Newsletters
The IRS released the optional standard mileage rates for 2025. Most taxpayers may use these rates to compute deductible costs of operating vehicles for:business,medical, andcharitable purposesSome mem...
The IRS, in partnership with the Coalition Against Scam and Scheme Threats (CASST), has unveiled new initiatives for the 2025 tax filing season to counter scams targeting taxpayers and tax professio...
The IRS reminded disaster-area taxpayers that they have until February 3, 2025, to file their 2023 returns, in the entire states of Louisiana and Vermont, all of Puerto Rico and the Virgin Islands and...
The IRS has announced plans to issue automatic payments to eligible individuals who failed to claim the Recovery Rebate Credit on their 2021 tax returns. The credit, a refundable benefit for individ...
Kansas provided guidance that explains the personal income tax modifications for taxpayers that open an adoption savings account. The state allows a subtraction from federal adjusted gross income for ...
The interest rate on all qualifying Missouri tax refunds remains at 3.2% for the period from April 1, 2025, through June 30, 2025. Statutory Interest Rates, Missouri Department of Revenue, January 2...
Here are a few tips to ensure your contributions pay off on your tax return: 1.Contributions must be made to qualified organizations to be deductible. You cannot deduct contributions made to specific individuals, political organizations and candidates. 2.You cannot deduct the value of your time or services. Nor can you deduct the cost of raffles, bingo or other games of chance. 3.If your contributions entitle you to merchandise, goods or services, including admission to a charity ball, banquet, theatrical performance or sporting event, you can deduct only the amount that exceeds the fair market value of the benefit received. 4.Donations of stock or other property are usually valued at the fair market value of the property. Special rules apply to donation of vehicles. 5.Clothing and household items donated must generally be in good used condition or better to be deductible. 6.Regardless of the amount, to deduct a contribution of cash, check, or other monetary gift, you must maintain a bank record or a written communication from the organization containing the name of the organization, the date of the contribution and amount of the contribution. 7.To claim a deduction for contributions of cash or property equaling $250 or more you must obtain a written acknowledgment from the qualified organization showing the amount of the cash and a description of any property contributed, and whether the organization provided any goods or services in exchange for the gift. One document from the organization may satisfy both the written communication requirement for monetary gifts and the written acknowledgement requirement for all contributions of $250 or more. 8.If you claim a deduction of more than $500 for all contributed property, you must attach IRS Form 8283, Noncash Charitable Contributions, to your return. 9.Taxpayers donating an item or a group of similar items valued at more than $5,000 must also complete Section B of Form 8283, which requires an appraisal by a qualified appraiser. 10.Contributions made for relief efforts in a Midwest disaster area receive special benefits.
For more information on charitable contributions, check out Publication 526, Charitable Contributions, which is available at www.irs.gov
President Donald Trump targeted federal hiring, including specific rules for the Internal Revenue Service, and the United States’ participation in the global tax framework being developed by the Organisation for Economic Co-operation and Development among his flurry of executive orders signed on the first day of his second term in the Oval Office.
President Donald Trump targeted federal hiring, including specific rules for the Internal Revenue Service, and the United States’ participation in the global tax framework being developed by the Organisation for Economic Co-operation and Development among his flurry of executive orders signed on the first day of his second term in the Oval Office.
In one order, President Trump ordered "a freeze on the hiring of Federal civilian employees, to be applied throughout the executive branch. As part of this freeze, no Federal civilian position that is vacant at noon on January 20, 2025, may be filled, and no new position may be created except as otherwise proved for in this memorandum or other applicable law."
The order calls on the Office of Management and Budget and the Department of Government Efficiency to "submit a plan to reduce the size of the Federal Government’s workforce through efficiency improvements and attrition."
When that plan is created, the executive order will expire, with the exception of hiring for the Internal Revenue Service.
"This memorandum shall remain in effect for the IRS until the Secretary of the Treasury, in consultation with the Director of OMB and the Administrator of [DOGE], determine that it is in the national interest to lift the freeze," the order continues.
The order also prohibits the hiring of contractors to circumvent the order.
In a separate executive order, President Trump has effectively removed the United States from the OECD global corporate tax framework, stating that it "has no force or effect in the United States."
The order goes on to state that "any commitments made by the prior administration on behalf of the United States with respect to the Global Tax Deal have no force or effect within the United States absent any act by the Congress adopting the relevant provisions of the Global Tax Deal."
The framework calls for a 15 percent minimum corporate income tax and has provisions that allow countries to collect a "top-up tax" from companies in countries with a lower rate, something the memo called "retaliatory."
By Gregory Twachtman, Washington News Editor
The Financial Crimes Enforcement Network is keeping beneficial reporting information reporting voluntary even though the Supreme Court has lifted the injunction that was put in place by a lower court to keep the BOI regulation from being enforced.
The Financial Crimes Enforcement Network is keeping beneficial reporting information reporting voluntary even though the Supreme Court has lifted the injunction that was put in place by a lower court to keep the BOI regulation from being enforced.
"In light of a recent federal court order, reporting companies are not currently required to file beneficial ownership information with FinCEN and are not subject to liability if they fail to do so while the order remains in force," the agency posted to its website on January 24, 2025. "However, reporting companies may continue to voluntarily submit beneficial ownership information reports."
The posting follows a Supreme Court order stating on January 23, 2025, that the injunction put in place by the United States District Court for the Eastern District of Texas on December 5, 2024, was removed.
Justice Ketanji Brown Jackson offered a dissenting opinion on lifting the injunction.
"However likely the Government’s success on the merits may be, in my view, emergency relief is not appropriate because the applicant has failed to demonstrate sufficient exigency to justify our interventions," Justice Jackson wrote, citing two reasons: the Fifth Circuit Court of Appeals has already expedited the hearing of the case and the government has deferred the implementation of the regulations on its own accord.
"The Government has provided no indication that injury of a more serious or significant nature would result if the Act’s implementation is further delayed while the litigation proceeds in the lower courts. I would therefore deny the application and permit the appellate process to run its course," Justice Jackson added.
By Gregory Twachtman, Washington News Editor
The Treasury and IRS have issued final regulations that provide rules for classifying digital and cloud transactions. The rules apply for purposes of the international provisions of the Code.
The rules retain the overall approach of the proposed regulations (NPRM REG-130700-14, August 14, 2019), with some revisions.
The Treasury and IRS also issued proposed regulations that provide sourcing rules for cloud transactions.
The Treasury and IRS have issued final regulations that provide rules for classifying digital and cloud transactions. The rules apply for purposes of the international provisions of the Code.
The rules retain the overall approach of the proposed regulations (NPRM REG-130700-14, August 14, 2019), with some revisions.
The Treasury and IRS also issued proposed regulations that provide sourcing rules for cloud transactions.
Background
Reg. §1.861-18 provides rules for classifying cross-border transactions involving digitized information, specifically computer programs, broadly grouped into the following categories:
- the transfer of a copyright;
- the transfer of a copyrighted article;
- the provision of services for the development or modification of a computer program; and
- the provision of know-how relating to the development of a computer program.
The 1998 final regulations focus on the distinction between the transfer of the copyright itself and transfer of a copyrighted article, using a substance-over-form characterization approach and by examining the underlying rights granted to the transferee. Transfers of copyrights and copyrighted articles are further characterized as complete or partial transfers, resulting in the transfers being characterized as either sales or licenses, in the case of a copyrights, or sales or leases, in the case of a copyrighted articles.
2025 Final Regulations
The 2025 final regulations maintain the basic framework for characterizing transfers of content and extend the characterization framework to digital content. Digital content is generally defined as any computer program or other content protected by copyright law, not just transactions involving computer programs.
The categories of transactions include:
- the transfer of a copyright in the digital content;
- the transfer of a copy of the digital content (a copyrighted article);
- the provision of services for the development or modification of the digital content; and
- the provision of know-how relating to the development of digital content.
The 2025 final regulations also provide for cloud transactions and characterize the transactions as a provision of services.
Cloud transactions are generally defined as transactions through which a person obtains on-demand network access to computer hardware, digital content, or similar resources.
The 2025 final regulations replace the de minimis rule and the concept of arrangement with a predominant character rule that applies to both digital content transactions and cloud transactions. Under the rule, a transaction with multiple elements is characterized based on the predominant character of the transaction.
Request for Comments on 2025 Final Regulations
The Treasury and IRS are considering whether the characterization rules should apply to all provisions of the Code and have requested comments on any specific areas that would be affected, with examples if appropriate. Comments are also requested on any guidance that would be needed and the approach the guidance should take. In addition to general comments, the Treasury and IRS also request comments on the desirability and effect of applying the rules in specific areas and the guidance need.
Comments should be submitted 90 days after the Notice requesting comments is published in the Internal Revenue Bulletin, with consideration for comments submitted after that date that do not delay the guidance. Comments may be submitted electronically via the Federal eRulemaking Portal www.regulations.com or or by mail to: Internal Revenue Service, CC:PA:01:PR (Notice 2025-6, Room 5203, P.O. Box 7604, Ben Franklin Station, Washington, D.C., 20044.
Proposed Sourcing Rules for Cloud Transactions
Gross income from a cloud transaction is sourced as services. Under the Code, gross income from the performance of services is sourced to the place where the service is performed.
To determine the place of performance, the proposed regulations would take into account the location of the employees and assets, including both tangible and intangible assets, that contribute to the provision of cloud transactions. The sourcing rules would apply on a taxpayer-by-taxpayer basis.
The place of performance of a cloud transactions is established through a formula composed of a fraction that has three parts-the intangible property factor, the personnel factor, and the tangible property factor. The factors make up the denominator of the fraction. The numerator is the sum of each portion of each factor that is from sources within the United States. The gross income from a cloud transaction multiplied by the fraction is the U.S. source portion of the gross income.
Proposed Regulations, NPRM REG-107420-24
Notice 2025-6
The IRS has released final regulations implementing the clean hydrogen production credit under Code Sec. 45V, as well as the election to treat a clean hydrogen production facility as energy property for purposes of the energy investment credit under Code Sec. 48. The regulations generally apply to tax years beginning after December 26, 2023.
The IRS has released final regulations implementing the clean hydrogen production credit under Code Sec. 45V, as well as the election to treat a clean hydrogen production facility as energy property for purposes of the energy investment credit under Code Sec. 48. The regulations generally apply to tax years beginning after December 26, 2023.
The regulations adopt the proposed regulations (REG-117631-23) with certain modifications. Rules are provided for determining lifecycle greenhouse gas (GHG) emissions rates resulting from hydrogen production processes; petitioning for provisional emissions rates; verifying production and sale or use of clean hydrogen; modifying or retrofitting existing qualified clean hydrogen production facilities; and using electricity from certain renewable or zero-emissions sources to produce qualified clean hydrogen.
Background
The Inflation Reduction Act of 2022 (P.L. 117-169) added Code Sec. 45V to provide a tax credit to produce qualified clean hydrogen produced after 2022 at a qualified clean hydrogen production facility during the 10-year period beginning on the date the facility is originally placed in service.
The credit is calculated by multiplying an applicable amount by the kilograms of qualified clean hydrogen produced. The applicable amount ranges from $0.12 to $0.60 per kilogram depending on the level of lifecycle greenhouse gas emissions associated with the production of the hydrogen. The credit is multiplied by five if the qualified clean hydrogen production facility meets certain prevailing wage and apprenticeship requirements.
Qualified Facility and Emissions Rate
The regulations provide that a qualified clean hydrogen production facility is a single production line that is used to produce qualified clean hydrogen. This includes all components, including multipurpose components, of property that function interdependently to produce qualified clean hydrogen through a process that results in the lifecycle GHG emissions rate used to determine the credit. It does not include equipment used to condition or transport hydrogen beyond the point of production, or feedstock-related equipment.
The lifecycle GHG emissions rate is determined under the latest publicly available 45VH2-GREET Model developed by the Argonne National Laboratory on the first day of the tax year during which the qualified clean hydrogen was produced. If a version of 45VH2-GREET becomes publicly available after the first day of the taxa year of production (but still within such tax year), then the taxpayer may elect to use the subsequent model.
Verifying Production and Sale
Code Sec. 45V requires the clean hydrogen to be produced for sale or use. No hydrogen is qualified clean hydrogen unless its production, sale, or use is verified by an unrelated party. A verification report prepared by a qualified verifier must be attached to a taxpayer’s Form 7210 for each qualified clean hydrogen production facility and for each tax year the Code Sec. 45V credit is claimed. The regulations outline the requirements for a verification report. They also contain requirements for the third-party verifier to perform to attest that the qualified clean hydrogen has been sold or used by a person for verifiable use.
Modified and Retrofitted Facilities
A facility placed in service before 2023 that is modified to produce qualified clean hydrogen may be eligible for the credit so long as the taxpayer’s expenses to modify the facility as chargeable to the capital account. However, merely changing fuel inputs does not constitute a modification for this purpose. A modification must enable to the facility to produce qualified clean hydrogen if it not before the modification to meet the lifecycle GHG emissions rate. Alternatively, an existing facility may be retrofitted to qualify for the credit provided that the fair market value of used property in the facility is not more than 20 percent of the facility’s total value (80/20 Rule).
Energy Credit Election
A taxpayer that owns and places in service a specified clean hydrogen production facility can make an irrevocable election to treat any qualified property that is part of the facility as energy property for purposes of the energy investment credit under Code Sec. 48. The final regulations contain definition of a specified facility, the energy percentage for the investment credit, and the time and manner for making the election. The rules include a safe harbor for determining the beginning of construction and using a provisional emissions rate (PER) to calculate the investment credit.
The IRS issued updates to frequently asked questions (FAQs) about the Energy Efficient Home Improvement Credit (Code Sec. 25C) and the Residential Clean Energy Property Credit (Code Sec. 25D). The former credit applies to qualifying property placed in service on or after January 1, 2023, and before January 1, 2033. The updates pertained to FS-2024-15. More information is available here.
The IRS issued updates to frequently asked questions (FAQs) about the Energy Efficient Home Improvement Credit (Code Sec. 25C) and the Residential Clean Energy Property Credit (Code Sec. 25D). The former credit applies to qualifying property placed in service on or after January 1, 2023, and before January 1, 2033. The updates pertained to FS-2024-15. More information is available here.
Energy Efficient Home Improvement Credit
The credit is limited to $2,000 per taxpayer per taxable year in the aggregate for electric or natural gas heat pump water heaters, electric or natural gas heat pumps, and biomass stoves or boilers.
Thus, a taxpayer could claim a total credit of $3,200 if they had sufficient expenditures in property categories (or a home energy audit) subject to the $1,200 limitation and in property categories subject to the $2,000 limitation.
Additionally, a taxpayer can claim the credit only for qualifying expenditures incurred for an existing home, or for an addition to or renovation of an existing home, but not for a newly constructed home.
Residential Clean Energy Property Credit
One of the FAQs mentions that this credit is a nonrefundable personal tax credit. A taxpayer claiming a nonrefundable credit can only use it to decrease or eliminate tax liability.
The credit is generally limited to 30 percent of qualified expenditures made for property placed in service between 2022 and 2032. However, the credit allowed for qualified fuel cell property expenditures is 30 percent of the expenditures, up to a maximum credit of $500 for each half kilowatt of capacity of the qualified fuel cell property.
The IRS has provided updated guidance on the implementation of section 530 of the Revenue Act of 1978 (P.L. 95-600), as amended, regarding controversies involving whether individuals are "employees" for employment tax purposes. Section 530 (which is not an Internal Revenue Code section) provides relief for employers who are involved in worker classification status disputes with the IRS and face large employment tax assessments as a result of the IRS’s proposed reclassifications of workers.
The IRS has provided updated guidance on the implementation of section 530 of the Revenue Act of 1978 (P.L. 95-600), as amended, regarding controversies involving whether individuals are "employees" for employment tax purposes. Section 530 (which is not an Internal Revenue Code section) provides relief for employers who are involved in worker classification status disputes with the IRS and face large employment tax assessments as a result of the IRS’s proposed reclassifications of workers.
Section 530 Safe Harbor
Section 530 provides that an employer will not be liable for federal employment taxes regarding an individual or class of workers if certain statutory requirements are met. Section 530 relief applies only if the taxpayer did not treat the individual as an employee for federal employment tax purposes for the period at issue, and meets each of the following requirements for that period:
- the taxpayer filed all required federal tax returns, including information returns, on a basis that is consistent with the taxpayer’s treatment of the individual as not being an employee (reporting consistency requirement);
- the taxpayer did not treat the individual or any individual holding a substantially similar position as an employee (substantive consistency requirement); and
- the taxpayer had a reasonable basis for not treating the individual as an employee (reasonable basis requirement).
Rev. Proc. 85-18, 1985-1 CB 518, provided instructions for implementing section 530 relating to the employment tax status of independent contractors and employees.
Updated Guidance
The updated guidance clarifies provisions in Rev. Proc. 85-18 regarding the definition of employee, the section 530 requirement for the filing of required returns, and the reasonable basis safe harbor rules. The updated guidance also includes new provisions that reflect certain statutory changes made to section 530 since 1986.
Among other things, the updated guidance amplifies guidelines in Rev. Proc. 85-18 which interpreted the word “treat” for purposes of determining whether a taxpayer did not treat an individual as an employee for section 530 purposes. Under the updated guidance, with respect to any individual, actions that indicate “treatment” of the individual as an employee for section 530 purposes include:
- withholding of income tax or FICA taxes from any payments made;
- filing of an original or amended employment tax return;
- filing or issuance of a Form W-2; and
- contracting with a third party to perform acts required of employers.
Provisions in Rev. Proc. 85-18 that explained how refunds, credits, abatements, and handling of claims applied to taxpayers who were under audit or otherwise involved in administrative or judicial processes with the IRS at the time of enactment of section 530 are no longer applicable and were not included in the updated guidance. Section 530 relief remains available at any stage in the administrative or judicial process if the requirements for relief are met.
Effect on Other Documents
Rev. Proc. 85-18, 1985-1 CB 518, is modified and superseded.
The IRS has issued final regulation identifying certain partnership related-party basis adjustment transactions as transactions of interest (TOI), a type of reportable transaction under Reg. §1.6011-4. Taxpayers that participate and material advisors to these transactions, and substantially similar transactions, are required to disclose as much to the IRS using Form 8886 and Form 8918, respectively, or be subject to penalties.
The IRS has issued final regulation identifying certain partnership related-party basis adjustment transactions as transactions of interest (TOI), a type of reportable transaction under Reg. §1.6011-4. Taxpayers that participate and material advisors to these transactions, and substantially similar transactions, are required to disclose as much to the IRS using Form 8886 and Form 8918, respectively, or be subject to penalties.
Basis Adjustment Transactions
A transaction is covered by the regulations if a partnership with two or more related partners engages in any of the following transactions.
- The partnership makes a current or liquidating distribution of property to a partner who is related to one or more partners, and the partnership increases the basis of one or more of its remaining properties under Code Sec. 734(b) and (c) by more than $10 million ($25 million for tax years before 2025).
- The partnership distributes property to a partner related to one or more partners in liquidation of the partnership interest, and the basis of one or more distributed properties is increased under Code Sec. 732(b) and (c) by more than $10 million ($25 million for tax years before 2025).
- The partnership distributes property to a partner who is related to one or more partners, the basis of one or more distributed properties is increased under Code Sec. 732(d) by more than $10 million ($25 million for tax years before 2025), and the related partner acquired all or a part of its interest in the partnership in a transaction that would have been a basis adjustment transaction had a Code Sec. 754 election been in effect.
A basis adjustment transaction for this purpose would occur if a partner transferred an interest in the partnership to a related partner in a nonrecognition transaction, and the basis of one or more partnership properties is increased under Code Sec. 743(b)(1) and (c) by more than $10 million ($25 million for tax years before 2025).
Retroactive Reporting
The final regulations limit the disclosure rule for open tax years that fall withing a six-year lookback window. The window is the seventy-two-month period before the first month of a taxpayer’s most recent tax year that began before January 14, 2025. The basis increase threshold in a TOI during the six-year lookback period is $25 million.
A taxpayer has until July 13, 2025, to file disclosure statements for TOIs in open tax years for which a tax return has already been filed and that fall within the six-year lookback window. Material advisors have until April 14, 2025, to file their disclosure statements for tax statements made before the final regulations.
Regulations under Code Sec. 2801, which imposes a tax on covered gifts and covered bequests received by a citizen or resident of the United States from a covered expatriate, have been issued.
Regulations under Code Sec. 2801, which imposes a tax on covered gifts and covered bequests received by a citizen or resident of the United States from a covered expatriate, have been issued.
Definitions
Reg. §28.2801-1 provides the general rules of liability imposed by Code Sec. 2801. For purposes of Code Sec. 2801, domestic trusts and foreign trusts electing to be treated as domestic trusts are treated as U.S. citizens. Terms used in chapter 15 of the Code are defined in Reg. §28.2801-2. The definition of the term “resident” is the transfer tax definition, which reduces opportunities to avoid the expatriate tax and is consistent with the purpose of the statute. The definition of “covered bequest” identifies three categories of property that are included in the definition and subject to tax under Code Sec. 2801. Reg. §§28.2801-2(i)(2) and (5) modify the definitions of an indirect acquisition of property.
Exceptions to the definitions of covered gifts and bequests are detailed in Reg. §28.2801-3. The timely payment of the tax shown on the covered expatriate’s gift or estate tax return was eliminated from the regulations as it relates to the exception from the definitions of covered gift and covered bequest. A rule was added in Reg. §28.2801-3(c)(3) that would limit the value of a covered bequest to the amount that exceeds the value of a covered gift to which tax under Code Sec. 2801 was previously imposed.
Covered Gifts and Bequests Made in Trust
Reg. §28.2801-3(d) provides rules regarding covered gifts and covered bequests made in trust, including transfers of property in trust that are subject to a general power of appointment granted by the covered expatriate. Contrary to the gift tax rule treating the trust beneficiary or holder of an immediate right to withdraw as the recipient of property, the rules treat transfers in trust that are covered gifts or bequests as transfers to the trust, which are taxed under Code Sec. 2801(e)(4). Consistent with the estate and gift tax rules, the exercise, release, or lapse of a covered expatriate’s general power of appointment for the benefit of a U.S. citizen or resident is a covered gift or covered bequest. Only for purposes of Code Sec. 2801, a covered expatriate’s grant of a general power of appointment over property not held in trust is a covered gift or bequest to the powerholder as soon as both the power is exercisable and the transfer of the property subject to the power is irrevocable.
Liability for Payment and Computation of Tax
Reg. §28.2801-4 provides rules regarding who is liable for the payment of the tax. In general, the U.S. citizen or resident, including a domestic trust, who receives the covered gift or bequest is liable for paying the tax. A non-electing foreign trust is not a U.S. citizen and is not liable for the tax. The U.S. citizen or resident who receives distributions from a non-electing foreign trust is liable on the receipt of the distribution to the extent the distribution is attributable to a covered gift or bequest. Rules regarding the date on which a recipient receives covered gifts or bequests are explained in Reg. §28.2801-4(d)(8)(ii). Reg. §28.2801-4(a)(2)(iii) is reserved to address charitable remainder and charitable lead trusts.
The manner in which the tax is computed is set forth in Reg. §28.2801-4(e). The value of the covered gift or bequest is the fair market value of the property on the date of its receipt, which is explained in Reg. §28.2801-4(d). A refund is allowed under Code Sec. 6511 if foreign gift or estate tax is paid after payment of the Code Sec. 2801 tax. In that scenario, the U.S recipient should file a claim for refund or a protective claim for refund on or before the application period of limitations has expired.
Foreign Trusts
Reg. §28.2801-5 sets forth rules applicable to foreign trusts, including the computation of the amount of a distribution from a foreign trust that is attributable to a covered gift or bequest made to the foreign trust. The election by a foreign trust to be treated as a domestic trust is explained in Reg. §28.2801-5(d)(3).
Other Rules
Reg. §28.2801-6 addresses special rules, including the determination of basis and the applicability of the generation-skipping transfer (GST) tax to certain Code Sec. 2801 transfers. Reg. §28.2801-6(d) discusses applicable penalties. Reg. §28.2801-7 provides guidance on the responsibility of a U.S. recipient to determine if tax under Code Sec. 2801 is due. Administrative regulations that address filing and payment due dates, returns, extension requests, and recordkeeping requirements with respect to the Code Sec. 2801 tax are also provided.
Due Date of Form 708
Form 708, United States Return of Tax for Gifts and Bequests from Covered Expatriates, is generally due on or before the 15th day of the 18th calendar month following the close of the calendar year in which the covered gift or bequest was received. The due date for Form 708 is further explained in Reg. 28.6071-1. Form 708 has yet to be issued by the IRS.
The regulations are generally effective on January 14, 2025.
The IRS has issued a revenue ruling addressing the federal tax treatment of contributions and benefits under state-administered paid family and medical leave (PFML) programs. The ruling clarifies how these contributions and benefits are classified for income tax, employment tax, and reporting purposes, with distinctions drawn between employer and employee contributions.
The IRS has issued a revenue ruling addressing the federal tax treatment of contributions and benefits under state-administered paid family and medical leave (PFML) programs. The ruling clarifies how these contributions and benefits are classified for income tax, employment tax, and reporting purposes, with distinctions drawn between employer and employee contributions.
PFML Contributions
Mandatory contributions made by employers under PFML programs are classified as excise taxes deductible as ordinary and necessary business expenses under Code Sec. 164. These payments are deemed state-imposed obligations for the purpose of funding public programs and are not included in employees' gross income under Code Sec. 61. In contrast, mandatory contributions withheld from employees’ wages are treated as state income taxes under Code Sec. 164(a)(3). Employees may deduct these amounts on their federal tax returns if they itemize deductions, subject to the state and local tax (SALT) deduction cap under Code Sec. 164(b)(6).
The ruling further specifies the treatment of benefits paid under PFML programs. Family leave benefits, which provide wage replacement during caregiving periods, are included in the recipient’s gross income under Code Sec. 61 but are not considered wages for federal employment tax purposes under Code Sec. 3121. By comparison, medical leave benefits attributable to employee contributions are excluded from gross income under Code Sec. 104(a)(3). However, medical leave benefits attributable to employer contributions are partially taxable under Code Sec. 105 and are subject to FICA taxes.
The ruling also addresses scenarios where employers voluntarily cover portions of employees’ contributions, referred to as "employer pick-ups." Such pick-ups are treated as additional compensation, included in employees’ gross income under Code Sec. 61, and are subject to federal employment taxes. Employers, however, may deduct these payments as ordinary business expenses under Code Sec. 162.
To ensure compliance, the IRS requires states and employers to report benefits exceeding $600 annually under Code Sec. 6041 using Form 1099. Additionally, benefits subject to employment taxes must be reported on Form W-2.
The ruling modifies prior guidance and includes a transition period for 2025 to allow states and employers to adjust their systems to meet reporting and compliance requirements. This clarification provides a framework for managing the tax implications of PFML programs, ensuring consistent treatment across jurisdictions.
Effective Date
This revenue ruling is effective for payments made on or after January 1, 2025. However, transition relief is provided to the states, the District of Columbia, and employers from certain withholding, payment, and information reporting requirements for state-paid medical leave benefits paid made during calendar year 2025.
Effect on Other Guidance
Rev. Rul. 81-194, Rev. Rul. 81-193, Rev. Rul. 81-192, and Rev. Rul. 81-191 are amplified to include the holdings in this revenue ruling that are applicable to the facts in those rulings. Rev. Rul. 72-191, as modified by Rev. Rul. 81-192, is further modified.
Rev. Rul. 2025-4
National Taxpayer Advocate Erin Collins identified the lengthy processing and uncertainty regarding the employee retention credit as being among the ten most serious problems facing taxpayers.
National Taxpayer Advocate Erin Collins identified the lengthy processing and uncertainty regarding the employee retention credit as being among the ten most serious problems facing taxpayers.
"Although the [Internal Revenue Service] has processed several hundred thousand claims in recent months, it was still sitting on a backlog of about 1.2 million claims as of October 26, 2024," Collins noted in her just released 2024 Annual Report to Congress. "Many claims have been pending for more than a year, and with the imminent start of the 2025 filing season, the IRS will shift its focus and resources to administering the filing season, resulting in even longer ERC processing delays."
Collins is calling on the IRS to provide more specific information with claims denials, more transparency on the timing of claims processing, and allowing taxpayers to submit documentation and seek an appeal before disallowing a claim that was not subject to an audit.
In addition to ERC processing, Collins identified delays in processing of tax returns as another serious problem taxpayers are facing, including delays associated with the more than 10 million paper 1040 returns and more than 75 million paper-filed returns and forms overall each year, as well as issues surrounding rejections of e-filed returns, most of which are valid returns. These delays end up delaying refunds and can be particularly hard on low-income filers who are receiving the Earned Income Tax Credit.
"We recommend the IRS continue to prioritize automating its tax processing systems, including by scanning all paper-filed tax returns in time for the 2026 filing season and processing amended tax returns automatically," the report states.
Another processing issue identified in the report deals with delays in processing and refunds for victims of identity theft.
Collins reported that the delays in addressing identity theft issues grew to 22 months in fiscal year 2024, affecting nearly 500,000 taxpayers.
"The IRS has advised us that it has begun to prioritize resolution of cases involving refunds over balance-due returns rather than following its traditional ‘first in, first out’ approach," the report states. "This is somewhat good news, but I strongly encourage the IRS to fix this problem once and for all during the coming year."
Other issues in the top 10 include:
- Taxpayer service is often not timely or adequate;
- The prevalence of tax-related scams;
- Employment recruitment, hiring, training, and retention challenges are hindering transformational change within the industry;
- The dependence on paper forms and manual document review in processing Individual Taxpayer Identification Numbers is causing delays and potential security risks;
- Limited taxpayer financial and tax literacy;
- The IRS’s administration of civil tax penalties is often unfair, inconsistently deters improper behavior, fails to promote efficient administration, and thus discourages tax compliance; and
- Changes to the IRS’s criminal voluntary disclosure practice requirements may be reducing voluntary compliance and negatively impacting the tax gap.
Collins also called on Congress to ensure the IRS receives adequate funding specifically for taxpayer services and technology upgrades, noting that many improvements that are highlighted in the report were made possible by the Inflation Reduction Act, which provided supplemental funding to the agency.
"Much of the funding has generated controversy – namely, the funding allocated for enforcement," the report notes. "But some of the funding has received strong bipartisan support – namely, the funding allocated for taxpayer services and technology modernization."
She reported that telephone service has improved dramatically, correspondence processing has improved dramatically, and in-person has become more accessible following the IRA funding, as well as technology improvements including increased scanning and processing of paper-filed tax returns electronically; increases in electronic correspondence; expansion of secure messaging; the ability to submit forms from mobile phones; and increases in both chatbot and voicebot technology.
"I want to highlight this distinction so that if Congress decides to cut IRA funding, it does not inadvertently throw the baby out with the bathwater," she reports.
By Gregory Twachtman, Washington News Editor
The IRS has released the annual inflation adjustments for 2021 for the income tax rate tables, and for over 50 other tax provisions. The IRS makes these cost-of-living adjustments (COLAs) each year to reflect inflation.
The IRS has released the annual inflation adjustments for 2021 for the income tax rate tables, and for over 50 other tax provisions. The IRS makes these cost-of-living adjustments (COLAs) each year to reflect inflation.
2021 Income Tax Brackets
For 2021, the highest income tax bracket of 37 percent applies when taxable income hits:
- $628,300 for married individuals filing jointly and surviving spouses,
- $523,600 for single individuals and heads of households,
- $314,150 for married individuals filing separately, and
- $13,050 for estates and trusts.
2021 Standard Deduction
The standard deduction for 2021 is:
- $25,100 for married individuals filing jointly and surviving spouses,
- $18,800 for heads of households, and
- $12,550 for single individuals and married individuals filing separately.
The standard deduction for a dependent is limited to the greater of:
- $1,100 or
- the sum of $350 plus the dependent’s earned income.
Individuals who are blind or at least 65 years old get an additional standard deduction of:
- $1,350 for married taxpayers and surviving spouses, or
- $1,700 for other taxpayers.
AMT Exemption for 2021
The alternative minimum tax (AMT) exemption for 2021 is:
- $114,600 for married individuals filing jointly and surviving spouses,
- $73,600 for single individuals and heads of households,
- $57,300 for married individuals filing separately, and
- $25,700 for estates and trusts.
The exemption amounts begin to phase out when alternative minimum taxable income (AMTI) exceeds:
- $1,047,200 for married individuals filing jointly and surviving spouses,
- $523,600 for single individuals, heads of households, and married individuals filing separately, and
- $85,650 for estates and trusts.
Expensing Section 179 Property in 2021
For tax years beginning in 2021, taxpayers can expense up to $1,050,000 in Code Sec. 179 property. However, this dollar limit is reduced when the Section 179 property placed in service during the year exceeds $2,620,000.
Estate and Gift Tax Adjustments for 2021
The following inflation adjustments apply to federal estate and gift taxes in 2021:
- the gift tax exclusion is $15,000 per donee, or $159,000 for gifts to spouses who are not U.S. citizens;
- the federal estate tax exclusion is $11,700,000; and
- the maximum reduction for real property under the special valuation method is $1,190,000.
2021 Inflation Adjustments for Other Tax Items
The maximum foreign earned income exclusion amount in 2021 is $108,700.
The IRS also provided inflation-adjusted amounts for the:
- adoption credit,
- lifetime learning credit,
- earned income credit,
- excludable interest on U.S. savings bonds used for education,
- various penalties, and
- many other provisions.
Effective Date
These inflation adjustments generally apply to tax years beginning in 2021, so they affect most returns that will be filed in 2022. However, some specified figures apply to transactions or events in calendar year 2021.
The IRS has released the 2021 cost-of-living adjustments (COLAs) for pension plan dollar limitations and other retirement-related provisions.
The IRS has released the 2021 cost-of-living adjustments (COLAs) for pension plan dollar limitations and other retirement-related provisions.
Key Unchanged Amounts
The 2021 contribution limit remains unchanged at $19,500 for employees who take part in:
- 401(k) plans,
- 403(b) plans,
- most 457 plans, and
- the federal government’s Thrift Savings Plan
The catch-up contribution limit for employees aged 50 and over who participate in these plans also remains unchanged at $6,500.
The limitation for SIMPLE retirement accounts is unchanged at $13,500.
For individual retirement arrangements (IRAs), the limit on annual contributions to an IRA remains unchanged at $6,000. The additional catch-up contribution limit for individuals aged 50 and over is not subject to an annual cost-of-living adjustment, and so remains $1,000.
IRAs and Roth IRAs
The income ranges for determining eligibility to make deductible contributions to traditional IRAs and to contribute to Roth IRAs have increased for 2021.
Taxpayers can deduct contributions to a traditional IRA if they meet certain conditions. The deduction phases out if the taxpayer or his or her spouse takes part in a retirement plan at work. The deduction phase out depends on the taxpayer's filing status and income.
- For single taxpayers covered by a workplace retirement plan, the 2021 phase-out range is $66,000 to $76,000, up from $65,000 to $75,000 for 2020.
- For married couples filing jointly, when the spouse making the contribution takes part in a workplace retirement plan, the 2021 phase-out range is $105,000 to $125,000, up from $104,000 to $124,000 for 2020.
- For an IRA contributor who is not covered by a workplace retirement plan but who is married to someone who is covered, the 2021 phase out range is between $198,000 and $208,000, up from $196,000 and $206,000 for 2020.
- For a married individual who is covered by a workplace plan and is filing a separate return, the phase-out range is not subject to an annual COLA and remains $0 to $10,000.
The 2021 income phase-out ranges for Roth IRA contributions are:
- $125,000 to $140,000 for singles and heads of household (up from $124,000 to $139,000 in 2020),
- $198,000 to $208,000 for married filing jointly (up from $196,000 to $206,000 in 2020), and
- $0 to $10,000 for married filing separately.
Saver’s Credit
The income limit for low- and moderate-income workers to claim the Saver's Credit under Code Sec. 25B has also increased for 2021:
- $66,000 for married couples filing jointly (up from $65,000 in 2020),
- $49,500 for heads of household (up from $48,750 in 2020), and
- $33,000 for singles and married filing separately (up from $32,500 in 2020).
The IRS has issued final regulations to update the life expectancy and distribution period tables under the required minimum distribution (RMD) rules. The tables reflect the general increase in life expectancy. The tables would apply for distribution calendar years beginning on or after January 1, 2022, with transition relief.
The IRS has issued final regulations to update the life expectancy and distribution period tables under the required minimum distribution (RMD) rules. The tables reflect the general increase in life expectancy. The tables would apply for distribution calendar years beginning on or after January 1, 2022, with transition relief.
RMDs apply to qualified plans, including 401(k) plans and profit sharing plans. They also apply to IRAs (including SEP and SIMPLE IRAs), inherited Roth IRAs, Tax Sheltered Annuity plans, and eligible deferred compensation plans. In general, RMDs must begin for the year the individual reaches age 72. An RMD for a calendar year is determined by dividing the participant’s account balance by the applicable distribution period.
Distribution periods are based on life expectancies and are found in one of three tables, depending on the circumstances:
- During the employee’s lifetime (including year of death), the applicable distribution period is determined by the Uniform Lifetime Table. The figures in that table are the joint and last survivor life expectancy for the employee and a hypothetical beneficiary 10 years younger.
- If an employee's sole beneficiary is the employee's surviving spouse and the spouse is more than 10 years younger than the employee, then the applicable distribution period is the joint and last survivor life expectancy of the employee and spouse under the Joint and Last Survivor Table.
- After the employee’s death, the distribution period is generally based on the designated beneficiary’s age using the Single Life Expectancy Table.
Updated Tables
Distribution periods under the new rules would generally increase between one and two years. For example, a 72-year-old IRA owner who applied the prior Uniform Lifetime Table to calculate RMDs used a life expectancy of 25.6 years. Applying the new Uniform Lifetime Table, a 72-year-old IRA owner will use a life expectancy of 27.4 years to calculate RMDs. As another example, a 75-year-old surviving spouse who is the employee’s sole beneficiary and applied the prior Single Life Table to compute RMDs used a life expectancy of 13.4 years. Under these regulations, a 75-year-old surviving spouse will use a life expectancy of 14.8 years.
Retirees and beneficiaries would be able to withdraw slightly smaller amounts from their plans each year. They could leave amounts in tax-favored retirement accounts for a slightly longer period of time, to account for the possibility that they may live longer.
Applicability Date
The life expectancy tables and Uniform Lifetime Table under these regulations apply for distribution calendar years beginning on or after January 1, 2022. Thus, for an IRA owner who attained age 70.5 in February of 2020 (so that the individual attains age 72 in August of 2021 and the individual’s required beginning date is April 1, 2022), these regulations do not apply to the RMD for the individual’s 2021 distribution calendar year (which is due April 1, 2022) but will apply to the RMD for the individual’s 2022 distribution calendar year (which is due December 31, 2022).
These regulations include a transition rule that applies if an employee died before January 1, 2022, and, under the rules of Reg. §1.401(a)(9)-5, the distribution period that applies for calendar years following the calendar year of the employee’s death is equal to a single life expectancy calculated as of the calendar year of the employee’s death (or if applicable, the year after the employee’s death), reduced by one for each subsequent year.
For 2021, the Social Security tax wage cap will be $142,800, and Social Security and Supplemental Security Income (SSI) benefits will increase by 1.3 percent. These changes reflect cost-of-living adjustments to account for inflation.
For 2021, the Social Security tax wage cap will be $142,800, and Social Security and Supplemental Security Income (SSI) benefits will increase by 1.3 percent. These changes reflect cost-of-living adjustments to account for inflation.
2021 Wage Cap
The Federal Insurance Contributions Act (FICA) tax on wages is 7.65 percent each for the employee and the employer. FICA tax has two components:
- a 6.2 percent Social Security tax, also known as Old Age, Survivors, And Disability Insurance (OASDI); and
- a 1.45 percent Medicare tax, also known as hospital insurance (HI).
For self-employed workers, the Self-Employment tax is 15.3 percent, consisting of:
- a 12.4 percent OASDI tax; and
- a 2.9 percent HI tax.
OASDI tax applies only up to a wage base, which includes most wages and self-employment income up to the annual wage cap.
For 2021, the wage base is $142,800. Thus, OASDI tax applies only to the taxpayer’s first $142,800 in wages or net earnings from self-employment. Taxpayers do not pay any OASDI tax on earnings that exceed $142,800.
There is no wage cap for HI tax.
Maximum Social Security Tax for 2021
For workers who earn $142,800 or more in 2021:
- an employee will pay a total of $8,853.60 in social security tax ($142,800 x 6.2 percent);
- the employer will pay the same amount; and
- a self-employed worker will pay a total of $17,707.20 in social security tax ($142,800 x 12.4 percent).
Additional Medicare Tax
Higher-income workers may have to pay an Additional Medicare tax of 0.9 percent. This tax applies to wages and self-employment income that exceed:
- $250,000 for married taxpayers who file a joint return;
- $125,000 for married taxpayers who file separate returns; and
- $200,000 for other taxpayers.
The annual wage cap does not affect the Additional Medicare tax.
Benefits Increase for 2021
Finally, a cost-of-living adjustment (COLA) will increase social security and SSI benefits for 2019 by 1.3 percent. The COLA is intended to ensure that inflation does not erode the purchasing power of these benefits.
Final regulations reflect the significant changes that the Tax Cuts and Jobs Act (TCJA) ( P.L. 115-97) made to the Code Sec. 274 deduction for travel and entertainment expenses. These regulations finalize, with some changes, previously released proposed regulations, NPRM REG-100814-19.
Final regulations reflect the significant changes that the Tax Cuts and Jobs Act (TCJA) ( P.L. 115-97) made to the Code Sec. 274 deduction for travel and entertainment expenses. These regulations finalize, with some changes, previously released proposed regulations, NPRM REG-100814-19.
Changes to Code Sec. 274 under the TCJA
For most expenses paid or incurred after 2017, TCJA:
- repealed the "directly related to a trade or business" and the business-discussion exceptions to the general disallowance of entertainment expense deductions;
- eliminated the general business expense deduction for 50 percent of entertainment (but not meal) expenses; and
- repealed the special substantiation rules for deductible entertainment (but not travel) expenses. Taxpayers may rely on the proposed regulations until they are finalized.
Entertainment Expenses
Among other things, Reg. §1.274-11:
- restates the statutory rules of Code Sec. 274(a), including the entertainment deduction disallowance rule for dues or fees to any social, athletic, or sporting club or organization;
- substantially incorporates the existing definition of "entertainment" from Reg. §1.274-2(b)(1); and
- confirms that the nine exceptions in Code Sec. 274(e) continue to apply to deductible entertainment expenditures.
The regulations also confirm that "entertainment" does not include food or beverages unless they are provided at or during an entertainment activity, and their costs are included in the entertainment costs.
Food and Beverage Expenses
As under the proposed regulations, Reg. §1.274-12 allows taxpayers to deduct 50 percent of business meal expenses if:
- the expense is an ordinary and necessary business expense;
- the expense is not lavish or extravagant; the taxpayer or an employee is present when the food or beverage is furnished;
- the food or beverage is provided to a current or potential business customer, client, consultant, or similar business contact; and
- food and beverages that are provided during or at an entertainment activity are purchased separately from the entertainment, or their cost is separately stated.
With respect to the fourth requirement listed above, the final regulations adopt the definition of "business associate" in Reg. §1.274-2(b)(2)(iii), but expands it to include employees. Thus, these requirements would apply to employer-provided meals to employees as well as non-employees. The final regulations also flesh out the fifth requirement listed above, and clarify that the separate charges for entertainment-related food and beverages must reflect their actual cost, including delivery fees, tips, and sales tax. Indirect expenses such as transportation to the food are not included in the actual cost.
Exceptions and Special Rules
Food or beverage expenses for employer-provided meals at an eating facility do not include expenses for the operation of the facility, such as salaries of employees preparing and serving meals, and other overhead costs. The final regulations apply the TCJA changes to the exceptions and special rules for deductible food and beverages in Code Sec. 274(e), Code Sec. 274(k) and Code Sec. 274(n), including:
- reimbursed food or beverage expenses;
- recreational expenses for employees;
- items available to the public; and
- goods or services sold to customers.
The final regulations also provide examples on several specific scenarios to illustrate the rules.
The Treasury and IRS have issued guidance on the recent order by President Trump to defer certain employee payroll tax obligations on wages paid from September 1, 2020, through December 31, 2020. Under the guidance:
The Treasury and IRS have issued guidance on the recent order by President Trump to defer certain employee payroll tax obligations on wages paid from September 1, 2020, through December 31, 2020. Under the guidance:
- the due date for the withholding and payment of the employee’s portion of the 6.2-percent old-age, survivors and disability insurance (OASDI) tax (Social Security tax) under Code Sec. 3101(a), and the employee’s portion of the Railroad Retirement Tax Act (RRTA) Tier 1 tax that is attributable to the 6.2-percent Social Security tax under Code Sec. 3201, on applicable wages is postponed until the period beginning on January 1, 2021, and ending on April 30, 2021; and
- the deferred taxes must be withheld and paid from wages and compensation paid between January 1, 2021, and April 30, 2021.
The guidance states that it does not separately postpone the deposit obligation for employee Social Security tax. This is because the deposit obligation does not arise until the tax is withheld, so by postponing the time for withholding the employee Social Security tax, the deposit obligation is delayed by operation of the tax regulations.
7508A Relief
In light of the coronavirus (COVID-19) disaster, President Trump issued a memorandum on August 8, 2020, directing the Treasury Secretary to use his Code Sec. 7508A authority to defer the withholding, deposit, and payment of the employee’s portion of Social Security tax, and the employee’s portion of the RRTA equivalent tax, on wages and compensation paid from September 1, 2020, through December 31, 2020. The deferral is available only for employees whose biweekly, pre-tax pay is less than $4,000, or a similar amount where a different pay period applies.
The Treasury Secretary has determined that employers required to withhold and pay the employee share of the Social Security tax under Code Sec. 3102(a) or the RRTA tax equivalent under Code Sec. 3202(a) are affected by the COVID-19 emergency for purposes of the relief described in the presidential memorandum.
Applicable Wages
The deferral applies to wages under Code Sec. 3121(a) or compensation under Code Sec. 3231(e) paid to an employee on a pay date during the period beginning on September 1, 2020, and ending on December 31, 2020 (collectively "applicable wages"), but only if the amount of wages or compensation paid for a biweekly pay period is less than $4,000, or the equivalent threshold amount with respect to other pay periods.
Applicable wages are determined on a pay period-by-pay period basis. If the amount of wages or compensation payable to an employee for a pay period is less than the corresponding pay period threshold amount, then that amount is considered applicable wages for the pay period. In that case, the relief provided in the guidance applies to the wages or compensation paid to that employee for that pay period, irrespective of the amount of wages or compensation paid to the employee for other pay periods.
Paying Deferred Taxes
An affected employer must withhold and pay the total applicable taxes that it has deferred ratably from wages and compensation paid between January 1, 2021, and April 30, 2021. Interest, penalties, and additions to tax will begin to accrue on May 1, 2021, on any unpaid deferred taxes.
If necessary, the employer can make arrangements to otherwise collect the total deferred taxes from the employee.
The IRS has issued guidance to employers on the requirement to report the amount of qualified sick and family leave wages paid to employees under the Families First Coronavirus Response Act (Families First Act) ( P.L. 116-127). This reporting provides employees who are also self-employed with information necessary for properly claiming qualified sick leave equivalent or qualified family leave equivalent credits under the Families First Act.
The IRS has issued guidance to employers on the requirement to report the amount of qualified sick and family leave wages paid to employees under the Families First Coronavirus Response Act (Families First Act) ( P.L. 116-127). This reporting provides employees who are also self-employed with information necessary for properly claiming qualified sick leave equivalent or qualified family leave equivalent credits under the Families First Act.
Background
Under the Families First Act, many employers with fewer than 500 employees must provide paid leave to employees due to circumstances related to the Coronavirus Disease 2019 (COVID-19). Certain employers must provide an employee with up to 80 hours of paid sick leave if the employee cannot work or telework because he or she:
- is subject to a federal, state or local quarantine or isolation order related to COVID-19;
- has been advised by a health care provider to self-quarantine due to concerns related to COVID-19;
- is experiencing symptoms of COVID-19 and seeking a medical diagnosis;
- is caring for an individual who is subject to a federal, state, or local quarantine or isolation order related to COVID-19, or has been advised by a health care provider to self-quarantine due to concerns related to COVID-19;
- is caring for a son or daughter if the child’s school or place of care has been closed, or the child’s care provider is unavailable, due to COVID-19 precautions; or
- is experiencing any other substantially similar condition specified by the Secretary of Health and Human Services in consultation with the Secretaries of the Treasury and Labor.
The employee is entitled to paid sick leave at his or her regular pay rate (or if higher, the applicable federal, state, or local minimum wage), up to:
- $511 per day ($5,110 in the aggregate) if the employee cannot work for reasons listed in (1), (2), or (3), above;
- $200 per day ($2,000 in the aggregate) if the employee cannot work for reasons listed in (4), (5), or (6) above.
The Families First Act also amends the Family and Medical Leave Act of 1993 to require employers to provide expanded paid family and medical leave to employees who cannot work or telework for reasons related to COVID-19. An employee can receive up to 10 weeks of paid family and medical leave at two-thirds the employee’s regular rate of pay, up to $200 per day ($10,000 in the aggregate) if the employee cannot work because he or she is caring for a son or daughter whose school or place of care is closed, or whose child care provider is unavailable, for reasons related to COVID-19.
Eligible employers may receive a refundable payroll credit for required qualified sick leave wages or qualified family leave wages paid to an employee, plus allocable qualified health plan expenses. An equivalent credit is available to self-employed individuals carrying on a trade or business, if the self-employed individual would be entitled to receive paid leave if he or she were an employee of an employer (other than himself or herself). The refundable credits apply to qualified leave wages paid with respect to the period beginning on April 1, 2020, and ending on December 31, 2020.
Reporting Qualified Leave Wages
In addition to reporting qualified sick leave wages paid and qualified family leave wages paid in Boxes 1, 3 (up to the social security wage base), and 5 of Form W-2 (or, in the case of compensation subject to the Railroad Retirement Tax Act (RRTA), in Boxes 1 and 14 of Form W-2), employers must report to the employee 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:
- the total amount of qualified sick leave wages paid for reasons (1), (2), or (3) above, labelled as "sick leave wages subject to the $511 per day limit" or in similar language;
- the total amount of qualified sick leave wages paid for reasons (4), (5), or (6) above, labelled as "sick leave wages subject to the $200 per day limit" or in similar language; and
- the total amount of qualified family leave wages paid, labelled as "emergency family leave wages" or in similar language.
If a separate statement is provided and the employee receives a paper Form W-2, the statement must be included with the Form W-2 provided to the employee. If the employee receives an electronic Form W-2, the statement must be provided in the same manner and at the same time as the Form W-2.
Self-Employed Individuals
Self-employed individuals who are claiming qualified sick leave equivalent or qualified family leave equivalent credits, and who are also eligible for qualified sick leave and qualified family leave wages as employees, must report the qualified leave wage amounts described above on Form 7202, Credits for Sick Leave and Family Leave for Certain Self-Employed Individuals, included with their income tax returns. They also must reduce (but not below zero) any qualified sick leave or qualified family leave equivalent credits by the amount of these qualified leave wages.
In consultation with Treasury Department, the Small Business Administration (SBA) has issued...
In consultation with Treasury Department, the Small Business Administration (SBA) has issued:
- new and revised guidance for the Paycheck Protection Program (PPP);
- revised PPP application forms;
- a revised PPP loan forgiveness application; and
- a new "EZ" PPP loan forgiveness application.
New, Revised PPP Guidance
The guidance implements the Paycheck Protection Program Flexibility Act (PPPFA) ( P.L. 116-142), which President Trump signed on June 5, 2020. The PPPFA aims to expand usability of the PPP for small businesses provided in the Coronavirus Aid, Relief, and Economic Security (CARES) Act ( P.L. 116-136).
The updated guidance expands PPP eligibility for business owners who have past felony convictions. Further, to implement the PPPFA, the SBA revised its first PPP interim final rule that was issued in April. As noted in Treasury’s recent announcement issued on June 8, the new rule reflects updates related to loan maturity, deferral of loan payments, and forgiveness.
The new and revised PPP guidance can be found at https://home.treasury.gov/system/files/136/PPP-IFR--Additional-Revisions-to-First-Interim-Final-Rule.pdf.
Revised PPP Applications
The SBA has issued revised the PPP application forms to conform with the changes in the guidance.
The revised Borrower application form can be found at https://home.treasury.gov/system/files/136/PPP-Borrower-Application-Form-Revised-June-12-2020.pdf.
For the revised Lender application form, see https://home.treasury.gov/system/files/136/PPP-Lender-Application-Form-Revised-June-12-2020.pdf.
Senators Request PPP Forgiveness Simplification
In a bipartisan effort, a group of over 40 senators have requested that Treasury and the SBA simplify the PPP loan forgiveness application for certain small business loans. Specifically, the senators urged Treasury and the SBA to revise the form so that it is no longer than one page for any loan under $250,000.
"While the Small Business Administrator was also given the ability to require additional documentation necessary to verify proper use of PPP funds, we believe it is beyond the program’s intent to require the information solicited in the 11-page forgiveness application that the SBA recently released," the senators wrote in a recent letter addressed to Treasury Secretary Steven Mnuchin and SBA Administrator Jovita Carranza. "We appreciate the interest in appropriately auditing the use of government money. However, the loan forgiveness application – which understandably needs more information for loans worth significantly more than $250,000 – is three times longer than the original application for the PPP."
On the heels the senators’ request, the SBA has released both a revised, full PPP loan forgiveness application, and a new "EZ" forgiveness application (Form 3508EZ). The new EZ loan forgiveness application can be used by:
- borrowers that are self-employed and have no employees;
- borrowers that did not reduce the salaries or wages of their employees by more than 25%, and did not reduce the number or hours of their employees; or
- borrowers that experienced reductions in business activity as a result of health directives related to COVID-19, and did not reduce the salaries or wages of their employees by more than 25%.
Both the full forgiveness application and the EZ forgiveness application give borrowers the option of using the original 8-week covered period (if their loan was made before June 5, 2020) or the PPPFA’s extended 24-week covered period. The EZ application requires fewer calculations and less documentation for eligible borrowers.
The new EZ forgiveness application can be found at https://home.treasury.gov/system/files/136/PPP-Forgiveness-Application-3508EZ.pdf.
The revised, full forgiveness application can be found at https://home.treasury.gov/system/files/136/3245-0407-SBA-Form-3508-PPP-Forgiveness-Application.pdf.
New IRS guidance fills in several more pieces of the Code Sec. 199A passthrough deduction puzzle. Taxpayers can generally rely on all of these new final and proposed rules.
New IRS guidance fills in several more pieces of the Code Sec. 199A passthrough deduction puzzle. Taxpayers can generally rely on all of these new final and proposed rules.
Final Regulations
The final regulations in T.D. 98xx_1 largely adopt the proposed regulations in NPRM REG-107892-18 (August 16, 2018), but with substantial modifications.
Taxpayers are likely to be disappointed in one thing that did not change: all items treated as capital gain or loss, including Section 1231 gains and losses, are still excluded from qualified business income (QBI). Taxpayers should continue to apply the Section 1231 netting and recapture rules when calculating the Code Sec. 199A deduction.
However, the final regulations drop the rule that treated an incidental non-specified services trade or business (SSTB) as part of an SSTB if the businesses were commonly owned and shared expenses, and the non-SSTB’s gross receipts were no more than five percent of the business’s combined gross receipts.
The final regulations make several adjustments to the proposed regulations for estates and trusts. Most significantly, the final regulations remove the definition of "principal purpose" under the anti-abuse rule that allows the IRS to aggregate multiple trusts. The IRS is taking this issue under advisement. Also, in determining if a trust or estate has taxable income that exceeds the threshold amount, distributions are no longer excluded. Instead, the entity’s taxable income is determined after taking into account any distribution deduction under Code Sec. 651 or Code Sec. 661.
The final regulations retain the presumption that an employee continues to be an employee while doing the same work for the same employer. However, the regulations provide a new three-year look back rule, and allow the worker to rebut the presumption by showing records (such as contracts or partnership agreements) that corroborate the individual’s status as a non-employee.
Other changes of note include:
- Disallowed, limited or suspended losses must be used in order from the oldest to the newest, on a FIFO (first in, first out) basis.
- A relevant passthrough entity (RPE) can aggregate businesses.
- If an RPE fails to report an item, only that item is presumed to be zero; the missing information may be reported on an amended return.
- The S portion and non-S portion of an electing small business trust (ESBT) are treated as a single trust for purposes of determining the threshold amounts.
Proposed Regs for QBI, RICs, Trusts, Estates
Taxpayers may rely on the proposed regulations in NPRM REG-134652-18, which cover three broad topics.
First, in calculating QBI, previously disallowed losses are treated as losses from a separate trade or business. If the losses relate to a publicly traded partnership (PTP), they must be treated as losses from a separate PTP. Attributes of the disallowed loss are determined in the year the loss is incurred.
Second, a RIC that receives qualified REIT dividends may pay Section 199A dividends. The IRS continues to consider permitting conduit treatment for qualified PTP income received by a RIC, and seeks public comment on this issue.
Finally, the proposed regulations also provide rules for charitable remainder unitrusts (and their beneficiaries), split-interest trusts, and separate shares.
Rental Real Estate Enterprise
The proposed revenue procedure set forth in Notice 2019-7 provides a safe harbor for a rental real estate enterprise to be treated as a trade or business for purposes of Section 199A. RPEs can also use the safe harbor.
A rental real estate enterprise must satisfy three conditions to qualify for the safe harbor:
- Separate books and records must be maintained to reflect income and expenses for each rental real estate enterprise.
- At least 250 or more hours of rental services must be performed per year with respect to the rental enterprise. For tax years beginning after December 31, 2022, this test can be satisfied in any three of the five consecutive tax years that end with the tax year.
- The taxpayer must maintain contemporaneous records of relevant items, including time reports, logs, or similar documents. (This requirement does not apply to tax years beginning in 2018.)
Relevant items include hours of all services performed, description of all services performed, dates on which such services were performed, and who performed the services.
W-2 Wages
Rev. Proc. 2019-11 allows taxpayers to use one of three methods to calculate W-2 wages for the passthrough deduction:
- the unmodified Box method;
- the modified Box 1 method; or
- the tracking wages method.
These methods were proposed in Notice 2018-64, I.R.B. 2018-35, 347. The unmodified Box method is simplest, but the other two methods are more accurate.
Comments Requested
The IRS requests comments on the proposed regulations and the proposed safe harbor. The IRS must receive the comments and any requests for public hearing within 60 days after the proposed regulations are published in the Federal Register.
People are buzzing about Roth Individual Retirement Accounts (IRAs). Unlike traditional IRAs, "qualified" distributions from a Roth IRA are tax-free, provided they are held for five years and are made after age 59 1/2, death or disability. You can establish a Roth IRA just as you would a traditional IRA. You can also convert assets in a traditional IRA to a Roth IRA.
Before 2010, only taxpayers with adjusted gross income of $100,000 or less were eligible to convert their traditional IRA (provided they were not married taxpayers filing separate returns). Beginning in 2010, anyone can convert a traditional IRA to a Roth IRA, regardless of income level or filing status.
Comment: While you can only contribute a maximum of $5,000 to a Roth IRA for 2010 (plus a $1,000 catch-up contribution if you are over age 50), you can convert an unlimited amount from a traditional IRA.
Conversion is treated as a taxable distribution of assets from the traditional IRA to the IRA holder, although it is not subject to the 10 percent tax on early distributions. While paying taxes on conversion is undesirable, the advantages of holding assets in a Roth IRA usually outweigh this disadvantage, especially if you will not be retiring soon. Furthermore, if you convert assets in 2010, you have the option of including them in income in 2011 and 2012 (50 percent each year) instead of 2010.
Comment: Generally, this income-splitting would be advantageous to any taxpayer who does not expect a sharp increase in income in 2011 or 2012. A wildcard factor is that the lower income tax rates that have been in effect since 2001 will expire after 2010 and could increase in 2011.
There are four ways to convert a traditional IRA to a Roth IRA:
- A rollover - you receive a distribution from a traditional IRA and roll it over to a Roth IRA within 60 days;
- Trustee-to-trustee transfer - you direct the trustee of the traditional IRA to transfer an amount to the trustee of a Roth IRA;
- Same-trustee transfer - the trustee of the traditional IRA transfers assets to a Roth IRA maintained by the same trustee; or
- Redesignation - you designate a traditional IRA as a Roth IRA, instead of opening a new Roth account.
Comment: The account holder does not have to convert all of the assets in the traditional IRA.
Another advantage of converting assets from a traditional IRA to a Roth IRA is that you can change your mind and put the assets back into the traditional IRA. This is known as a recharacterization. You have until the due date, with extensions, for the return filed for the year of conversion. Thus, if you convert assets in 2010, you have until mid-October in 2011 to undo the conversion.
This ability to recharacterize the conversion allows you to use hindsight to check whether your assets declined in value after the conversion. Since you are paying taxes on the amount converted, a decline in asset value means that you paid taxes on phantom income that no longer exists. However, if you convert assets into multiple Roth IRAs, you can choose to recharacterize the assets in a Roth IRA that decreased in value, while maintaining the conversion for a Roth IRA's assets that appreciated in value.
The use of a Roth IRA can be a savvy investment, but whether to convert assets is not an easy decision. If you would like to explore your options, please contact this office.
You may have done some spring cleaning and found that you have a lot of clothes that you no longer wear or want, and would like to donate to charity. Used clothing that you want to donate to charity and take a charitable deduction for, however, is subject to a few rules and requirements.
Under IRS guidelines, clothing, furniture, and other household items must be in good used condition or better, to be deductible. Shirts with stains or pants with frayed hems just won't cut it. Furthermore, if the item(s) of used clothing are not in good used condition or better, and you wish to deduct more than $500 for a single piece of clothing, the IRS requires a professional appraisal.
For donations of less than $250, you must obtain a receipt from the charity, reflecting the donor's name, date and location of the contribution, and a reasonably detailed description of the donation. It is your responsibility to obtain this written acknowledgement of your donation.
Used clothing contributions worth more than $500
If you are deducting more than $500 with respect to one piece of used clothing you donate, you must file Form 8283, Noncash Charitable Contributions, with the IRS. For donated items of used clothing worth more than $500 each, you must attach a qualified appraisal report is to your tax return. The Form 8283 asks you to include information such as the date you acquired the item(s) and how you acquired the item(s) (for example, were the clothes a holiday gift or did you buy the items at the store).
Determining the fair market value of used clothing
You may also need to include the method you used to determine the value of the used clothing. According to the IRS, the valuation of used clothing does not necessarily lend itself to the use of fixed formulas or methods. Typically, the value of used clothing that you donate, is going to be much less than you when first paid for the item. A rule of thumb, is that for items such as used clothing, fair market value is generally the price at which buyers of used items pay for used clothing in consignment or thrift stores, such as the Salvation Army.
To substantiate your deduction, ask for a receipt from the donor that attests to the fact that the clothing you donated with in good, used condition, or better. Moreover, you may want to take pictures of the clothing.
If you need have questions about valuing and substantiating your charitable donations, please contact our office.