ERC Compliance Efforts Top $1 Billion in Six Months, IR-2024-78 The IRS announced that compliance efforts around erroneous Employee Retention Credit (ERC) claims have topped more than $1 billion within six months. "We are encouraged by the results so fa...
IRS Releases Guidance on Form 1099-K, FS-2024-7; IR-2024-5 The IRS has released guidance to help taxpayers understand what to do with Form 1099-K. Responding to feedback from taxpayers, tax professionals and payment processors, the agency had announced b...
OR - IRC conformity updated Oregon enacted legislation updating the state’s IRC conformity date for computing the corporate activity, corporate and personal income taxes.What is the new conformity date?Oregon’s new IRC confo...
President Bidensupportextending the individualtaxprovisions of the Tax Cuts and Jobs Act, many of which are set to expire next year, Department of the Treasury Secretary Janet Yellen said.
PresidentBidensupportextendingtheindividualtaxprovisionsof theTax Cuts and Jobs Act, many of which are set to expire next year, Department of the Treasury Secretary JanetYellensaid.
"The President has made it clear that he would oppose raising back thetaxesfor working people and families making under $400,000,"SecretaryYellentestified before the Senate Finance Committee during a March 21, 2024,hearingto review the White House fiscal year 2025budget proposal.
She then affirmed that"he would"supportextendingtheindividualtaxprovisionsof theTCJAwhen asked by committee Ranking Member Mike Crapo (R-Idaho), who noted that the budget did not make any mention of this.
Yellendefended the fiscal 2025 budget request against assertions thattaxeswill indeed go up for those making under $400,000, contrary to PresidentBiden’s promise, because thetaxesthat are targeted to wealthy corporations to ensure they are paying their fair share will ultimately be passed down to their consumers in the form of higher prices and lower wages.
"I think what the impact when you changetaxeson corporations, what the impact is on families involves a lot of channels that are speculative,"Yellensaid."They are included in models that sometimes the Treasury used for the purposes of analysis, in ataxthat is levied on corporations, that has no obvious direct effect on households."
The proposed budget would increase the corporate minimumtaxfrom the current 15 percent to 21 percent, as well as raise thetaxrate on U.S. multinationals’ foreign earnings from the current 10.5 percent to 21 percent. The current corporatetaxrate would climb to 28 percent and the budget would eliminatetaxbreaks for million-dollar executive compensation. It would also increase thetaxrate on corporate stock buybacks from 1 percent to 4 percent, among other business-relatedtaxprovisions.
Corporations and billionaires will be paying more in taxes if Congress follows recommendations PresidentBiden gave during his State of the Union address.
Corporationsand billionaires will be paying more in taxes if Congress follows recommendationsPresidentBidengave during hisStateof theUnionaddress.
PresidentBidenhighlighted a number of initiatives during the March 7, 2024, address. Forcorporations, he said that it is"time to raise the corporate minimum tax to at least 21 percent."
"Remember in 2020, 55 of the biggest companies in America made $40 billion and paid zero in federal income taxes,"PresidentBidensaid."Zero. Not anymore. Thanks to the law I wrote [and] we signed, big companies have to pay minimum 15 percent. But that’s still less than working people paid federal taxes."
Additionally, he alluded to further recommendations that will likely be included when the administration released its budget proposal, expected as early as the week of March 11, 2024. This includes limiting tax breaks related to corporate and private jets and capping deductions on certain employees at $1 million.
For billionaires,PresidentBidenis looking to increase their tax rate to 25 percent.
"You know what the average federal taxes for those billionaires [is]?"he asked. “"They’re making great sacrifices. 8.2 percent. That’s far less than the vast majority of Americans pay. No billionaire should pay a lower federal tax rate than a teacher or a sanitation worker or nurse."”
PresidentBidensaid this proposal would raise $500 billion over the next 10 years and suggested some of that additional tax money would help strengthen Social Security so that there would be no need to cut benefits or raise the retirement age to extend the life of the Social Security program.
The IRS has launched a new initiative to improve tax compliance among high-incometaxpayers who have not filed federal income tax returns since 2017.
TheIRShas launched a newinitiativeto improve tax compliance amonghigh-incometaxpayerswho have not filed federal incometax returnssince 2017. This effort, funded by the Inflation Reduction Act, involves sending outIRScompliance letters to over 125,000 cases wheretax returnshave not been filed since 2017. These mailings include more than 25,000 to individuals with incomes exceeding $1 million and over 100,000 to those with incomes ranging between $400,000 and $1 million for the tax years 2017 to 2021. TheIRSwill begin mailing these compliance alerts, formally known as theCP59Notice, this week.
Recipients of these letters should act promptly to prevent further notices, increased penalties, and stronger enforcement actions. Consulting a tax professional can help them swiftly file latetax returnsand settle outstanding taxes, interest, and penalties. The failure-to-file penalty is 5 percent per month, capped at 25 percent of the tax owed. Additional resources are available on theIRSwebsitefor non-filers.
The non-filerinitiativeis part of theIRS's broader campaign to ensure large corporations, partnerships, andhigh-incomeindividuals fulfill their tax obligations. Non-respondents to the non-filer letter will face further notices and enforcement actions. If someone consistently ignores these notices, theIRSmay file a substitutetax returnon their behalf. However, it's still advisable for the individual to file their ownreturnto claim eligible exemptions, credits, and deductions.
An individual’s claim for innocent spouse relief was rejected for lack of jurisdiction because the taxpayer failed to file his petition within the 90-day deadline under Code Sec. 6015(e)(1)(A).
Anindividual’sclaimforinnocent spouse reliefwas rejected for lack of jurisdiction because the taxpayerfailedtofilehispetitionwithin the 90-day deadline underCode Sec. 6015(e)(1)(A). The taxpayer argued that the deadline tofileapetitionfor a denial ofinnocent spouse reliefwas not jurisdictional and asked that the Tax Court hear his case on equitable grounds. However, the Tax Court noted that a filing deadline is jurisdictional if Congress clearly states that it is. The IRS argued that argues that the 90-day filing deadline ofCode Sec. 6015(e)(1)(A)was jurisdictional because Congress clearly stated that it was and the Supreme Court’s decision inBoechler, P.C. v. Commissioner, 142 S. Ct. 1493, in addition to numerous appellate cases, supported this argument.
The Tax Court examined the"text, context, and relevant historical treatment"of the provision at issue and concluded that the 90-day filing deadline ofCode Sec. 6015(e)(1)(A)was jurisdictional. On the basis of statutory interpretation principles, the jurisdictional parenthetical inCode Sec. 6015(e)(1)(A)was unambiguous. It did not contain any ambiguous terms and there was a clear link between the jurisdictional parenthetical and the filing deadline. Specifically,Code Sec. 6015(e)(1)(A)is a provision that solely sets forth deadlines. Further, it was unclear what weight, if any, should be given to the equitable nature ofCode Sec. 6015. The statutory context arguments were not strong enough to overcome the statutory text. Accordingly, the Tax Court ruled that the 90-day filing deadline in Code Sec. 6015(e)(1)(A) was jurisdictional.
The IRS has continued to increase the amount of information available in multiple languages. This was part of the IRS transformation work under the Strategic Operating Plan, made possible by additional resources provided by the Inflation Reduction Act (P.L. 117-169).
TheIRShas continued toincreasethe amount of information available in multiplelanguages. This was part of theIRStransformation work under the Strategic Operating Plan, made possible by additionalresourcesprovided by the Inflation Reduction Act (P.L. 117-169). OnIRS.gov,taxpayerscan select their preferredlanguagefrom the dropdown menu at the top of the page, including Spanish, Vietnamese, Russian, Korean, Haitian Creole, Traditional Chinese and Simplified Chinese. Additionally, theLanguagespagegivestaxpayersinformation in 21languageson key topics such as"Your Rights as aTaxpayer"and"Who Needs to File."
"TheIRSis committed to making further improvements fortaxpayersin a wide range of areas, including expandingoptionsavailable totaxpayersin multiplelanguages,"saidIRSCommissioner Danny Werfel."Understanding taxes can be challenging enough, so it’s important for theIRSto put a variety of information onIRS.gov and other materials into thelanguageataxpayerknows best. This is part of the larger effort by theIRSto make taxes easier for alltaxpayers,"he added.
Iftaxpayerscannot find the answers to their tax questions onIRS.gov, they can call theIRSor get in-person help at anIRSTaxpayerAssistance Center. Finally, hundreds ofIRSVolunteer Income Tax Assistance (VITA) and Tax Counseling for the Elderly (TCE) programs have access to Over the Phone Interpreterservices. VITA and TCE offer free basic tax return preparation to qualified individuals.
The IRS has granted to withholding agents an administrative exemption from the electronic filing requirements for Form 1042, Annual Withholding Tax Return for U.S. Source Income of Foreign Persons.
TheIRShas granted to withholding agents an administrativeexemptionfrom theelectronic filingrequirements forForm 1042, Annual Withholding Tax Return for U.S. Source Income of Foreign Persons. Under theexemption:
withholding agents (both U.S. and foreign persons) are not required to fileForms 1042electronically during calendar year 2024; and
withholding agents that are foreign persons are not required to fileForms 1042electronically during calendar year 2025.
Theexemptionis automatic, so withholding agents do not need to file anelectronic filingwaiver request to use theexemption.
Electronic FilingofForm 1042
UnderCode Sec. 6011(e), theIRSmust prescribe regulations with standards for determining which federal tax returns must be filed electronically. In 2023, final regulations were published to implement amendments toCode Sec. 6011(e)that lowered the threshold number of returns for requiredelectronic filingof certain returns. The regulations included requirements for filingForm 1042electronically.
The final regulations provide that:
a withholding agent (but not an individual, estate,or trust) must electronically fileForm 1042if the agent is required to file 10 or more returns of any type during the same calendar year in whichForm 1042is required to be filed;
a withholding agent that is a partnership with more than 100 partners must electronically fileForm 1042regardless of the number of returns the partnership is required to file during the calendar year; and
a withholding agent that is a financial institution must electronically fileForm 1042without regard to the number of returns it is required to file during the calendar year.
The final regulations apply toForms 1042required to be filed for tax years ending on or after December 31, 2023. This means that withholding agents must apply the newelectronic filingrequirements beginning withForms 1042due on or after March 15, 2024.
Challenges to Withholding Agents
Since the final regulations were published, theIRSreceived feedback from withholding agents noting challenges in transitioning to the procedures needed for filingForms 1042electronically. Withholding agents expressed concerns about the limited number of ApprovedIRSModernizede-FileBusiness Providers forForm 1042, and difficulties accessing the schema and business rules for filingForm 1042electronically. Withholding agents that do not rely on modernizede-filebusiness providers said that they needed more time to upgrade their systems for filing on theIRS’s Modernizede-Fileplatform. Agents also noted challenges specific to foreign persons filingForms 1042regarding the authentication requirements necessary for accessing the platform.
In response to these concerns, theIRSused its power under the regulations to provide theexemptionfrom theelectronic filingrequirement forForm 1042, in the interest of effective and efficient tax administration.
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).