The IRS has announced penalty relief for the 2025 tax year relating to new information reporting obligations introduced under the One, Big, Beautiful Bill Act (OBBBA). The relief applies to penalties imposed under Code Secs. 6721 and 6722 for failing to file or furnish complete and correct information returns and payee statements.

The IRS has announced penalty relief for the 2025 tax year relating to new information reporting obligations introduced under the One, Big, Beautiful Bill Act (OBBBA). The relief applies to penalties imposed under Code Secs. 6721 and 6722 for failing to file or furnish complete and correct information returns and payee statements.

The OBBBA introduced new deductions for qualified tips and qualified overtime compensation, applicable to tax years beginning after December 31, 2024. These provisions require employers and payors to separately report amounts designated as cash tips or overtime, and in some cases, the occupation of the recipient. However, recognizing that employers and payors may not yet have adequate systems, forms, or procedures to comply with the new rules, the IRS has designated 2025 as a transition period.

For 2025, the Service will not impose penalties if payors or employers fail to separately report these new data points, provided all other information on the return or payee statement is complete and accurate. This relief applies to information returns filed under Code Sec. 6041 and to Forms W-2 furnished to employees under Code Sec. 6051. The IRS emphasized that this transition relief is limited to the 2025 tax year only and that full compliance will be required beginning in 2026 when revised forms and updated electronic reporting systems are available.

Although not mandatory, the IRS encourages employers to voluntarily provide separate statements or digital records showing total tips, overtime pay, and occupation codes to help employees determine eligibility for new deductions under the OBBBA. Employers may use online portals, additional written statements, or Form W-2 box 14 for this purpose.

Notice 2025-62

IR-2025-110

The 2026 cost-of-living adjustments (COLAs) that affect pension plan dollar limitations and other retirement-related provisions have been released by the IRS. In general, many of the pension plan limitations will change for 2026 because the increase in the cost-of-living index met the statutory thresholds that trigger their adjustment. However, other limitations will remain unchanged.

The 2026 cost-of-living adjustments (COLAs) that affect pension plan dollar limitations and other retirement-related provisions have been released by the IRS. In general, many of the pension plan limitations will change for 2026 because the increase in the cost-of-living index met the statutory thresholds that trigger their adjustment. However, other limitations will remain unchanged.

The SECURE 2.0 Act (P.L. 117-328) made some retirement-related amounts adjustable for inflation. These amounts, as adjusted for 2026, include:

• The catch-up contribution amount for IRA owners who are 50 or older is increased from $1,000 to $1,100.
• The amount of qualified charitable distributions from IRAs that are not includible in gross income is increased from $108,000 to $111,000.
• The limit on one-time qualified charitable distributions made directly to a split-interest entity is increased from $54,000 to $55,000.
• The dollar limit on premiums paid for a qualifying longevity annuity contract (QLAC) remains $210,000.

Highlights of Changes for 2026

The contribution limit has increased from $23,500 to $24,500 for employees who take part in:

• 401 (k)
• 403 (b)
• most 457 plans, and
• the federal government’s Thrift Savings Plan

The annual limit on contributions to an IRA increased from $7,000 to $7,500.

The catch-up contribution limit for individuals aged 50 and over for employer retirement plans (such as 401(k), 403(b), and most 457 plans) has increased from $7,500 to $8,000.

The income ranges increased for determining eligibility to make deductible contributions to:

• IRAs,
• Roth IRAs, and
• to claim the Saver’s Credit.

Phase-Out Ranges

Taxpayers can deduct contributions to a traditional IRA if they meet certain conditions. The deduction phases out if the taxpayer or their spouse takes part in a retirement plan at work. The phase-out depends on the taxpayer’s filing status and income.

• For single taxpayers covered by a workplace retirement plan, the phase-out range is $81,000 to $91,000, up from $79,000 to $89,000.
• For joint filers, when the spouse making the contribution takes part in a workplace retirement plan, the phase-out range is $129,000 to $149,000, up from $126,000 to $146,000.
• For an IRA contributor who is not covered by a workplace retirement plan but their spouse is, the phase-out range is $242,000 to $252,000, up from $236,000 to $246,000.
• For a married individual filing separately who is covered by a workplace plan, the phase-out range remains $0 to $10,000.

The phase-out ranges for Roth IRA contributions are:

• $153,000 to $168,000 for singles and heads of household,
• $242,000 to $252,000 for joint filers,
• $0 to $10,000 for married separate filers.

Finally, the income limits for the Saver’s Credit are:

• $80,500 for joint filers,
• $60,375 for heads of household,
• $40,250 for singles and married separate filers.

Notice 2025-67

IR-2025-111

The IRS released interim guidance and announced its intent to publish proposed regulations regarding the exclusion of interest on loans secured by rural or agricultural real property under Code Sec. 139L. Taxpayers may rely on the interim guidance in section 3 of the notice for loans made after July 4, 2025, and on or before the date that is 30 days after the publication of the forthcoming proposed regulations.

The IRS released interim guidance and announced its intent to publish proposed regulations regarding the exclusion of interest on loans secured by rural or agricultural real property under Code Sec. 139L. Taxpayers may rely on the interim guidance in section 3 of the notice for loans made after July 4, 2025, and on or before the date that is 30 days after the publication of the forthcoming proposed regulations.

Partial Exclusion of Interest

Code Sec 139L, as added by the One Big Beautiful Bill Act (P.L. 119-21), provides for a partial exclusion of interest for certain loans secured by rural or agricultural real property. The amount excluded is 25 percent of the interest received by a qualified lender on a qualified real estate loan. A qualified lender will include 75 percent of the interest received on a qualified real estate loan in gross income. A qualified lender is not required to be the original holder of the loan on the issue date of the loan in order to exclude the interest under Code Sec 139L.

Qualified Real Estate Loan

A qualified real estate loan is secured by qualified rural or agricultural property only if, at the time that the interest accrues, the qualified lender holds a valid and enforceable security interest with respect to the property under applicable law. Subject to a safe harbor provision, the amount of a loan that is a qualified real estate loan is limited to the fair market value of the qualified rural or agricultural property securing the loan, as of the issue date of the loan. If the amount of the loan is greater than the fair market value of the property securing the loan, determined as of the issue date of the loan, only the portion of the loan that does not exceed the fair market value is a qualified real estate loan.

The safe harbor allows a qualified lender to treat a loan as fully secured by qualified rural or agricultural property if the qualified lender holds a valid and enforceable security interest with respect to the qualified rural or agricultural property under applicable law and the fair market value of the property security the loan is at least 80 percent of the issue price of the loan on the issue date.

Fair market value can be determined using any commercially reasonable valuation method. Subject to certain limitations, the fair market value of any personal property used in the course of the activities conducted on the qualified rural or agricultural property (such as farm equipment or livestock) can be added to the fair market value of the rural or agricultural real estate. The addition to fair market value may be made if a qualified lender holds a valid and enforceable security interest with respect to such personal property under applicable law and the relevant loan must be secured to a substantial extent by rural or agricultural real estate.

Use of the Property

The presence of a residence on qualified rural or agricultural property or intermittent periods of nonuse for reasons described in Code Sec. 139L(c)(3) does not prevent the property from being qualified rural or agricultural property so long as the the property satisfies the substantial use requirement.

Request for Comments

The Treasury Department and the IRS are seeking comments on the notice in general and on the following specific issues:

• The extent to which the forthcoming proposed regulations address the meaning of certain terms;
• The extent to which the forthcoming proposed regulations address whether property is substantially used for the production of one or more agricultural products or in the trade or business of fishing or seafood processing;
• The extent to which the forthcoming proposed regulations address how the substantial use requirement applies to properties with mixed uses;
• The manner in which the forthcoming proposed regulations address changes involving qualified rural or agricultural property following the issuance of a qualified real estate loan;
• The manner in which the forthcoming proposed regulations address how a qualified lender determines whether the loan remains secured by qualified rural or agricultural property;
• The extent to which the forthcoming proposed regulations address how Code Sec. 139L applies in securitization structures; and
• The extent to which the forthcoming proposed regulations address Code Sec. 139L(d), regarding the application of Code Sec. 265 to any qualified real estate loan.

Written comments should be submitted, either electronically or by mail, by January 20, 2026.

Notice 2025-71

IR-2025-113

The IRShas provided a safe harbor for trusts that otherwise qualify as investment trusts under Reg. §301.7701-4(c) and as grantor trusts to stake their digital assets without jeopardizing their tax status as investment trusts and grantor trusts. The Service also provided a limited time period for an existing trust to amend its governing instrument (trust agreement) to adopt the requirements of the safe harbor.

The IRShas provided a safe harbor for trusts that otherwise qualify as investment trusts under Reg. §301.7701-4(c) and as grantor trusts to stake their digital assets without jeopardizing their tax status as investment trusts and grantor trusts. The Service also provided a limited time period for an existing trust to amend its governing instrument (trust agreement) to adopt the requirements of the safe harbor.

Background

Under “custodial staking,” a third party (custodian) takes custody of an owner’s digital assets and facilitates the staking of such digital assets on behalf of the owner. The arrangement between the custodian and the staking provider generally provides that an agreed-on portion of the staking rewards are allocated to the owner of the digital assets.

Business or commercial trusts are created by beneficiaries simply as a device to carry on a profit-making business that normally would have been carried on through a business organization classified as a corporation or partnership. An investment trust with a single class of ownership interests, representing undivided beneficial interests in the assets of the trust, is classified as a trust if there is no power under the trust agreement to vary the investments of the certificate holders.

Trust Arrangement

The revenue procedure applies to an arrangement formed as a trust that (i) would be treated as an investment trust, and as a grantor trust, if the trust agreement did not authorize staking and the trust’s digital assets were not staked, and (ii) with respect to a trust in existence before the date on which the trust agreement first authorizes staking and related activities in a manner that satisfies certain listed requirements, qualified as an investment trust, and as a grantor trust, immediately before that date. If the listed requirements (described below) are met, a trust's authorization in the trust agreement to stake its digital assets and the resulting staking of the trust's digital assets will, under the safe harbor, not prevent the trust from qualifying as an investment trust and as a grantor turst.

Requirements for Trust

The requirements for the safe harbor to apply are as follows:

• Interests in the trust must be traded on a national securities exchange and must comply with the SEC’s regulations and rules on staking activities.
• The trust must own only cash and units of a single type of digital asset under Code Sec. 6045(g)(3)(D).
• Transactions for the cash and units of digital asset must be carried out on a permissionless network that uses a proof-of-stake consensus mechanism to validate transactions.
• Trust’s digital assets must be held by a custodian acting on behalf of the trust at digital asset addresses controlled by the custodian.
• Only the custodian can effect a sale, transfer, or exercise the rights of ownership over said digital assets, including while those assets are staked.
• Staking of the trust's digital assets must protect and conserve trust property and mitigate the risk that another party could control a majority of the assets of that type and engage in transactions reducing the value of the trust’s digital assets.
• The trust’s activities relating to digital assets must be limited to (1) accepting deposits of the digital assets or cash in exchange for newly issued interests in the trust; (2) holding the digital assets and cash; (3) paying trust expenses and selling digital assets to pay trust expenses or redeem trust interests; (4) purchasing additional digital assets with cash contributed to the trust; (5) distributing digital assets or cash in redemption of trust interests; (6) selling digital assets for cash in connection with the trust's liquidation; and (7) directing the staking of the digital assets in a way that is consistent with national securities exchange requirements.
• The trust must direct the staking of its digital assets through custodians who facilitate the staking on the trust's behalf with one or more staking providers.
• The trust or its custodian must have no legal right to participate in or direct the activities of the staking provider.
• The trust's digital assets must generally be available to the staking provider to be staked.
• The trust's liquidity risk policies must be based solely on factors relating to national securities exchange requirements regarding redemption requests.
• The trust's digital assets must be indemnified from slashing due to the activities of staking providers.
• The only new assets the trust can receive as a result of staking are additional units of the single type of digital asset the trust holds.

Amendment to Trust

A trust may amend its trust agreement to authorize staking at any time during the nine-month period beginning on November 10, 2025. Such an amendment will not prevent a trust from being treated as a trust that qualifies as an investment trust under Reg. §301.7701-4(c) or as a grantor trust if the aforementioned requirements were satisfied.

Effective Date

This guidance is effective for tax years ending on or after November 10, 2025.

Rev. Proc. 2025-31

WASHINGTON – National Taxpayer Advocate Erin Collins told attendees at a recent conference that she wants to see the Taxpayer Advocate Service improve its communications with taxpayers and tax professionals.

WASHINGTON – National Taxpayer Advocate Erin Collins told attendees at a recent conference that she wants to see the Taxpayer Advocate Service improve its communications with taxpayers and tax professionals.

“What I would like to do is improve our responsiveness and communication with fill-in-the-blank, whether it be taxpayer or practitioner, because I think that is huge,” Collins told attendees November 18, 2025, at the American Institute of CPA’s National Tax Conference.

“I think a lot of my folks are working really hard to fix things, but they’re not necessarily communicating as fast and often as they should,” she continued. “So, I would like to see by year-end we’re in a position that that is a routine and not the exception.”

In tandem with that, Collins also told attendees she would like to see the IRS be quicker in terms of how it fixes issues. She pointed to the example of first-time abatement, something she called an “an amazing administrative relief for taxpayers” but one that is only available to those who know to ask for it.

She estimated that there are about one million taxpayers every year that are eligible to receive it and among those, most are lower income taxpayers.

The IRS, Collins noted, agreed a couple of years ago that this was a problem. “The challenge they had was how do they implement it through their systems?”

Collins was happy to report that those who qualify for first-time abatement will automatically be notified starting with the coming tax filing season, although she did not have any insight as to how the process would be implemented.

Patience

Collins also asked for patience from the taxpayer community in the wake of the recently-ended government shutdown, which has increased the TAS workload as TAS employees were not deemed essential and were furloughed during the shutdown.

She noted that TAS historically receives about 5,000 new cases a week and the shutdown meant the rank-and-file at TAS were not working. She said that the service did work to get some cases closed that didn’t require employee help.

“So, any of you who are coming in or have cases, please be patient,” Collins said. “Our guys are doing the best they can, but they do have, unfortunately, a backlog now coming in.”

By Gregory Twachtman, Washington News Editor

The IRS and Treasury have issued final regulations that implement the excise tax on stock repurchases by publicly traded corporations under Code Sec. 4501, introduced in the Inflation Reduction Act of 2022. Proposed regulations on the computation of the tax were previously issued on April 12, 2024 (NPRM REG-115710-22) and final regulations covering the procedural aspects of the tax were issued on July 3, 2024 (T.D. 10002). Following public comments and hearings, the proposed computation regulations were modified and are now issued as final, along with additional changes to the final procedural regulations. The rules apply to repurchases made after December 31, 2022.

The IRS and Treasury have issued final regulations that implement the excise tax on stock repurchases by publicly traded corporations under Code Sec. 4501, introduced in the Inflation Reduction Act of 2022. Proposed regulations on the computation of the tax were previously issued on April 12, 2024 (NPRM REG-115710-22) and final regulations covering the procedural aspects of the tax were issued on July 3, 2024 (T.D. 10002). Following public comments and hearings, the proposed computation regulations were modified and are now issued as final, along with additional changes to the final procedural regulations. The rules apply to repurchases made after December 31, 2022.

Overview of Code Sec. 4501

Code Sec. 4501 imposes a one percent excise tax on the fair market value of any stock repurchased by a “covered corporation”—defined as any domestic corporation whose stock is traded on an established securities market. The statute also covers acquisitions by “specified affiliates,” including majority-owned subsidiaries and partnerships. A “repurchase” includes redemptions under Code Sec. 317(b) and any transaction the Secretary determines to be economically similar. The amount subject to tax is reduced under a netting rule for stock issued by the corporation during the same tax year.

Scope and Definitions

The final regulations clarify the definition of stock, covering both common and preferred stock, with several exclusions. They exclude:

• Additional tier 1 capital not qualifying as common equity tier 1,
• Preferred stock under Code Sec. 1504(a)(4),
• Mandatorily redeemable stock or stock with enforceable put rights if issued prior to August 16, 2022,
• Certain instruments issued by Farm Credit System entities and savings and loan holding companies.

The IRS rejected requests to exclude all preferred stock or foreign regulatory capital instruments, limiting exceptions to U.S.-regulated issuers only.

Exempt Transactions and Carveouts

Several categories of transactions are excluded from the excise tax base. These include:

• Repurchases in connection with complete liquidations (under Code Secs. 331 and 332),
• Acquisitive reorganizations and mergers where the corporation ceases to be a covered corporation,
• Certain E and F reorganizations where no gain or loss is recognized and only qualifying property is exchanged,
• Split-offs under Code Sec. 355 are included unless the exchange is treated as a dividend,
• Reorganizations are excluded if shareholders receive only qualifying property under Code Sec. 354 or 355.

The IRS adopted a consideration-based test to determine whether the reorganization exception applies, disregarding whether shareholders actually recognized gain.

Application to Take-Private Transactions and M&A

The final rules clarify that leveraged buyouts, take-private deals, and restructurings that result in loss of public listing status are not considered repurchases for tax purposes. This reverses prior treatment under proposed rules, aligning with policy concerns that such deals are not akin to value-distribution schemes.

Similarly, cash-funded acquisitions and upstream mergers into parent companies are excluded where the repurchase is part of a broader ownership change plan.

Netting Rule and Timing Considerations

Under the netting rule, the amount subject to tax is reduced by the value of new stock issued during the tax year. This includes equity compensation to employees, even if unrelated to a repurchase program. The rule does not apply where a corporation is no longer a covered corporation at the time of issuance.

Stock is treated as repurchased on the trade date, and issuances are counted on the date the rights to stock are transferred. The IRS clarified that netting applies only to stock of the covered corporation and not to instruments issued by affiliates.

Foreign Corporations and Surrogates

The excise tax also applies to certain acquisitions by specified affiliates of:

• Applicable foreign corporations, i.e., foreign entities with publicly traded stock,
• Covered surrogate foreign corporations, as defined under Code Sec. 7874.

Where such affiliates acquire stock from third parties, the tax is applied as if the affiliate were a covered corporation, but limited only to shares issued by the affiliate to its own employees. These provisions prevent U.S.-parented multinational groups from circumventing the tax through offshore affiliates.

Exceptions Under Code Sec. 4501(e)

The six statutory exceptions remain intact:

• Reorganizations with no gain/loss under Code Sec. 368(a);
• Contributions to employer-sponsored retirement or ESOP plans;
• De minimis repurchases under $1 million per tax year;
• Dealer transactions in the ordinary course of business;
• Repurchases by RICs and REITs;
• Repurchases treated as dividends under the Code.

The IRS expanded the RIC/REIT exception to cover certain non-RIC mutual funds regulated under the Investment Company Act of 1940 if structured as open-end or interval funds.

Reporting and Administrative Requirements

Taxpayers must report repurchases on Form 720, Quarterly Federal Excise Tax Return. Recordkeeping, filing, and payment obligations are governed by Part 58, Subpart B of the regulations. The procedural rules also address:

• Applicable filing deadlines;
• Corrections for adjustments and refunds;
• Return preparer obligations under Code Secs. 6694 and 6695.

These provisions codify prior guidance issued in Notice 2023-2 and reflect technical feedback from tax professionals and stakeholders.

Applicability Dates

The final rules apply to:

• Stock repurchases occurring after December 31, 2022;
• Stock issuances during tax years ending after December 31, 2022;
• Procedural compliance starting with returns due after publication in the Federal Register.

Corporations may rely on Notice 2023-2 for transactions before April 12, 2024, and either the proposed or final regulations thereafter, provided consistency is maintained.

Takeaways

The final regulations narrow the excise tax’s reach to align with Congressional intent: discouraging opportunistic buybacks that return capital to shareholders outside traditional dividend mechanisms. By excluding structurally transformative M&A transactions, debt-like preferred stock, and regulated financial instruments, the IRS attempts to strike a balance between tax enforcement and market practice.

T.D. 10037

President Trump recently walked back consideration of capital gains indexing and a payroll tax cut, less than 24 hours after signaling his support for both.

President Trump recently walked back consideration of capital gains indexing and a payroll tax cut, less than 24 hours after signaling his support for both.

Payroll Tax Cut
Reports on Capitol Hill had begun swirling recently that the Trump administration was considering cutting payroll taxes.

"We’re looking at various tax reductions," Trump told reporters at the White House on August 20. "I have been thinking about payroll taxes for a long time," he added. "A lot of people would like to see that."

However, White House staff swiftly denied that any payroll tax cut was under consideration, according to several reports.

Along those lines, Michael Zona, communications director for Senate Finance Committee (SFC) Chairman Chuck Grassley, R-Iowa, told Wolters Kluwer on August 20 that no such discussions were occurring between the SFC majority and the president. "Chairman Grassley has not discussed a potential payroll tax cut with the Administration," Zona told Wolters Kluwer.

Payroll taxes are used to fund certain social programs such as Social Security and Medicare. Generally, payroll taxes are paid primarily through the wages and salaries of employees, as noted by the nonpartisan Tax Foundation. Amid recent reports that the U.S. economy could be heading toward a recession, cutting payroll taxes could potentially benefit middle-income taxpayers and bolster consumer spending.

On August 20, Trump disputed the notion that a recession could be around the bend. Additionally, Trump told reporters that any consideration of a payroll tax cut is unrelated to mostly Democratic claims of an impending recession. In that vein, Zona told Wolters Kluwer on August 20 that "[a]t this point, recession seems more of a political wish by Democrats than an economic reality."

Indexing Capital Gains to Inflation
Further, Trump confirmed to reporters at the White House on August 20 that he is still considering indexing capital gains to inflation. Lately, lawmakers have become increasingly vocal concerning their differing viewpoints on the matter, both as to tax policy and legality.

"We’ve been talking about indexing [capital gains to inflation] for a long time," Trump said. "It can be done directly by me…I can do it directly," he said, referencing a recent uptick in debate between Republican and Democratic lawmakers on the legality of such an executive move.

No Tax Cuts, No Indexing
Then on August 21, Trump told reporters at the White House that "I’m not looking at a tax cut now; we don’t need it. We have a strong economy."

Additionally, Trump followed up his initial assertion of authority to circumvent Congress on the tax policy issue by stating on August 21 that if he wanted to unilaterally index capital gains to inflation, he would need a letter from the Attorney General.

However, the longstanding Republican and Democratic debate as to whether the executive branch has authority to index capital gains to inflation appears to be moot, at least for the time being.

"I’m not looking to do indexing," Trump said on August 21. "I’ve studied indexing for a long time. I want tax [cuts] for middle-class workers. I think indexing is probably better for the upper income groups; I’m not looking to do that."

The Senate’s top tax writers have released the first round of bipartisan task force reports examining over 40 expired and soon to be expired tax breaks known as tax extenders. Congress is expected to address these particular tax breaks, as well as temporary tax policy in general, when lawmakers return to Washington, D.C. in September.

The Senate’s top tax writers have released the first round of bipartisan task force reports examining over 40 expired and soon to be expired tax breaks known as tax extenders. Congress is expected to address these particular tax breaks, as well as temporary tax policy in general, when lawmakers return to Washington, D.C. in September.

Tax Extenders Task Forces
Senate Finance Committee (SFC) Chairman Chuck Grassley, R-Iowa, and Ranking Member Ron Wyden, D-Ore., on August 13 released three of six reports detailing the work of bipartisan task forces that were created to examine certain tax breaks, which expired or will expire between December 31, 2017, and December 31, 2019. The three remaining tax extenders task force reports are expected to be released soon.

The reports released by Grassley and Wyden on August 13 were from the following task forces:

• Energy;
• Cost Recovery; and
• Individual, Excise and Other Temporary Tax Policy.

Next Steps
Wyden also highlighted the importance of moving away from the notion of temporary tax provisions in general, which Democrats and Republicans alike largely agree is not good tax policy. "Tax policy should not be set a year or two at a time. We need to find permanent solutions that provide certainty to families and businesses," Wyden said in an August 13 press release.

Grassley and Wyden introduced their bipartisan tax extenders bill earlier this year. However, Grassley reiterated on August 13 that movement of all tax legislation must be initiated in the House. Although House Ways and Means Committee Chairman Richard Neal, D-Mass., has also introduced his own tax extenders proposal, the bill is unlikely to garner enough support from Senate Republicans.

"The next step will be to put together a legislative package based on the proposals that the taskforces received, the areas of consensus among the taskforce members and continued bipartisan discussions," Grassley said in an August 13 press release. "Taxpayers deserve predictability and clarity, and they haven’t received either for far too long on temporary tax policy."

Bonus depreciation guidance that applies to property acquired after September 27, 2017, in a tax year that includes September 28, 2017, allows taxpayers to make a late election or revoke a prior valid election to...

Bonus depreciation guidance that applies to property acquired after September 27, 2017, in a tax year that includes September 28, 2017, allows taxpayers to make a late election or revoke a prior valid election to:

• elect out of 100 percent bonus depreciation;
• elect 100 percent bonus depreciation on specified plants in the year of planting or grafting; or
• elect the 50 percent rate in place of the 100 percent rate.

The late election or revocation may be made by filing an accounting method change, or in certain cases by filing an amended return. The taxpayer must have timely filed its federal tax return for the 2016 or 2017 tax year. Most taxpayers will prefer the administrative ease of filing an accounting method change with their next return and making a single Code Sec. 481(a) adjustment. This route is easier than filling an amended return and, if necessary, amended returns for any subsequent affected year.

Background
The Tax Cuts and Jobs Act ( P.L. 115-97) increased the bonus depreciation rate from 50 percent to 100 percent, effective for property acquired and placed in service after September 27, 2017. Many taxpayers filed returns for a 2016 or 2017 tax year that included September 27, 2017, before proposed bonus depreciation regulations ( REG-104397-18, August 8, 2018) were issued to explain the related bonus depreciation changes. Consequently, the IRS is granting relief to taxpayers, and disregarding the general rule that advance IRS permission must be obtained in a letter ruling to make a late election or revoke a prior election and that making or revoking an election is not an accounting method change.

Amended Returns
A late election or revocation of an election may be made on an amended return for the 2016 or 2017 tax year that includes September 28, 2017. However, according to the guidance, the amended return must be filed before the taxpayer files its federal return for the first tax year succeeding the 2016 or 2017 tax year, and must include the adjustment directly related to the late election or revocation as well as any collateral adjustments. Thus, for a calendar year taxpayer, an amended return for 2017 may be filed if the 2018 tax year return has not been filed. (e.g., if an October 15, 2019 filing extension was obtained).

Accounting Method Changes
Instead of filing an amended return, a taxpayer may file Form 3115, Application for Change in Accounting Method, with a taxpayer’s timely filed federal tax return for the first, second, or third tax year succeeding the 2016 or 2017 tax year that includes September 28, 2017, to make or revoke a covered election.

The automatic consent procedures apply. Accordingly, no fee is required. Multiple Forms 3115 do not need to be filed if more than one election or revocation is made.

Rev. Proc. 2018-31, I.R.B. 2018-22, 637, which lists all automatic accounting method changes, is modified to include this accounting method change.

Deemed Elections
A taxpayer who filed a timely 2016 or 2017 return that includes September 28, 2017, without following the formal election procedures in Rev. Proc. 2017-33, I.R.B. 2017-19, 1236, may be deemed to have made a valid election. Specifically, with respect to property placed in service after September 27, 2017, in a 2016 or 2017 tax year that includes September 28, 2017:

• An election to claim 100 percent bonus depreciation on a specified plant in the year of planting or grafting is considered made if the 100 percent rate was actually claimed on the return.
• An election not to claim bonus depreciation for a class of property is considered made if the taxpayer did not claim 100 percent bonus depreciation (or the elective 50 percent rate) for that class of property on the return.
• An election to claim the 50 percent bonus rate in lieu of the 100 percent bonus rate is considered made if the taxpayer claimed bonus depreciation on all qualified property using the 50 percent rate or on all specified plants in the year of planting or grafting.

These deemed elections may be revoked by filing an amended return or an accounting method change under the general rules above.

The IRS has granted a six-month extension to eligible partnerships to file a superseding Form 1065, U.S. Return of Partnership Income, and furnish corresponding Schedules K-1, Partner’s Share of Income, Deductions, Credits. For a calendar year partnership, the deadline to file Form 1065 and corresponding Schedules K-1 was March 15, which has now been extended to September 15.

The IRS has granted a six-month extension to eligible partnerships to file a superseding Form 1065, U.S. Return of Partnership Income, and furnish corresponding Schedules K-1, Partner’s Share of Income, Deductions, Credits. For a calendar year partnership, the deadline to file Form 1065 and corresponding Schedules K-1 was March 15, which has now been extended to September 15.

The relief is available to a partnership that satisfies the following eligibility requirements for the applicable tax year:

• the partnership has not elected the application of Code Sec. 6221(b) (Election Out for Certain Partnerships with 100 or Fewer Partners);
• it has timely filed Form 1065 and
• it has timely furnished all required Schedules K-1 (without regard to the extensions of time provided by the revenue procedure).

The extensions are available only to partnerships that timely filed Form 1065 and timely furnished Schedules K-1 and also file a superseding Form 1065 and furnish corresponding Schedules K-1 on or before the date that is six-months after the non-extended deadline. Further, the filing and furnishing extensions apply only to partnership tax years that ended prior to the issuance of the revenue procedure and for which the extended due date for the partnership tax year is after July 25, 2019.

The IRS is allowing the extensions because certain Bipartisan Budget Act of 2015 (BBA) partnerships timely filed Form 1065 for the 2018 tax year and timely furnished Schedules K-1 to their partners but may have made errors, including not properly reporting all of the required information on the Schedules K-1. The relief is directed at partnerships that, having timely filed, did not request an extension of the deadline to file and, due to the restrictions on amending Schedules K-1 under Code Sec. 6031(a) may not amend the Schedules K-1, including for the 2018 tax year.

Eligible partnerships taking advantage of the extensions should file a superseding Form 1065 and furnish corresponding Schedules K-1 in the same manner as the original return and Schedules K-1 and write on the top of the superseding Form 1065 "SUPERSEDING FORM 1065 PURSUANT TO REVENUE PROCEDURE 2019-32."

Proposed regulations increase a vehicle’s maximum value for eligibility to use the fleet-average valuation rule or the vehicle cents-per-mile valuation rule. The increase to $50,000 is effective for the 2018 calendar year. The maximum value is adjusted annually for inflation after 2018. The proposed regulations provide transition rules for certain employers.

Proposed regulations increase a vehicle’s maximum value for eligibility to use the fleet-average valuation rule or the vehicle cents-per-mile valuation rule. The increase to $50,000 is effective for the 2018 calendar year. The maximum value is adjusted annually for inflation after 2018. The proposed regulations provide transition rules for certain employers.

Taxpayers may rely on the proposed regulations until final regulation amendments are published in the Federal Register.

Depreciation Limits Increased, Inflation Calculation Changed
The Tax Cuts and Job Act ( P.L. 115-97) substantially increased the maximum annual dollar limitations on the depreciation deductions for passenger automobiles. The new dollar limitations are based on the depreciation, over a five-year recovery period, of a passenger automobile with a cost of $50,000. As a result, the IRS issued Notice 2019-8, I.R.B. 2019-3, 354, providing that it intends to amend Reg. §1.61-21(d) and (e) to:

• incorporate a higher base value of $50,000 as the maximum value for use of the vehicle cents-per-mile and fleet-average valuation rules, effective for the 2018 calendar year; and
• adjust the $50,000 base value annually for inflation in 2019 and subsequent years.

Additionally, the Notice provides that the IRS will not publish separate maximum values for trucks and vans for use with the fleet-average and vehicle cents-per-mile valuation rules. For tax years beginning after December 31, 2017, inflation adjustments for these purposes are calculated using both the consumer price index (CPI) automobile component and the Chained Consumer Price Index for All Urban Consumers (C-CPI-U) automobile component ( Code Sec. 280F(d)(7)(B)). The C-CPI-U automobile component does not currently have separate components for new cars and new trucks.

The IRS later issued Notice 2019-34, I.R.B. 2019-22, 1257, to:

• provide a 2019 inflation increase to $50,400 for these amounts; and
• announce it would revise Reg. §1.61-21(d) to provide a transition rule for certain employers.

Transition Rules
The proposed regulations include the following transition rules.

Fleet-average valuation rule. If an employer did not qualify to use the fleet-average valuation rule prior to January 1, 2018, because the automobile’s fair market value exceeded the inflation-adjusted maximum value requirement for the year the automobile was first made available to the employee for personal use, the employer may adopt the fleet-average valuation rule for 2018 or 2019, provided the fair market value of the automobile does not exceed $50,000 on January 1, 2018, or $50,400 on January 1, 2019.

Vehicle cents-per-mile valuation rule. An employer that did not qualify to adopt the vehicle cents-per-mile valuation rule for a vehicle first made available to an employee for personal use before calendar year 2018 may first adopt the vehicle cents-per-mile valuation rule for the 2018 or 2019 tax year for the vehicle if:

• the employer did not qualify to adopt the vehicle cents-per-mile valuation rule because the vehicle’s fair market value exceeded the inflation-adjusted limitation for the year the vehicle was first used by the employee for personal use; and
• the vehicle’s fair market value does not exceed $50,000 on January 1, 2018, or $50,400 on January 1, 2019.

Similarly, if the employer first used the commuting valuation rule, the employer may adopt the vehicle cents-per-mile valuation rule for the 2018 or 2019 tax year if:

• the employer did not qualify to switch to the vehicle cents-per-mile valuation rule on the first day on which the commuting valuation rule was not used because the vehicle’s fair market value exceeded the inflation-adjusted limitation for the year the commuting valuation rule was first not used; and
• the fair market value of the vehicle does not exceed $50,000 on January 1, 2018, or $50,400 on January 1, 2019.

COMMENT 
An employer that adopts the vehicle cents-per-mile valuation rule generally must continue to use the rule for all subsequent years in which the vehicle qualifies for it. However, the employer may use the commuting valuation rule for any year during which use of the vehicle qualifies for the commuting valuation rule.
 

The temporary nondiscrimination relief for closed defined benefit plans provided in Notice 2014-5, I.R.B. 2014-2, 276, is extended through plan years beginning in 2020. Notice 2014-5 provided temporary nondiscrimination relief for certain defined benefit pension plans that were "closed" before December 13, 2013. Notice 2014-5, I.R.B. 2014-2, 276, Notice 2015-28, I.R.B. 2015-14, 848, Notice 2016-57, I.R.B. 2016-40, 432, Notice 2017-45, I.R.B. 2017-38, 232, and Notice 2018-69, I.R.B. 2018-37, 426, are modified.

The temporary nondiscrimination relief for closed defined benefit plans provided in Notice 2014-5, I.R.B. 2014-2, 276, is extended through plan years beginning in 2020. Notice 2014-5 provided temporary nondiscrimination relief for certain defined benefit pension plans that were "closed" before December 13, 2013. Notice 2014-5, I.R.B. 2014-2, 276, Notice 2015-28, I.R.B. 2015-14, 848, Notice 2016-57, I.R.B. 2016-40, 432, Notice 2017-45, I.R.B. 2017-38, 232, and Notice 2018-69, I.R.B. 2018-37, 426, are modified.

Closed Defined Benefit Plans
Employers have been moving away from traditional defined benefit plans for rank and file employees. Existing plans are sometimes closed for new employees as of a specified date. These plans are referred to as "closed plans," and the employees who continue to earn pension benefits under the closed plan are often known as a "grandfathered group of employees."

Closed plans must continue to meet the coverage and nondiscrimination tests, but they may eventually find it difficult because the proportion of the grandfathered group of employees who are highly compensated employees compared to the employer’s total workforce increases over time. This occurs because grandfathered employees usually continue to receive pay raises and so may become highly compensated employees, while new employees who are generally nonhighly compensated employees are not covered by the closed plan.

Notice 2014-5 Relief
For plan years beginning before 2016, Notice 2014-5 provides testing relief for defined benefit/defined contribution plans that include a closed defined benefit plan that was closed before December 13, 2013. Under this relief the plan can demonstrate satisfaction of the nondiscrimination in amount requirement on the basis of equivalent benefits, even if the does not meet any of the existing eligibility conditions for testing on that basis.

This relief has been extended several times in anticipation of the IRS issuing final amendments to the Code Sec. 401(a)(4) regulations. Most recently the relief was extended until plan years beginning in 2019, and it is now extended for plan years beginning in 2020. The IRS issued proposed regulations in 2016 to provide a permanent fix ( NPRM REG-125761-14, Jan. 29, 2016). The IRS expects the final regulations will provide that the reliance granted in the preamble to the proposed regulations may be applied for plan years beginning before 2021.

The IRS has adopted final regulations with respect to the allocation by a partnership of foreign income taxes. The final regulations are intended to improve the operation of an existing safe harbor rule. This safe harbor rule, under Reg. §1.704-1(b)(4)(viii), determines whether allocations of creditable foreign tax expenditures (CFTEs) are deemed to be in accordance with the partners’ interests in the partnership.

The IRS has adopted final regulations with respect to the allocation by a partnership of foreign income taxes. The final regulations are intended to improve the operation of an existing safe harbor rule. This safe harbor rule, under Reg. §1.704-1(b)(4)(viii), determines whether allocations of creditable foreign tax expenditures (CFTEs) are deemed to be in accordance with the partners’ interests in the partnership.

The final regulations—

• clarify the effect of Code Sec. 743(b) adjustments on the determination of net income in a CFTE category;
• include special rules regarding how deductible allocations (that is, allocations that give rise to a deduction under foreign law) are taken into account for purposes of determining net income in a CFTE category;
• include special rules regarding how nondeductible guaranteed payments (that is, guaranteed payments that do not give rise to a deduction under foreign law) are taken into account for purposes of determining net income in a CFTE category; and
• include a clarification of the rules regarding the treatment of disregarded payments between branches of a partnership for purposes of determining income attributable to an activity included in a CFTE category.

A transition rule applies to partnerships whose agreements were entered into before February 14, 2012.

Transactions involving digital content and cloud computing have become common due to the growth of electronic commerce. The transactions must be classified in terms of character so that various provisions of the Code, such as the sourcing rules and subpart F, can be applied.

Transactions involving digital content and cloud computing have become common due to the growth of electronic commerce. The transactions must be classified in terms of character so that various provisions of the Code, such as the sourcing rules and subpart F, can be applied.

Digital Content Transactions
Existing Reg. §1.861-18 provides rules for classifying transactions involving computer programs. The proposed regulations broaden the scope of the rules to apply to all transfers of digital content. "Digital content" is defined as any content in digital format that is either protected by copyright law or is no longer protected due solely to the passage of time.

The proposed regulations clarify that a transfer of the mere right to public performance or display of digital content for advertising does not alone constitute a transfer of a copyright.

Additionally, the proposed regulations clarify the title passage rule. When there is a sale of a copyrighted article through an electronic medium, the sale will occur at the location of the download or installation onto the end user’s device, or, in the absence of that information, the location of the customer.

A sale of personal property occurs at the place where the rights, title, and interest of the seller in the property are transferred to the buyer. If bare legal title is retained by the seller, the sale occurs where beneficial ownership passes.

Cloud Computing Transactions
Cloud computing transactions are typically characterized by on-demand network access to computer resources. The proposed regulations classify a "cloud transaction" as either:

• a lease of property (i.e., computer hardware, digital content, or other similar resources); or
• a provision of services.

The proposed regulations provide a nonexhaustive list of factors for determining how a cloud transaction is classified. In general, application of the relevant factors will result in a transaction being treated as a provision of services, rather than a lease of property. The factors include both statutory factors under Code Sec. 7701(e)(1) and factors applied by the courts.

The IRS Large Business and International Division (LB&I) has withdrawn its directive to examiners that provided instructions on transfer pricing issue selection related to stock based compensation (SBC) in cost sharing arrangements (CSAs).

The IRS Large Business and International Division (LB&I) has withdrawn its directive to examiners that provided instructions on transfer pricing issue selection related to stock based compensation (SBC) in cost sharing arrangements (CSAs).

U.S. taxpayers that are cost sharing participants must include SBC as intangible development costs (IDCs), under Reg. §1.482-7A(d)(2) and Reg. §1.482-7(d)(3) if these costs are directly identified with, or reasonably allocable to, the intangible development activity of the CSA. In 2015, the Tax Court invalidated Reg. §1.482-7A(d)(2) in Altera Corp., 145 TC 91, Dec. 60,354. The IRS appealed Alteraand issued Directive LB&I-04-0118-005 on January 12, 2018, directing examiners to stop opening new examinations for issues related to SBC included in CSA IDCs until the outcome of the Altera appeal was known.

On June 7, 2019, the U.S. Court of Appeals for the Ninth Circuit reversed the Tax Court’s opinion (Altera Corp., CA-9, 2019-1 ustc ¶50,231). Based on the Ninth Circuit’s decision, LB&I has formally withdrawn LB&I-04-0118-005.

LB&I has instructed examiners to continue applying Reg. §§1.482-7A(d)(2) and 1.482-7(d)(3), including opening new examinations of CSA SBC issues when appropriate. Because the issues may be factually intensive, LB&I states that transfer pricing teams should develop the facts to support their analyses and conclusions. Finally, LB&I instructs issue teams to consider consulting the Practice Network and Counsel where appropriate, for support in developing the most reliable analyses of this issue.

LB&I will continue to monitor further developments related to the Ninth Circuit’s decision.

On July 1, President Trump signed into law a sweeping, bipartisan IRS reform bill called the Taxpayer First Act ( P.L. 116-25). This legislation aims to broadly redesign the IRS for the first time in over 20 years.

On July 1, President Trump signed into law a sweeping, bipartisan IRS reform bill called the Taxpayer First Act ( P.L. 116-25). This legislation aims to broadly redesign the IRS for the first time in over 20 years.

Reworked IRS Reform Bill

The Senate approved the Taxpayer First Act by voice vote on June 13. The measure was unanimously approved in the House on June 10.

The reworked IRS reform bill, originally introduced in the last Congress, was revised in early June after the House passed a prior version in April. However, the original House-approved bill (HR 1957) was quickly doomed in the Senate because of controversy surrounding the IRS’s Free File program.

The provision codifying the IRS’s Free File program was removed from the original bill, and the measure was reintroduced as HR 3151. Congress then quickly sent it to the president’s desk.

Taxpayer First Act Provisions

The Taxpayer First Act aims to reform the IRS into a more taxpayer-friendly agency. It requires the IRS to develop a comprehensive customer service strategy, as well as a plan to redesign the IRS’s structure, modernize its technology, and enhance its cyber security.

The measure also:

• codifies and enhances an independent Office of Appeals within the IRS;
• waives the application fee for an offer in compromise (OIC) by a low-income taxpayer;
• sets new electronic filing requirements;
• clarifies information available about low-income taxpayer clinics (LITCs);
• codifies the Volunteer Income Tax Assistance (VITA) Program;
• requires notice regarding the closure of taxpayer assistance centers (TACs);
• improves the IRS whistleblower program;
• modifies the private debt collection program;
• clarifies procedures for equitable relief from joint liability;
• establishes new safeguards on seizing funds believed to be structured to avoid the $10,000 financial reporting requirement; and
• modifies procedures for the issuance of summons and notice of third-party contacts by the IRS.

Hill Reaction

"This signing is the culmination of a lengthy, bipartisan process undertaken by the [House] Ways and Means Committee to implement pro-taxpayer reforms at the IRS for the first time in more than 20 years," Senate Finance Committee (SFC) Ron Wyden, D-Ore., said in a July 1 statement. "New protections for low-income taxpayers, practical enforcement reforms, and upgraded assistance for taxpayers and small businesses will all now go into place."

Additionally, the House’s top Republican tax writer issued a statement after Trump signed the IRS reform legislation. "I’m proud that after three years of thoughtful bipartisan work, our bold package of reforms to the Internal Revenue Service are the law of the land," Ways and Means ranking member Kevin Brady, R-Tex., said on July 1. "Thank you to President Trump for signing this historic legislation, which is the biggest and boldest step in over 20 years to redesign and restructure the IRS into an agency with a singular mission – quality taxpayer service."

The House has approved a bipartisan repeal of the Affordable Care Act’s (ACA) so-called "Cadillac"excise tax on certain high-cost insurance plans.

The House has approved a bipartisan repeal of the Affordable Care Act’s (ACA) so-called "Cadillac"excise tax on certain high-cost insurance plans.

ACA Cadillac Tax Repeal

The Middle Class Health Benefits Tax Repeal Bill (HR 748) cleared the House on the evening of July 17 by a 419-to-6 vote. The bipartisan bill would repeal the 40 percent excise tax under the ACA known as the "Cadillac tax" on certain high-cost employer-sponsored health care plans.

Congress has repeatedly delayed the ACA’s "Cadillac" tax, which is currently set to go into effect in 2022. However, HR 748 would fully repeal the tax.

Although the measure has bipartisan support in the Senate, as for when it will get its legs in the upper chamber remains to be seen. Lately, Senate Majority Leader Mitch McConnell, R-KY., has been viewed on Capitol Hill as focusing more on moving nominations than considering tax bills.

HR 748’s Large Price Tag May Signal Hope for Tax Extenders

Notably, HR 748 dodged House Democrats’ "pay as you go" rules for tax legislation, thus carrying with it a large price tag with no offsets. The nonpartisan Congressional Budget Office (CBO) has estimated that the bill would cost the federal government more than $196 billion over 10 years.

Senate Finance Committee (SFC) Chairman Chuck Grassley, R-Iowa, has signaled that Democrats’ support for repealing the ACA’s "Cadillac"tax without pay-fors may signal a newly opened door for tax extenders. Grassley has consistently expressed that he is focused on addressing the previously and soon to be expired tax breaks known as tax extenders but has been waiting for the Democratic controlled House to send such a bill, noting that tax legislation must originate in the House.

However, House Democrats’ tax extenders bill, the Taxpayer Certainty and Disaster Tax Relief Bill of 2019 (HR 3301) would offset its costs by causing the GOP tax law’s increase in estate tax exemption amounts to sunset early at the beginning of 2023. Under the Tax Cuts and Jobs Act (TCJA) ( P.L. 115-97), the estate tax provisions would expire at the start of 2026.

The bill cleared the House Ways and Means Committee last month but has not yet reached the House floor. Senate Republicans have called any proposal to repeal provisions under the TCJA a "nonstarter."

The IRS has released final regulations that clarify the employment tax treatment of partners in a partnership that owns a disregarded entity.

The IRS has released final regulations that clarify the employment tax treatment of partners in a partnership that owns a disregarded entity.

The Treasury Department and the IRS had issued the temporary regulations ( T.D. 9766) to clarify that the rule that a disregarded entity is treated as a corporation for employment tax purposes does not apply to the self-employment tax treatment of any individuals who are partners in a partnership that owns a disregarded entity. The temporary regulations continued to explicitly provide that the owner of a disregarded entity who is treated as a sole proprietor for income tax purposes is subject to self-employment taxes. A notice of proposed rulemaking ( REG-114307-15) cross-referencing T.D. 9766was published on the same day.

The final regulations adopt the proposed regulations as amended. The corresponding temporary regulations are removed.

Disregarded Entity

These regulations affect partners in a partnership that owns a disregarded entity, and contain amendments to 26 CFR part 301. Generally, under Reg. §301.7701-2(c)(2)(i) and except as otherwise provided, a business entity that has a single owner and is not a corporation under Reg. §301.7701-2(b)is disregarded as an entity separate from its owner (a disregarded entity). However, Reg. §301.7701-2(c)(2)(iv)(B) treats a disregarded entity as a corporation for purposes of employment taxes imposed under Subtitle C of the Internal Revenue Code. This exception to the treatment of disregarded entities does not apply to taxes imposed under Subtitle A of the Code, including self-employment taxes.

Effective Date

These regulations are effective on July 2, 2019.

Final regulations allow employers to voluntarily truncate employees’ social security numbers (SSNs) on copies of Forms W-2, Wage and Tax Statement, furnished to employees. The truncated SSNs appear on the forms as IRS truncated taxpayer identification numbers (TTINs). The regulations also clarify and provide an example of how the truncation rules apply to Forms W-2.

Final regulations allow employers to voluntarily truncate employees’ social security numbers (SSNs) on copies of Forms W-2, Wage and Tax Statement, furnished to employees. The truncated SSNs appear on the forms as IRS truncated taxpayer identification numbers (TTINs). The regulations also clarify and provide an example of how the truncation rules apply to Forms W-2.

Why Truncate?

The Protecting Americans from Tax Hikes (PATH) Act of 2015 ( P.L. 114-113) amended Code Sec. 6051(a)(2) by replacing the requirement that employers include employees’ SSNs on copies of Forms W-2 furnished to employees with a requirement to use an "identifying number for the employee."Because the SSN was no longer required to appear on Forms W-2 furnished to employees, the IRS published proposed regulations in 2017 to allow employers to truncate employees’ SSNs on those Forms W-2 ( REG-105004-16). The amendments were intended to aid employers’ efforts to protect employees from identity theft.

The final regulations adopt the proposed regulations without substantive changes to the content of the rules.

SSN Truncation on Forms W-2

The final regulations permit employers to truncate employees’ SSNs on copies of:

• Forms W-2 furnished to employees to report wages paid, employment taxes withheld, etc.;
• Forms W-2 furnished to employees to report wages paid in the form of group-term life insurance;
• Forms W-2 furnished to payees to report third-party sick pay; and
• Forms W-2c furnished to correct errors on Forms W-2.

The regulations do not apply to any other forms. Also, truncation is not mandatory; the regulations permit truncation but do not require it.

Under the general truncation rules, a TTIN cannot be used on a statement or document if a statute, regulation, other guidance published in the Internal Revenue Bulletin, form, or instructions:

• specifically requires use of an SSN, IRS individual taxpayer identification number (ITIN), IRS adoption taxpayer identification number (ATIN), or IRS employer identification number (EIN); and
• does not specifically permit truncation.

For instance, an employer cannot truncate an employee’s SSN on copies of Forms W-2 filed with the Social Security Administration.

The IRS intends to incorporate the revised regulations into forms and instructions.

Effective Date; Applicability Date

The final regulations are effective on July 3, 2019, but when they apply varies. Reg. §31.6051-1, Reg. §31.6051-3, and Reg. §1.6052-2, as amended, apply for statements required to be filed and furnished under Code Sec. 6051 and Code Sec. 6052 after December 31, 2020. Reg. §31.6051-2, as amended, applies on July 3, 2019. Reg. §301.6109-4, as amended, applies to returns, statements, and other documents required to be filed or furnished after December 31, 2020.

IRS final regulations provide rules that apply when the lessor of investment tax credit property elects to pass the credit through to a lessee. If this election is made, the lessee is generally required to include the credit amount in income (50 percent of the energy investment credit). The income is included in income ratably over the shortest MACRS depreciation period that applies to the investment credit property. No basis reduction is made to the investment credit property.

IRS final regulations provide rules that apply when the lessor of investment tax credit property elects to pass the credit through to a lessee. If this election is made, the lessee is generally required to include the credit amount in income (50 percent of the energy investment credit). The income is included in income ratably over the shortest MACRS depreciation period that applies to the investment credit property. No basis reduction is made to the investment credit property.

Partners and S shareholders who receive the credit (i.e., are the ultimate credit claimants) must make income inclusions in proportion to their share of the credit.

No Basis Increase for Partners and S Shareholders

The regulations resolve a contentious issue against taxpayers. They provide that a partner’s income inclusions are not treated as an item of partnership income under subchapter K. A similar rule applies to S corporations. Therefore, basis adjustment rules that would increase a partner’s outside basis or S shareholder’stock basis if the income inclusion amounts were treated as items of income do not apply. The IRS says its interpretation is appropriate because the investment credit and limitations on the investment credit are determined at the partner and S shareholder level.

Coordination With Recapture Rules

If a recapture event occurs an adjustment is made to the lessee’s (or ultimate claimant’s) gross income to account for any difference between the amounts that were included in income and the credit that is allowed after recapture. Special rules are provided when the amount of the unrecaptured credit exceeds the income inclusions and when the income inclusions exceed the unrecaptured credit.

Election to Accelerate Income Inclusion Upon Lease Termination

The lessee (or ultimate claimant) may make an irrevocable election to include in gross income any remaining income inclusion amounts in the tax year in which a lease terminates or is otherwise disposed of. If a partner or S shareholder disposes of its partnership or S corporation interest, the partner or S shareholder may also make an irrevocable election to include remaining inclusion amounts in income in the year of disposition. These elections may only be made if the recapture period has expired and a recapture event had not occurred during the recapture period.

Effective Date

The final regulations are effective on July 17, 2019 and apply to investment credit property placed in service on or after September 19, 2016.

Tax writers in Congress are set to begin debating and writing tax reform legislation. On September 27, the White House and GOP leaders in Congress released a framework for tax reform. The framework sets out broad principles for tax reform, leaving the details to the two tax-writing committees: the House Ways and Means Committee and the Senate Finance Committee. How quickly lawmakers will write and pass tax legislation is unclear. What is clear is that tax reform is definitely one of the top issues on Congress’ Fall agenda.

Tax writers in Congress are set to begin debating and writing tax reform legislation. On September 27, the White House and GOP leaders in Congress released a framework for tax reform. The framework sets out broad principles for tax reform, leaving the details to the two tax-writing committees: the House Ways and Means Committee and the Senate Finance Committee. How quickly lawmakers will write and pass tax legislation is unclear. What is clear is that tax reform is definitely one of the top issues on Congress’ Fall agenda.

Individuals

The GOP framework proposes consolidating the current seven individual tax rates into three: 12, 25 and 35 percent. However, the framework leaves open the possibility of an additional top rate “to the highest-income taxpayers to ensure that the reformed tax code is at least as progressive as the existing tax code and does not shift the tax burden from high-income to lower- and middle-income taxpayers.”

For individuals, the GOP framework also proposes to:

• Eliminate the alternative minimum tax
• Roughly double the standard deduction
• Repeal the federal estate tax
• Preserve the home mortgage interest deduction and the deduction for charitable contributions
• Eliminate most other itemized deductions
• Repeal the personal exemption for dependents
• Retain tax benefits that encourage work, higher education and retirement security

Family incentives

Family incentives have traditionally garnered bipartisan support in Congress and the GOP framework includes several. The child tax credit, for example, currently phases out when incomes reach certain levels. The GOP framework calls for increasing the income levels for the credit to unspecified amounts.   Another proposal would create a new non-refundable $500 credit for non-child dependents. The details would be left to the tax-writing committees.

Businesses

One pillar of the GOP framework is a corporate tax rate cut. The framework calls for a 20 percent corporate tax rate, down from the current 35 percent rate. Businesses that operate as passthroughs, such as S corporations, would have a maximum tax rate of 25 percent, subject to unspecified limitations to prevent abuses.

Other business proposals include:

• Enhanced expensing
• Limiting the deduction for net interest expenses by C corporations
• Eliminating the Code Sec. 199 deduction
• Preserving the research and development credit and tax preferences for low-income housing
• Reforming certain international taxation rules

Drafting legislation

After the GOP framework was released, the chairs of the tax writing committees said their committees would begin drafting legislation. The Ways and Means Committee is made up of 24 Republicans and 16 Democrats. Republicans also have a majority on the Senate Finance Committee but only by two votes (14 to 12). This narrow vote margin is likely to influence any tax bill out of the Senate Finance Committee. Our office will keep you posted of developments.

Extenders

A number of popular but temporary tax incentives have expired. Unless extended, these “extenders” will not be available to taxpayers when they file their 2017 returns in 2018. They include:

• Tax exclusion for canceled mortgage debt
• Mortgage insurance premium deductibility
• Higher education tuition deduction
• Special expensing rules for film, television, and theatrical productions
• Seven-year recovery period for motorsports entertainment complexes

Other tax bills

Several tax-related bills may be taken up by either the House or Senate, including:

• RESPECT Act, passed by the House and waiting for a vote in the Senate, would limit the IRS’s ability to seize assets related to structured transactions
• FY 2018 IRS budget bill, passed by the House and waiting for a vote in Senate, which would fund the IRS for FY 2018

Please contact our office if you have any questions about tax reform, the extenders or other tax bills.

As millions of Americans recover from Hurricanes Harvey, Irma and Maria, Congress is debating disaster tax relief. The relief would enhance the casualty loss rules, relax some retirement savings rules, and make other temporary changes to the tax laws, all intended to help victims of these recent disasters. At press time, a package of temporary disaster tax relief measures is pending in the House. The timeline for Senate action, however, is unclear.

As millions of Americans recover from Hurricanes Harvey, Irma and Maria, Congress is debating disaster tax relief. The relief would enhance the casualty loss rules, relax some retirement savings rules, and make other temporary changes to the tax laws, all intended to help victims of these recent disasters. At press time, a package of temporary disaster tax relief measures is pending in the House. The timeline for Senate action, however, is unclear.

Tax relief

In past years, after disasters similar to Hurricanes Harvey, Irma and Maria, Congress passed disaster tax relief measures. After Hurricane Katrina, far-reaching disaster tax relief was passed by Congress, which benefited businesses and individuals. In 2008, lawmakers passed a national disaster tax relief law. However, that law was temporary. After Hurricane Sandy several years ago, disaster tax relief was introduced in Congress but ultimately was not passed. Now, Congress is revisiting disaster tax relief.

Targeted tax relief

The House bill is the Disaster Tax Relief Act of 2017. The bill provides targeted tax relief to victims of Hurricanes Harvey, Irma and Maria. Unlike national disaster tax relief, discussed below, the measures in the House bill are temporary.

Included in the House bill is language to:

• Enhance the deduction for personal casualty losses
• Allow penalty-free access to retirement funds
• Encourage charitable giving
• Provide a tax credit to qualified employers
• Allow taxpayers to use prior year income for EITC and child tax credit

At press time, a similar disaster tax relief bill has not been introduced in the Senate. Reports have surfaced that the Senate Finance Committee may unveil some proposals in the near future. These proposals could mirror some or all of the ones in the House bill.

National disaster tax relief bill

In September, Rep. Bill Pascrell, D-New Jersey, and Rep. Tom Reed, R-New York, introduced the National Disaster Tax Relief Act of 2017. Their bill aims to create disaster tax relief not just for victims of Hurricanes Harvey, Irma and Maria, but victims of all disasters. The lawmakers modeled their 2017 bill on previous national disaster tax relief acts, including the legislation passed in 2008.

Like the House-passed temporary disaster tax relief bill, the National Disaster Tax Relief Act would relax the casualty loss rules. The National Disaster Tax Relief Act would also provide a temporary five-year net operating loss (NOL) carryback for qualified natural disaster losses; allow an affected business taxpayer to deduct certain qualified disaster cleanup expenses; and increase temporarily the limits that an affected business taxpayer could expense for qualifying Code Sec. 179 property.

Please contact our office if you have any questions about disaster tax relief.

IRS Exam staffing in fiscal year (FY) 2016, the latest tax year with statistics available, reached a 20-year low. As a result, the Treasury Inspector General for Tax Administration (TIGTA) has reported that the IRS undertook fewer audits.

IRS Exam staffing in fiscal year (FY) 2016, the latest tax year with statistics available, reached a 20-year low. As a result, the Treasury Inspector General for Tax Administration (TIGTA) has reported that the IRS undertook fewer audits.

Staffing

"Examination is a vitally important aspect of maintaining a voluntary tax compliance system because 85 percent of the Gross Tax Gap is comprised of underreported tax on timely filed returns," TIGTA reported. Although hiring increased in FY 2016, it did not make up for recent attrition and retirements, TIGTA found. Examination staffing in FY 2016 reached a 20-year low with 8,847 employees, a decrease of four percent from FY 2015 (9,189 employees) and 23 percent lower than FY 2012 (11,432 employees).

Overall, the number of IRS full-time employees has declined by some 14 percent since FY 2012. The decline in the number of employees is likely to continue, TIGTA predicted. Approximately 22 percent of full-time permanent employees in the IRS are eligible to retire, and the IRS expects this number to increase to 34 percent by 2019, TIGTA found. "Should this loss of staffing be realized, the gap created by the loss of knowledge and experience has the potential to materially affect the administration and enforcement of tax laws," TIGTA reported.

Audit coverage

Individuals. TIGTA reported that the IRS examined one of every 143 individual income tax returns in FY 2016. This reflected a 16 percent decline compared to FY 2015 and 30 percent fewer examinations than the five-year high reported in FY 2012. The IRS examined one in 17 returns in FY 2016 with more than $1 million in income, which, according to TIGTA, is a decline of 29 percent compared to FY 2015.

Corporations and S corps. TIGTA found that fewer corporate tax returns were examined during FY 2016 than any year since FY 2004. The number of S corp examinations fell 15 percent from FY 2015 to FY 2016 (one in every 295 S corp returns in FY 2016 compared to one in every 248 S corp returns in FY 2015).

Partnerships. Partnership examinations also declined, TIGTA found. The number of partnership returns examined decreased 24 percent from FY 2015 to 14,645 in FY 2016. "Due to a focus on partnership examinations in FY 2015, one of every 196 returns filed were examined; however, this number decreased to one of every 263 returns being examined in FY 2016," TIGTA reported.

TIGTA Ref. No. 2017-30-072

IRS Chief Counsel, in generic legal advice (AM-2017-003), recently described when a qualified employer may take into account the payroll tax credit for increasing research activities. The Protecting Americans from Tax Hikes Act of 2015 (PATH Act) created the payroll credit aimed at start-ups with little or no income tax liabilities. This tax break allows taxpayers to get the cash benefit of the payroll tax credit sooner as they reduce their payroll tax liability as payroll payments are made, instead of having to wait until the end of the quarter to receive the credit.

IRS Chief Counsel, in generic legal advice (AM-2017-003), recently described when a qualified employer may take into account the payroll tax credit for increasing research activities. The Protecting Americans from Tax Hikes Act of 2015 (PATH Act) created the payroll credit aimed at start-ups with little or no income tax liabilities. This tax break allows taxpayers to get the cash benefit of the payroll tax credit sooner as they reduce their payroll tax liability as payroll payments are made, instead of having to wait until the end of the quarter to receive the credit.

Background

A qualified business during a tax year may elect to apply a portion of its research credit against the 6.2 percent payroll tax imposed on the employer’s wage payments to employees. This payroll credit for research expenditures is limited to the lesser of: (a) the research credit for the tax year; (b) $250,000; or (c) the amount of the business credit for the tax year, including the research credit that may be carried forward to the tax year immediately after the election year.

Schedule B. Chief Counsel explained that if an employer is a semiweekly schedule depositor, it must complete Schedule B (Form 941), Report of Tax Liability for Semiweekly Schedule Depositors, and attach it to Form 941. Schedule B is also referred to as Record of Federal Tax Liability (ROFTL) for semiweekly schedule depositors. The IRS uses this information to determine if the employer made its federal employment tax deposits on time. Current Instructions for Schedule B describe the payroll tax credit.

Payroll credit

Employers, Chief Counsel explained, know the maximum amount of payroll tax credit potentially available for a quarter at the beginning of the quarter. This is because the return reflecting the payroll tax credit election on Form 6765, Credit for Increasing Research Activities, must have been filed before the quarter begins in which the employer can claim credit. However, the amount of the credit that is allowed for the quarter is limited to the employer Social Security tax on wages paid to the employer's employees during the quarter.

Therefore, as the employer makes payments of wages from the beginning of the quarter for which the payroll tax credit is taken, the employer can take the payroll tax credit into account for purposes of the Schedule B and for purposes of deposit liability on the Form 941 or other employment tax return, provided the employer later files Form 8974, "Qualified Small Business Payroll Tax Credit for Increasing Research Activities," Chief Counsel explained.

Further, the payroll tax credit should be taken against deposit liabilities and reflected on Schedule B as the employer incurs liability for employer Social Security tax on wages paid in the quarter to which it applies, beginning with the first payment of wages in the quarter. "It would be counter to the purpose of the payroll tax credit to allow it as a credit only when the employer files its Form 941 for the quarter claiming the credit and not as the employer is paying wages during the quarter subject to employer Social Security tax," Chief Counsel stated.

Deadline opportunity: The IRS also recently announced that it would allow start-up companies to make the payroll tax credit election on an amended return for the 2016 tax year, but as long as the amended return is filed by December 31, 2017.

Every year, millions of post-secondary students access the IRS Data Retrieval Tool (DRT) to complete the Free Application for Federal Student Aid (FAFSA). This year, the DRT is unavailable for FAFSA filers because of cybersecurity concerns. The information needed to complete the FAFSA can be found on a previously filed federal income tax return.

Every year, millions of post-secondary students access the IRS Data Retrieval Tool (DRT) to complete the Free Application for Federal Student Aid (FAFSA). This year, the DRT is unavailable for FAFSA filers because of cybersecurity concerns. The information needed to complete the FAFSA can be found on a previously filed federal income tax return.

FAFSA

To apply for federal student aid, an individual must complete and submit the FAFSA. He or she will automatically be considered for federal student aid. In addition, the individual's post-secondary institution may use his or her FAFSA information to determine eligibility for nonfederal aid. The DRT provides tax data that automatically fills in information for part of the FAFSA form.

Individuals who plan to attend post-secondary schools from July 1, 2017 to June 30, 2018 must submit the 2017-2018 FAFSA. Individuals will need tax information from 2015 to complete the 2017-2018 FAFSA.

Suspicious activity

Earlier this year, the IRS reported that cybercriminals may have tried to obtain tax information through the DRT. The agency's security filters identified fraudulent returns using information obtained from the DRT. According to the IRS, as many as 100,000 taxpayer accounts may have been compromised through the DRT by cyberthieves. In response, the IRS took the DRT offline.

Work-around

FAFSA filers can manually provide their tax return information, the IRS has instructed. Our office can help you prepare a FAFSA while the DRT is offline.

FAFSA filers can also use the IRS's online Get Transcript Tool. Individuals can obtain a Tax Return Transcript, which reflects most line items including adjusted gross income (AGI) from the original tax return filed, along with any forms and schedules. This transcript is only available for the current tax year and returns processed during the prior three years. Individuals can also obtain a Tax Account Transcript, which reflects basic data such as return type, marital status, adjusted gross income, taxable income and all payment types. This transcript is available for the current tax year and up to 10 prior years. Keep in mind that a transcript is not a photocopy of the return. A transcript can be confusing to read. Again, please contact our office for assistance.

Income-driven repayment plan

The DRT also provides tax data that automatically fills in information for the income-driven repayment (IDR) plan application for federal student loan borrowers. The DRT is online for DRT applications.

As the new administration and Congress get to work, tax reform is high on the agenda. Although legislative language has not been yet released, statements from tax writers in Congress shed some light on various proposals.

As the new administration and Congress get to work, tax reform is high on the agenda. Although legislative language has not been yet released, statements from tax writers in Congress shed some light on various proposals.

Tax reform

House Ways and Means Chair Kevin Brady, R-Texas, has predicted that tax reform will lower the tax rates for all businesses. "We are proposing a corporate rate of 20 percent and for small businesses, a top rate of no more than 25 percent," Brady said in February. As for the timeline of tax reform, Brady said that tax reform legislation will be unveiled in the "coming months," but "repeal and replacement of the Affordable Care Act (ACA) comes first.”

Senate Finance Committee Chair Orrin Hatch, R-Utah, has said that the Senate will work through its own tax reform process. "No one should expect the Senate to simply take up and pass a House tax reform bill," Hatch said in February. Hatch added that Senate tax writers are in the early stages of drafting a tax reform proposal. Hatch did not provide details of the proposal but said that House and Senate Republicans generally agree on basic principles, such as lower tax rates for individuals and businesses.

One area of potential friction is the House GOP’s so-called “border adjustability” proposal. Hatch has questioned if the border adjustment proposal, essentially taxing imports but not U.S. exports, is “in line with international trade obligations” and if “adjustments would need to be made to prevent shifting a tax burden onto specific industries.”

Democrats, although in agreement the tax code is in need of reform, have been critical of Republicans’ proposed solutions as appearing to focus on tax cuts for the wealthy. "They (Republicans) are for trickle-down economics…giving tax breaks to the wealthy, it trickles down and if somebody gets a job, that’s great, if they don’t, so be it,” House Minority Leader Nancy Pelosi, D-Calif., said in February. "You don’t receive economic security by tossing the rich even more tax breaks," she added.

Affordable Care Act

The Affordable Care Act (ACA) included a host of tax-related provisions. The ACA created the net investment income (NII) tax, the additional Medicare Tax, an excise tax on certain medical devices, and more. The ACA also imposes shared responsibility requirements on individuals and employers (known as the individual and employer mandates). Although President Trump and Republicans in Congress have called for repeal and replacement of the ACA, it is not clear at this time if repeal includes the ACA’s tax provisions. In February, Hatch said that all of the ACA’s taxes “need to go.”

The timeline for Congressional action on the ACA is expected to be known in March. GOP leaders in Congress have said that they will unveil an ACA repeal and replacement measure in March.

Pelosi said in February that Democrats have still not seen a repeal and replacement plan for the ACA. "They're supposed to have their plan to repeal the Affordable Care Act. We have not seen hide nor hair," Pelosi said. According to Pelosi, the GOP’s chosen route of reforming the healthcare law is a difficult endeavor "You have to know how to legislate," she said.

If you have any questions about tax reform, please contact our office.