2025 Standard Mileage Rates Released (Notice 2025-5; IR-2024-312) 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...
IRS Reminds Taxpayers of Disaster Deadlines (IR-2025-1) 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...
OR - IRC conformity bills introduced Bills were introduced in the Oregon Senate and House to update the state’s IRC conformity date for computing the corporate activity, corporate and personal income taxes. H.B. 2092, H.B. 2113, S.B...
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 oneorder, 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 executiveorder, 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."
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 Courtorderstating 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.
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. §1.861-18provides 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.
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 underCode Sec. 45V, as well as the election to treat a clean hydrogen production facility as energy property for purposes of the energy investment credit underCode 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) addedCode Sec. 45Vto 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. 45Vrequires 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’sForm 7210for each qualified clean hydrogen production facility and for each tax year theCode Sec. 45Vcredit 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 underCode 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 availablehere.
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 isnotan 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 inRev. Proc. 85-18regarding 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 inRev. Proc. 85-18which 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 inRev. Proc. 85-18that 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 underReg. §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 usingForm 8886andForm 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 underCode 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 underCode 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 underCode 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 aCode Sec. 754election 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 underCode 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 underCode 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. §28.2801-1provides the general rules of liability imposed byCode 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 inReg. §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 underCode 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 inReg. §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 inReg. §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 underCode Sec. 2801was 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. §28.2801-4provides 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 inReg. §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 inReg. §28.2801-4(d). A refund is allowed underCode Sec. 6511if foreign gift or estate tax is paid after payment of theCode Sec. 2801tax. 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. §28.2801-5sets 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 inReg. §28.2801-5(d)(3).
Other Rules
Reg. §28.2801-6addresses special rules, including the determination of basis and the applicability of the generation-skipping transfer (GST) tax to certainCode Sec. 2801transfers.Reg. §28.2801-6(d)discusses applicable penalties.Reg. §28.2801-7provides 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 theCode Sec. 2801tax 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 15thday of the 18thcalendar 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 underCode Sec. 164. These payments are deemed state-imposed obligations for the purpose of funding public programs and are not included in employees' gross income underCode Sec. 61. In contrast, mandatory contributions withheld from employees’ wages are treated as state income taxes underCode 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 underCode 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 underCode Sec. 61but are not considered wages for federal employment tax purposes underCode Sec. 3121. By comparison, medical leave benefits attributable to employee contributions are excluded from gross income underCode Sec. 104(a)(3). However, medical leave benefits attributable to employer contributions are partially taxable underCode Sec. 105and 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 underCode Sec. 61, and are subject to federal employment taxes. Employers, however, may deduct these payments as ordinary business expenses underCode Sec. 162.
To ensure compliance, the IRS requires states and employers to report benefits exceeding $600 annually underCode Sec. 6041using 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.
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 AnnualReportto 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.
The IRS has provided guidance regarding whether taxpayers receiving loans under the Paycheck Protection Program (PPP) may deduct otherwise deductible expenses. Act Sec. 1106(i) of the Coronavirus Aid, Relief, and Economic Security (CARES) Act ( P.L. 116-136) did not address whether generally allowable deductions such as those under Code Secs. 162 and 163 would still be permitted if the loan was later forgiven pursuant to Act Sec. 1106(b). The IRS has found that such deductions are not permissible.
The IRS has provided guidance regarding whether taxpayers receiving loans under the Paycheck Protection Program (PPP) may deduct otherwise deductible expenses. Act Sec. 1106(i) of the Coronavirus Aid, Relief, and Economic Security (CARES) Act ( P.L. 116-136) did not address whether generally allowable deductions such as those under Code Secs. 162 and 163 would still be permitted if the loan was later forgiven pursuant to Act Sec. 1106(b). The IRS has found that such deductions are not permissible.
PPP Loans The CARES Act expanded the Small Business Administration’s (SBA’s) existing Section 7(a) loan program to include certain PPP loans. The PPP is made available from the SBA to provide small businesses with loans to help pay payroll costs, mortgages, rent, and utilities during the COVID-19 (coronavirus) crisis. All payments of principal, interest, and fees under the loans are deferred for at least 6 months. The loans are also forgiven for amounts payroll costs, mortgage or rent obligations, and certain utility payments incurred between February 15 and June 30. The loans are 100 percent guaranteed by the SBA.
Deductions Prohibited If the SBA forgives a taxpayer’s PPP loan pursuant to Act. Sec. 1106(b) of the CARES Act, the amount of the loan is excluded from gross income. Under Reg. §1.265-1 taxpayers cannot deduct expenses that are allocable to income that is either wholly excluded from gross income or wholly exempt from the taxes. This rule exists in order to prevent double tax benefits. Thus, the IRS has determined that taxpayers who have their PPP loans forgiven may not deduct any business or interest expenses related to the income associated with the loan.
Treasury and the Small Business Administration (SBA) have worked together to release the Paycheck Protection Program (PPP) Loan Forgiveness Application. According to Treasury’s May 15 press release, the application and correlating instructions inform borrowers how to apply for forgiveness of PPP loans under the Coronavirus Aid, Relief, and Economic Security Act (CARES) Act ( P.L. 116-136). The PPP was enacted under the CARES Act to provide eligible small businesses with loans during the COVID-19 pandemic.
Treasury and the Small Business Administration (SBA) have worked together to release the Paycheck Protection Program (PPP) Loan Forgiveness Application. According to Treasury’s May 15 press release, the application and correlating instructions inform borrowers how to apply for forgiveness of PPP loans under the Coronavirus Aid, Relief, and Economic Security Act (CARES) Act ( P.L. 116-136). The PPP was enacted under the CARES Act to provide eligible small businesses with loans during the COVID-19 pandemic.
Additionally, SBA is expected to issue regulations and guidance to assist borrowers as they complete their applications, and to provide lenders with guidance on their responsibilities, according to Treasury.
Measures included in the application and instructions intended to reduce compliance burdens and simplify the process for borrowers include:
options to calculate payroll costs using an "alternative payroll covered period" that aligns with borrowers’ regular payroll cycles;
flexibility to include eligible payroll and non-payroll expenses paid or incurred during the eight-week period after receiving their PPP loan;
step-by-step instructions on how to perform the calculations required by the CARES Act to confirm eligibility for loan forgiveness;
borrower-friendly implementation of statutory exemptions from loan forgiveness reduction based on rehiring by June 30; and
the addition of a new exemption from the loan forgiveness reduction for borrowers who have made a good-faith, written offer to rehire workers that was declined.
Although you may want your traditional individual retirement accounts (IRAs) to keep accumulating tax-free well into your old age, the IRS sets certain deadlines. The price for getting an upfront deduction when contributing to a traditional IRA (or having a rollover IRA) is that Uncle Sam eventually starts taxing it once you reach 70½. The required minimum distribution (RMD) rules under the Internal Revenue Code accomplish that.
Although you may want your traditional individual retirement accounts (IRAs) to keep accumulating tax-free well into your old age, the IRS sets certain deadlines. The price for getting an upfront deduction when contributing to a traditional IRA (or having a rollover IRA) is that Uncle Sam eventually starts taxing it once you reach 70½. The required minimum distribution (RMD) rules under the Internal Revenue Code accomplish that.
If distributions do not meet the strict minimum requirements for any one year once you reach 70½, you must pay an excise tax equal to 50 percent, even if you kept the money in the account by mistake.
Required minimum distribution
The traditional IRA owner must begin receiving a minimum amount of distributions (the RMD) from his or her IRA by April 1 of the year following the year in which he or she reaches age 70½. That first deadline is referred to as the required beginning date.
If, in any year, you as a traditional IRA owner receive more than the RMD for that year, you will not receive credit for the additional amount when determining the RMD for future years. However, any amount distributed in your 70½ year will be credited toward the amount that must be distributed by April 1 of the following year. The RMD for any year after the year you turn 70½ must be made by December 31 of that year.
Distribution period
The distribution periodis the maximum number of years over which you are allowed to take distributions from the IRA. You calculate your RMD for each year by dividing the amount in the IRA as of the close of business on December 31 of the preceding year by your life expectancy at that time as set by special IRS tables. Those tables are found in IRS Publication 590, "IRAs Appendix C."
Example: Say you were born on November 1, 1936, are unmarried, and have a traditional IRA. Since you have reached age 70½ in 2007 (on May 1 to be exact), your required beginning date is April 1, 2008. Assume further that as of December 31, 2006, your account balance was $26,500. Using Table III, the applicable distribution period for someone your age as of December 31, 2007 (when you will be age 71) is 26.5 years. Your RMD for 2007 is $1,000 ($26,500 ÷ 26.5). That amount must be distributed to you by April 1, 2008.
The RMD rules do not apply to Roth IRAs; they only apply to traditional IRAs. That is one of the principal estate planning reasons for setting up a Roth IRA or rolling over a traditional IRA into a Roth IRA. The downside of a Roth IRA, of course, is not getting an upfront deduction for contributions, or having to pay tax on the balance when rolled over from a traditional IRA into a Roth IRA.
Please contact this office if you need any help in determining a RMD or in deciding whether a rollover to a Roth IRA now to avoid RMD issues later might make sense for you.
Q. I use my computer for both business and pleasure and I am confused about how much I can deduct. Also, how are PDAs such as Palm Pilots, etc. deducted for tax purposes?
Q. I use my computer for both business and pleasure and I am confused about how much I can deduct. Also, how are PDAs such as Palm Pilots, etc. deducted for tax purposes?
A. Because computers and peripheral equipment are viewed as more susceptible than other business property to unwarranted deductions for personal use, they are subject to special scrutiny under the tax law. This scrutiny comes from their classification as "listed property," which limits the amount that may be deducted each year.
A computer as listed property only becomes an issue if it is not used exclusively in business. If a computer is used exclusively at the taxpayer's regular business establishment or in the taxpayer's principal trade or business, the listed property limitations don't apply at all.
Any computer that you use predominately for pleasure may not be written-off over its life nearly as quickly as exclusive-use computers. If your business usage does not meet the predominant use test, you are relegated to using a much slower depreciation method (the ADS, straight-line method) over the longer-ADS recovery period.
Your computer will meet the predominant use test for any tax year if its qualified business use is more than 50% of its total use. You must review your computer's usage and determine the percentage usage for each of its various uses (business, investment, and personal). When computing the predominant use test, any investment use of your computer cannot be considered as part of the percentage of qualified business use. However, you do use the combined total of business and investment use to figure your depreciation deduction for the property. It's up to you to prove business use to the IRS; the IRS does not need to prove personal use to reject your deductions.
In order to claim your computer expenses, you must meet the adequate records requirements by maintaining a "log" or other documentary evidence that sufficiently establishes the business/investment percentage claimed. The log should be similar to a log you would keep to track your auto expenses, indicating date, time of usage, business or nonbusiness, and business reason. Good documentation is always the key to success if your return is ever audited.
Finally, what about application of these rules to PDA's? The shorter the designated "life" of the property, the faster you can write-off its cost. Cell phones are generally considered 7-year property (the cost is depreciated over seven years). Computers are generally considered 5-year property, and computer-software normally is 3-year property. PDA's are generally classified as 5-year property, being considered wireless computers. If a PDA includes a cell phone feature, as long as that feature is not predominant and removable, it continues to fall under the 5-year property rule. Software that you may download to your PDA is 3-year property. Software that you buy already loaded into the PDA, however, is 5-year property. Monthly charges for a wireless service provider are deductible as paid each month, just as your business would deduct any phone or internet service bill.
Most homeowners have found that over the past five to ten years, real estate -especially the home in which they live-- has proven to be a great investment. When the 1997 Tax Law passed, most homeowners assumed that the eventual sale of their home would be tax free. At that time, Congress exempted from tax at least $250,000 of gain on the sale of a principal residence; $500,000 if a joint return was filed. Now, those exemption amounts, which are not adjusted for inflation, don't seem too generous for many homeowners.
Most homeowners have found that over the past five to ten years, real estate -especially the home in which they live-- has proven to be a great investment. When the 1997 Tax Law passed, most homeowners assumed that the eventual sale of their home would be tax free. At that time, Congress exempted from tax at least $250,000 of gain on the sale of a principal residence; $500,000 if a joint return was filed. Now, those exemption amounts, which are not adjusted for inflation, don't seem too generous for many homeowners.
What can be done?
Keeping lots of receipts is one answer! Remember, it will be the gain on your home that is potentially taxable, not full sale price. Gain is equal to net sales price minus an amount equal to the price you paid for your house (including mortgage debt) plus the cost of any improvements made over the years. Bottom line: If your residence has gain that will otherwise be taxed, you will get around 30 percent back on the cost of the improvements (assume your tax bracket is about 30 percent when you sell), simply by keeping good records of those improvements.
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.
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.
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 cannot 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. It doesn't need to be a big project, however, just relatively permanent. For example, putting in a skylight or a new kitchen sink qualifies.
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 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 before 1998.
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).