occur, sometimes with devastating results. By taking an active role in the management of your account, you can quickly uncover any errors, make good investment choices, and ascertain a secure, comfortable retirement. Here are some guidelines to help you get the most out of your 401(k) plan.
Do you know where your 401(k) plan funds are? Errors can and do occur, sometimes with devastating results. By taking an active role in the management of your account, you can quickly uncover any errors, make good investment choices, and ascertain a more secure retirement. Here are some guidelines to help you get the most out of your 401(k) plan, which - in light of current economic times - is more important now then ever.
Watch out for errors. Your company is required to provide an annual statement that shows the amounts that were contributed to your plan throughout the year. Compare amounts withheld from your paychecks to the employee contributions recorded on your 401(k) statement. If your employer has a matching program, verify that employer contributions are being correctly allocated to your account. Make sure the plan's vesting schedule is being correctly applied to you.
Do your homework. In addition to offering the company stock, most companies also offer a wide range of investment options. By gathering information for the different investment choices offered, you have a better opportunity to make an intelligent, informed decision. If your company does not provide a fund prospectus or performance history for the mutual fund or stock choices offered, you can contact the fund or company directly to obtain this pertinent information.
Make smart investment choices. Many employees make the mistake of investing too conservatively. Since a 401(k) plan is usually comprised of a variety of diversified securities, including stock, you can take advantage of the fact that over the long term, stocks generally outperform all other investments. Diversification has its place in any portfolio, so bonds and T-bills should also be considered.
Keep an eye on your plan's performance. While the annual statement provided by your employer will give you detail as to how your investments have performed over the past year, it's a good idea to monitor your fund's investments more frequently. While a good overall return for the year may make you think that your investment mix is right on target, very strong earnings in the first part of the year may hide the fact that some of your investments have taken a turn for the worse. To monitor the individual funds and stocks that comprise your 401(k) plan, check the business section of your newspaper on a regular basis, and just go online if you're invested with one of the major funds. Remember, too, that you pay no tax on your 401(k) investments until you retire and start to withdraw from it. As a result, funds geared to the situation in which short and long-term selling are treated the same for tax purposes ought to play into your investment strategy.
Maintaining good financial records is an important part of running a successful business. Not only will good records help you identify strengths and weaknesses in your business' operations, but they will also help out tremendously if the IRS comes knocking on your door.
Maintaining good financial records is an important part of running a successful business. Not only will good records help you identify strengths and weaknesses in your business' operations, but they will also help out tremendously if the IRS comes knocking on your door.
The IRS requires that business owners keep adequate books and records and that they be available when needed for the administration of any provision of the Internal Revenue Code (i.e., an audit). Here are some basic guidelines:
Copies of tax returns. You must keep records that support each item of income or deduction on a business return until the statute of limitations for that return expires. In general, the statute of limitations is three years after the date on which the return was filed. Because the IRS may go back as far as six years to audit a tax return when a substantial understatement of income is suspected, it may be prudent to keep records for at least six years. In cases of suspected tax fraud or if a return is never filed, the statute of limitations never expires.
Employment taxes. Chances are that if you have employees, you've accumulated a great deal of paperwork over the years. The IRS isn't looking to give you a break either: you are required to keep all employment tax records for at least 4 years after the date the tax becomes due or is paid, whichever is later. These records include payroll tax returns and employee time documentation.
Business assets. Records relating to business assets should be kept until the statute of limitations expires for the year in which you dispose of the asset in a taxable disposition. Original acquisition documentation, (e.g. receipts, escrow statements) should be kept to compute any depreciation, amortization, or depletion deduction, and to later determine your cost basis for computing gain or loss when you sell or otherwise dispose of the asset. If your business has leased property that qualifies as a capital lease, you should retain the underlying lease agreement in case the IRS ever questions the nature of the lease.
For property received in a nontaxable exchange, additional documentation must be kept. With this type of transaction, your cost basis in the new property is the same as the cost basis of the property you disposed of, increased by the money you paid. You must keep the records on the old property, as well as on the new property, until the statute of limitations expires for the year in which you dispose of the new property in a taxable disposition.
Inventories. If your business maintains inventory, your recordkeeping requirements are even more arduous. The use of special inventory valuation methods (e.g. LIFO and UNICAP) may prolong the record retention period. For example, if you use the last-in, first-out (LIFO) method of accounting for inventory, you will need to maintain the records necessary to substantiate all costs since the first year you used LIFO.
Specific Computerized Systems Requirements
If your company has modified, or is considering modifying its computer, recordkeeping and/or imaging systems, it is essential that you take the IRS's recently updated recordkeeping requirements into consideration.
If you use a computerized system, you must be able to produce sufficient legible records to support and verify amounts shown on your business tax return and determine your correct tax liability. To meet this qualification, the machine-sensible records must reconcile with your books and business tax return. These records must provide enough detail to identify the underlying source documents. You must also keep all machine-sensible records and a complete description of the computerized portion of your recordkeeping system.
Some additional advice: when your records are no longer needed for tax purposes, think twice before discarding them; they may still be needed for other nontax purposes. Besides the wealth of information good records provide for business planning purposes, insurance companies and/or creditors may have different record retention requirements than the IRS.
After your tax returns have been filed, several questions arise: What do you do with the stack of paperwork? What should you keep? What should you throw away? Will you ever need any of these documents again? Fortunately, recent tax provisions have made it easier for you to part with some of your tax-related clutter.
After your tax returns have been filed, several questions arise: What do you do with the stack of paperwork? What should you keep? What should you throw away? Will you ever need any of these documents again? Fortunately, recent tax provisions have made it easier for you to part with some of your tax-related clutter.
The IRS Restructuring and Reform Act of 1998 created quite a stir when it shifted the "burden of proof" from the taxpayer to the IRS. Although it would appear that this would translate into less of a headache for taxpayers (from a recordkeeping standpoint at least), it doesn't let us off of the hook entirely. Keeping good records is still the best defense against any future questions that the IRS may bring up. Here are some basic guidelines for you to follow as you sift through your tax and financial records:
Copies of returns. Your returns (and all supporting documentation) should be kept until the expiration of the statute of limitations for that tax year, which in most cases is three years after the date on which the return was filed. It's recommended that you keep your tax records for six years, since in some cases where a substantial understatement of income exists, the IRS may go back as far as six years to audit a tax return. In cases of suspected tax fraud or if you never file a return at all, the statute of limitations never expires.
Personal residence. With tax provisions allowing couples to generally take the first $500,000 of profits from the sale of their home tax-free, some people may think this is a good time to purge all of those escrow documents and improvement records. And for most people it is true that you only need to keep papers that document how much you paid for the house, the cost of any major improvements, and any depreciation taken over the years. But before you light a match to the rest of the heap, you need to consider the possibility of the following scenarios:
- Your gain is more than $500,000 when you eventually sell your house. It could happen. If you couple past deferred gains from prior home sales with future appreciation and inflation, you could be looking at a substantial gain when you sell your house 15+ years from now. It's also possible that tax laws will change in that time, meaning you'll want every scrap of documentation that will support a larger cost basis in the home sold.
- You did not use the home as a principal residence for a period. A relatively new income inclusion rule applies to home sales after December 31, 2008. Under the Housing and Economic Recovery Act of 2008, gain from the sale of a principal residence will no longer be excluded from gross income for periods that the home was not used as the principal residence. These periods of time are referred to as "non-qualifying use." The rule applies to sales occurring after December 31, 2008, but is based only on non-qualified use periods beginning on or after January 1, 2009. The amount of gain attributed to periods of non-qualified use is the amount of gain multiplied by a fraction, the numerator of which is the aggregate period of non-qualified use during which the property was owned by the taxpayer and the denominator of which is the period the taxpayer owned the property. Remember, however, that "non-qualified" use does not include any use prior to 2009.
- You may divorce or become widowed. While realizing more than a $500,000 gain on the sale of a home seems unattainable for most people, the gain exclusion for single people is only $250,000, definitely a more realistic number. While a widow(er) will most likely get some relief due to a step-up in basis upon the death of a spouse, an individual may find themselves with a taxable gain if they receive the house in a property settlement pursuant to a divorce. Here again, sufficient documentation to prove a larger cost basis is desirable.
Individual Retirement Accounts. Roth IRA and education IRAs require varying degrees of recordkeeping:
- Traditional IRAs. Distributions from traditional IRAs are taxable to the extent that the distributions exceed the holder's cost basis in the IRA. If you have made any nondeductible IRA contributions, then you may have basis in your IRAs. Records of IRA contributions and distributions must be kept until all funds have been withdrawn. Form 8606, Nondeductible IRAs, is used to keep track of the cost basis of your IRAs on an ongoing basis.
- Roth IRAs. Earnings from Roth IRAs are not taxable except in certain cases where there is a premature distribution prior to reaching age 59 1/2. Therefore, recordkeeping for this type of IRA is the fairly simple. Statements from your IRA trustee may be worth keeping in order to document contributions that were made should you ever need to take a withdrawal before age 59 1/2.
- Education IRAs. Because the proceeds from this type of an IRA must be used for a particular purpose (qualified tuition expenses), you should keep records of all expenditures made until the account is depleted (prior to the holder's 30th birthday). Any expenditures not deemed by the IRS to be qualified expenses will be taxable to the holder.
Investments. Brokerage firm statements, stock purchase and sales confirmations, and dividend reinvestment statements are examples of documents you should keep to verify the cost basis in your securities. If you have securities that you acquired from an inheritance or a gift, it is important to keep documentation of your cost basis. For gifts, this would include any records that support the cost basis of the securities when they were held by the person who gave you the gift. For inherited securities, you will want a copy of any estate or trust returns that were filed.
Keep in mind that there are also many nontax reasons to keep tax and financial records, such as for insurance, home/personal loan, or financial planning purposes. The decision to keep financial records should be made after all factors, including nontax factors, have been considered.
With home values across the country at the highest levels seen in years, you may find that you could actually have a gain from the sale of your home in excess of the new IRS exclusion amount of $500,000 ($250,000 for single and married filing separately taxpayers). In order to determine your potential gain or loss from the sale, you will first need to know the basis of your personal residence.
With home values across the country dropping significantly from just a year ago, but still generally much higher then they had been even five years ago, you may find that you could actually have a gain from the sale of your home in excess of the new IRS exclusion amount of $500,000 ($250,000 for single and married filing separately taxpayers). In order to determine your potential gain or loss from the sale, you will first need to know the basis of your personal residence.
Note. The Housing and Economic Recovery Act of 2008 modified the home sale exclusion applicable to home sales after December 31, 2008. Under the new rule, gain from the sale of a principal residence that is attributable to periods that the home was not used as a principal residence (i.e. "non-qualifying use") will be no longer be excluded from income. A transition rule provided in the new law applies the new income inclusion rule to nonqualified use periods that begin on or after January 1, 2009. This is a generous transition rule in light of the new requirement.
The basis of your personal residence is generally made up of three basic components: original cost, improvements, and certain other basis adjustments.
Original cost
How your home was acquired will need to be considered when determining its original cost basis.
Purchase or Construction. If you bought your home, your original cost basis will generally include the purchase price of the property and most settlement or closing costs you paid. If you or someone else constructed your home, your basis in the home would be your basis in the land plus the amount you paid to have the home built, including any settlement and closing costs incurred to acquire the land or secure a loan.
Examples of some of the settlement fees and closing costs that will increase the original cost basis of your home are:
- Attorney's fees,
- Abstract fees,
- Charges for installing utility service,
- Transfer and stamp taxes,
- Title search fees,
- Surveys,
- Owner's title insurance, and
- Unreimbursed amounts the seller owes but you pay, such as back taxes or interest; recording or mortgage fees; charges for improvements or repairs, or selling commissions.
Gift. If you acquired your home as a gift, your basis will be the same as it would be in the hands of the donor at the time it was given to you. However, the basis for loss is the lesser of the donor's adjusted basis or the fair market value on the date you received the gift.
Inheritance. If you inherited your home, your basis is the fair market value on the date of the deceased's death or on the "alternate valuation" date, as indicated on the federal estate tax return filed for the deceased.
Divorce. If your home was transferred to you from your ex-spouse incident to your divorce, your basis is the same as the ex-spouse's adjusted basis just before the transfer took place.
Improvements
If you've been in your home any length of time, you most likely have made some home improvements. These improvements will generally increase your home's basis and therefore decrease any potential gain on the sale of your residence. Before you increase your basis for any home improvements, though, you will need to determine which expenditures can actually be considered improvements versus repairs.
An improvement materially adds to the value of your home, considerably prolongs its useful life, or adapts it to new uses. The cost of any improvements can not be deducted and must be added to the basis of your home. Examples of improvements include putting room additions, putting up a fence, putting in new plumbing or wiring, installing a new roof, and resurfacing your patio.
Repairs, on the other hand, are expenses that are incurred to keep the property in a generally efficient operating condition and do not add value or extend the life of the property. For a personal residence, these costs cannot be do not add to the basis of the home. Examples of repairs are painting, mending drywall, and fixing a minor plumbing problem.
Other basis adjustments
Additional items that will increase your basis include expenditures for restoring damaged property and assessing local improvements. Some common decreases to your home's basis are:
Insurance reimbursements for casualty losses.
Deductible casualty losses that aren't covered by insurance.
Payments received for easement or right-of-way granted.
Deferred gain(s) on previous home sales.
Depreciation claimed after May 6, 1997 if you used your home for business or rental purposes.
Recordkeeping
In order to document your home's basis, it is wise to keep the records that substantiate the basis of your residence such as settlement statements, receipts, canceled checks, and other records for all improvements you made. Good records can make your life a lot easier if the IRS ever questions your gain calculation. You should keep these records for as long as you own the home. Once you sell the home, keep the records until the statute of limitations expires (generally three years after the date on which the return was filed reporting the sale)