The Treasury Department and the IRS have proposed regulations that identify occupations that customarily and regularly receive tips, and define "qualified tips" that eligible tip recipients may claim for the "no tax on tips" deduction under Code Sec. 224. This deduction was enacted as part of the the One Big Beautiful Bill Act (OBBBA) (P.L. 119-21).

The Treasury Department and the IRS have proposed regulations that identify occupations that customarily and regularly receive tips, and define "qualified tips" that eligible tip recipients may claim for the "no tax on tips" deduction under Code Sec. 224. This deduction was enacted as part of the the One Big Beautiful Bill Act (OBBBA) (P.L. 119-21).

Background

Under Code Sec. 224, an eligible individual can claim an income tax deduction for qualified tips received in tax years 2025 through 2028. The deduction is limited to $25,000 per tax year, and starts to phase out when modified adjusted gross income is above $150,000 ($300,000 for joint filers).

An employer must report qualified tips on an employee‘s Form W-2, or the employee must report the tips on Form 4137. A service recipient must report qualified tips on an information return furnished to a nonemployee payee (Form 1099-NEC, Form 1099-MISC, Form 1099-K).

If an individual tip recipient is "married" (under Code Sec. 7703), the deduction applies only if the individual and his or her spouse file a joint return. The deduction is not allowed unless the taxpayer includes his or her social security number (SSN) on their income tax return for the tax year. For this purpose, a SSN is valid only if it is issued to a U.S. citizen or a person authorized to work in the United States, and before the due date of the taxpayer’s return.

What is a Qualified Tip?

A "qualified tip" is a cash tip received in an occupation that customarily and regularly received tips on or before December 31, 2024. An amount is not a qualified tip unless (1) the amount received is paid voluntarily without any consequence for nonpayment, is not the subject of negotiation, and is determined by the payor; (2) the trade or business in which the individual receives the amount is not a specified service trade or business under Code Sec. 199A(d)(2); and (3) other requirements established in regulations or other guidance are satisfied.

The proposed regulations define qualified tips—and payments that are not qualified tips— based on several factors, including the following:

• Qualified tips must be paid in cash or an equivalent medium, such as check, credit card, debit card, gift card, tangible or intangible tokens that are readily exchangeable for a fixed amount in cash, or another form of electronic settlement or mobile payment application that is denominated in cash.

• Qualified tips do not include items paid in any medium other than cash, such as event tickets, meals, services, or other assets that are not exchangeable for a fixed amount in cash (such as most digital assets).

• Qualified tips must be received from customers. For employees, qualified tips can be received through a mandatory or voluntary tip-sharing arrangement, such as a tip pool.

• Qualified tips must be paid voluntarily by the customer, and not be subject to negotiation.

• Qualified tips do not include some service charges. For example, if a restaurant imposes an automatic 18-percent service charge for large parties and distributes that amount to waiters, bussers and kitchen staff, the amounts distributed are not qualified tips if the charge is added with no option for the customer to disregard or modify it.

• Qualified tips do not include amounts received for an illegal activity (a service the performance of which is a felony or misdemeanor under applicable law), prostitution services, or pornographic activity.

• Qualified tips do not include tips received by an employee or other service provider who has an ownership interest in or is employed by the tip payor.

The proposed regulations also include examples that illustrate some of the requirements and restrictions.

Occupations that Customarily and Regularly Receive Tips

The proposed regulations list the occupations that customarily and regularly received tips on or before December 31, 2024. For each occupation, the list provides a numeric Treasury Tipped Occupation Code (TTOC), an occupation title, a description of the types of services performed in the occupation, illustrative examples of specific occupations, and the related Standard Occupation Classification (SOC) system code(s) published by the Office of Management and Budget (OMB).

The list groups the eligible occupations into eight categories:

• Beverage and Food Service—includes bartenders; wait staff; food servers outside of a restaurant; dining room and cafeteria attendants and bartender helpers; chefs and cooks; food preparation workers; fast food and counter workers; dishwashers; host staff, restaurant, lounge, and coffee shop; bakers

• Entertainment and Events—includes gambling dealers; gambling change persons and booth cashiers; gambling cage workers; gambling and sports book writers and runners; dancers; musicians and singers; disc jockeys (but not radio disc jockeys); entertainers and performers; digital content creators; ushers, lobby attendants, and ticket takers; locker room, coatroom, and dressing room attendants

• Hospitality and Guest Services—includes baggage porters and bellhops; concierges; hotel, motel, and resort desk clerks; maids and housekeeping cleaners

• Home Services—includes home maintenance and repair workers; home landscaping and groundskeeping workers; home electricians; home plumbers; home heating and air conditioning mechanics and installers; home appliance installers and repairers; home cleaning service workers; locksmiths; roadside assistance workers

• Personal Services—includes personal care and service workers; private event planners; private event and portrait photographers; private event videographers; event officiants; pet caretakers; tutors; nannies and babysitters

• Personal Appearance and Wellness—includes skincare specialists; massage therapists; barbers, hairdressers , hairstylists, and cosmetologists; shampooers; manicurists and pedicurists; eyebrow threading and waxing technicians; makeup artists; exercise trainers and group fitness instructors; tattoo artists and piercers; tailors; shoe and leather workers and repairers

• Recreation and Instruction—includes golf caddies; self-enrichment teachers; recreational and tour pilots; tour guides; travel guides; sports and recreation instructors

• Transportation and Delivery—includes parking and valet attendants; taxi and rideshare drivers and chauffeurs; shuttle drivers; goods delivery people; personal vehicle and equipment cleaners; private and charter bus drivers; water taxi operators and charter boat workers; rickshaw, pedicab, and carriage drivers; home movers

Applicability Dates

The proposed regulations apply for tax years beginning after December 31, 2024. Taxpayers may rely on the proposed regulations for those tax years, and on or before the date the final regulations are published in the Federal Register, but only if the proposed regulations are followed in their entirety and in a consistent manner.

Request for Comments, Public Hearing

Written or electronic comments must be received by October 22, 2025 (30 days after the proposed regulations are published in the Federal Register). Comments may be submitted electronically via the Federal eRulemaking Portal (https://www.regulations.gov), or on paper submitted to: CC:PA:01:PR (REG-110032-25), Room 5203, Internal Revenue Service, P.O. Box 7604, Ben Franklin Station, Washington, DC 20044.

A public hearing is being held on October 23, 2025, at 10:00 a.m. Eastern Time (ET). Requests to speak and outlines of topics to be discussed at the public hearing must be received by October 22, 2025; if no outlines are received by that date, the public hearing will be cancelled. Requests to attend the public hearing must be received by 5:00 p.m. ET on October 21, 2023.

Proposed Regulations, NPRM REG-110032-25

The IRS issued final regulations implementing the Roth catch-up contribution requirement and other statutory changes to catch-up contributions made by the SECURE 2.0 Act of 2022 (P.L. 117-328). The regulations affect qualified retirement plans that allow catch-up contributions (including 401(k) plans, 403(b) plans, governmental plans, SEPs and SIMPLE plans) and their participants. The regulations generally apply for contribtions in tax years beginning after December 31, 2026, with extensions for collectively bargained, multiemployer, and governmental plans. However, plans may elect to apply the final rules in earlier tax years.

The IRS issued final regulations implementing the Roth catch-up contribution requirement and other statutory changes to catch-up contributions made by the SECURE 2.0 Act of 2022 (P.L. 117-328). The regulations affect qualified retirement plans that allow catch-up contributions (including 401(k) plans, 403(b) plans, governmental plans, SEPs and SIMPLE plans) and their participants. The regulations generally apply for contribtions in tax years beginning after December 31, 2026, with extensions for collectively bargained, multiemployer, and governmental plans. However, plans may elect to apply the final rules in earlier tax years.

The SECURE 2.0 Act amended the catch-up contribution provision to allow an increased contribution limit for participants aged 60 through 63 and an increased contribution limit for certain SIMPLE plans. The final regulations provide that SIMPLE plans may allow participant to take advantage of one of these increased contribution limits, but not both. However, beginning with the 2025 calendar year, a SIMPLE plan that provides for increased contribution limits for all participants may instead permit participants attaining age 60 to 63 to contribute the full amount allowed for that age group.

With respect to mandatory Roth catch-up contributions for particpants whose income exceeds a statutory threshold, the final regulations allow 401(k) and 403(b) plans to automatically treat catch-up contributions as Roth for affected participants, provided an opt-out opportunity is offered. The final regulations do not include a rule allowing deemed Roth elections for all employees' catch-up contributions, only for those employees whose income exceeds the threshold. In response to comments, the final regulations provide that deemed elections must cease within a reasonable period of time following the date on which the employee no longer meets the mandatory Roth threshold or an amended Form W-2 is filed or furnished to the employee indicating that the employee no longer meets the mandatory Roth threshold. As a result, Roth catch-up contributions made pursuant to the deemed election before the end of the reasonable period of time need not be recharacterized as pre-tax catch-up contributions. The IRS further indicated that the plan must be amended to implement deemed Roth elections, and that the deadline for adopting amendments implementing the SECURE 2.0 Act is generally December 31, 2026.

The final regulations provide two correction methods to address pre-tax contributions that should have been designated Roth. First, a plan may transfer pre-tax contributions to the participant's Roth account and report the contribution as an elective deferral that is a designated Roth contribution on the participant's Form W-2. This correction method is available only if the participant's Form W-2 for that year has not yet been filed or furnished to the participant. Alternatively, the plan can directly roll over the elective deferrals that would be catch-up contributions if they had been designated Roth contributions (adjusted for earnings and losses) from the participant’s pre-tax account to the participant’s designated Roth account and report the rollover on Form 1099-R. Failures do not need to be corrected if the amount of the pre-tax elective deferral that was required to be a designated Roth contribution does not exceed $250, or if the participant was incorrectly treated as subject to the Roth catch-up contribution requirement due to a Form W-2 that is later amended.

T.D. 10033

IR-2025-91

Revenue Procedure 2025-28 instructs taxpayers on how to make various elections, file amended returns or change accounting methods for research or experimental expenditures as provided under the One, Big, Beautiful Bill Act (P.L. 119-21). The revenue procedure also provides transitional rules, modifies Rev. Proc. 2025-23, and grants an extension of time for partnerships, S corporations, C corporations, individuals, estates and trusts, and exempt organizations to file superseding 2024 federal income tax returns.

Revenue Procedure 2025-28 instructs taxpayers on how to make various elections, file amended returns or change accounting methods for research or experimental expenditures as provided under the One, Big, Beautiful Bill Act (P.L. 119-21). The revenue procedure also provides transitional rules, modifies Rev. Proc. 2025-23, and grants an extension of time for partnerships, S corporations, C corporations, individuals, estates and trusts, and exempt organizations to file superseding 2024 federal income tax returns.

Background

The Tax Cuts and Jobs Act (TCJA) required taxpayers to capitalize and amortize specified research or experimental expenditures over 5 years for domestic research or 15 years for foreign research, beginning with taxable years after December 31, 2021. The OBBB Act, enacted July 4, significantly modified these rules by adding new Code Sec. 174A to allow immediate deduction of domestic research or experimental expenditures while retaining the capitalization and amortization requirements only for foreign research expenditures.

Code Sec. 174A provides that domestic research or experimental expenditures paid or incurred in taxable years beginning after December 31, 2024, are generally deductible when paid or incurred. Alternatively, taxpayers may elect under Code Sec. 174A(c) to capitalize these expenditures and amortize them over at least 60 months, beginning when the taxpayer first realizes benefits from the expenditures.

The OBBB Act also provides transition relief, including retroactive application options for small business taxpayers and methods for recovering previously capitalized amounts.

Code Sec. 280C(c)(2) Elections and Revocations

Eligible small business taxpayers may make late elections under Code Sec. 280C(c)(2) to reduce their research credit in lieu of reducing their deductible research expenditures or revoke prior Code Sec. 280C(c)(2) elections. These are available for applicable taxable years where the original return was filed before September 15, 2025.

Elections are made by adjusting the research credit amount on amended returns, attaching amended Form 6765 marked with the appropriate revenue procedure reference, and including required declarations.

Code Sec. 174A(c) Election Procedures

For domestic research or experimental expenditures paid or incurred in taxable years beginning after December 31, 2024, taxpayers may elect to capitalize and amortize these expenditures under Code Sec. 174A(c). The election must be made by the due date of the return for the first applicable taxable year by attaching a statement specifying the amortization period (not less than 60 months) and the month when benefits are first realized.

Automatic Consent for Accounting Method Changes

Rev. Proc. 2025-28 modifies Rev. Proc. 2025-23 to provide automatic consent procedures for various accounting method changes related to research expenditures:

changes to comply with Code Sec. 174 for expenditures paid or incurred before January 1, 2025;

changes to implement the new Code Sec. 174A deduction or amortization methods for expenditures paid or incurred after December 31, 2024; and

changes to comply with modified Code Sec. 174 requirements for foreign research expenditures.

For the first taxable year beginning after December 31, 2024, taxpayers may use statements in lieu of Form 3115 for certain accounting method changes, with simplified procedures and waived duplicate filing requirements.

Small Business Retroactive Election

Small business taxpayers meeting the Code Sec. 448(c) gross receipts test (average annual gross receipts of $31,000,000 or less for 2025) may elect to retroactively apply Code Sec. 174A to domestic research or experimental expenditures paid or incurred in taxable years beginning after December 31, 2021. This election allows eligible taxpayers to either deduct these expenditures in the year paid or incurred or elect the Code Sec. 174A(c) amortization method.

The election is made by attaching a statement entitled "FILED PURSUANT TO SECTION 3.03 OF REV. PROC. 2025-28" to the taxpayer's original or amended federal income tax return for each applicable taxable year. The statement must include the taxpayer's identification information, declarations regarding tax shelter status and gross receipts test compliance, and specification of the chosen method.

Elections made on amended returns must be filed by July 6, 2026, subject to the normal statute of limitations under Code Sec. 6511 for refund claims.

Relief for Previously Filed Returns

Rev. Proc. 2025-28 grants automatic six-month extensions for eligible taxpayers to file superseding returns for 2024 taxable years. This relief is available to taxpayers who filed returns before September 15, 2025, without extensions, and need to make elections or method changes provided by the revenue procedure.

The extension applies to partnerships, S corporations, C corporations, individuals, trusts, estates, and exempt organizations with 2024 taxable years ending before September 15, 2025, where the original due date was before September 15, 2025.

Effective Date

Most provisions of Rev. Proc. 2025-28 are effective August 28, 2025. The modified automatic change procedures apply to Forms 3115 filed after August 28, 2025, with transition rules for taxpayers who properly filed duplicate copies before November 15, 2025.

Rev. Proc. 2025-28

The shareholders of S corporations engaged in cannabis sales could not include wages disallowed under Code Sec. 280E when calculating the Code Sec. 199A deduction. The Court reasoned that only wages "properly allocable to qualified business income" qualify, and nondeductible wages cannot be so allocated under the statute.

The shareholders of S corporations engaged in cannabis sales could not include wages disallowed under Code Sec. 280E when calculating the Code Sec. 199A deduction. The Court reasoned that only wages "properly allocable to qualified business income" qualify, and nondeductible wages cannot be so allocated under the statute.

The individuals owned three S corporations and reported pass-through income for the tax years at issue. Two corporations, engaged in cannabis sales, were subject to Code Sec. 280E, which bars deductions for expenses of businesses trafficking in controlled substances. Both entities paid significant W-2 wages, but portions were nondeductible under Code Sec. 280E. Petitioners claimed the full amount of reported wages in computing the Code Sec. 199A deduction.

The IRS reduced the deductions, asserting that only deductible wages could count as W-2 wages under Code Sec. 199A. The Court agreed, finding that Code Sec. 199A(b)(4)(B) excludes any amount not "properly allocable to qualified business income," and Code Sec. 199A(c)(3)(A)(ii) limits qualified items to those "allowed in determining taxable income." Because nondeductible wages are not allowed in determining taxable income, they cannot be W-2 wages. "Although certain amounts may have been reported by an employer to an employee in a Form W-2," the Court explained, "those amounts do not constitute "W-2 wages" for purposes of 199A if they are not properly allocated to qualified business income."

A dissenting judge argued that Congress intended the wage limitation to encourage job creation and that wages properly allocable to a trade or business should count regardless of deductibility. The majority, however, concluded that statutory text foreclosed this interpretation.

A.A. Savage, 165 TC No. 5, Dec. 62,714

A married couple was not entitled to claim a plug-in vehicle credit after the year in which their vehicle was first placed in service. 

A married couple was not entitled to claim a plug-in vehicle credit after the year in which their vehicle was first placed in service. The Tax Court explained that Code Sec. 30D provides a one-time credit available only in the year a qualified vehicle is first placed in service, meaning when it is ready and available for its intended function. The couple purchased a new plug-in electric vehicle and continued to claim the credit in later years. The IRS disallowed the credit for the tax year at issue and determined a deficiency. An accuracy-related penalty was also proposed but later conceded. Relying on regulations interpreting similar provisions under the general business credit, the Court emphasized that once the vehicle was in use in the year of purchase, it was considered placed in service. Accordingly, the Court held that the credit could not be claimed again in subsequent years.

A. Moon, 165 TC No. 4, Dec. 62,712

The Financial Crimes Enforcement Network (FinCEN) has proposed regulations that would amend the Anti-Money Laundering/Countering the Financing of Terrorism (AML/CFT) Program and Suspicious Activity Report (SAR) Filing Requirements for registered investment advisers (IA AML Rule) by delaying the obligations of covered investment advisers from January 1, 2026, to January 1, 2028. 

The Financial Crimes Enforcement Network (FinCEN) has proposed regulations that would amend the Anti-Money Laundering/Countering the Financing of Terrorism (AML/CFT) Program and Suspicious Activity Report (SAR) Filing Requirements for registered investment advisers (IA AML Rule) by delaying the obligations of covered investment advisers from January 1, 2026, to January 1, 2028. The proposed regulation follows an exemptive relief order issued earlier this summer (FinCEN Exemptive Relief Order, August 5, 2025).

The IA AML Rule requires covered investment advisers to establish AML/CFT programs, report suspicious activity, and keep relevant records, among other requirements.

By delaying the effective date, FinCEN states that it will have an opportunity to review the IA AML Rule, and ensure that the rule is effectively tailored to the diverse business models and risk profiles of firms in the investment adviser sector. According to FinCEN, the review may also provide an opportunity to reduce any unnecessary or duplicative regulatory burden, and ensure the IA AML Rule strikes an appropriate balance between cost and benefit, while still adequately protecting the U.S. financial system and guarding against money laundering, terrorist financing, and other illicit finance risks.

Request for Comments

FinCEN invites interested parties to submit comments on the proposed delay in the effective date of the IA AML Rule. Written or electronic comments must be received by October 22, 2025 (30 days after the proposed regulations are published in the Federal Register). Comments may be submitted electronically via the Federal eRulemaking Portal (https://www.regulations.gov), or by mail to: Policy Division, Financial Crimes Enforcement Network, P.O. Box 39, Vienna, VA 22183. Refer to Docket Number FINCEN-2025-0072 and RIN 1506-AB58 and 1506-AB69.

FinCEN Proposed Rule RIN-1506-AB58 and 1506-AB69

The IRS has issued a revenue procedure with a safe harbor that allows certain interests in rental real estate to be treated as a trade or business for purposes of the Code Sec. 199A qualified business income (QBI) deduction. The safe harbor is intended to lessen taxpayer uncertainty on whether a rental real estate interest qualifies as a trade or business for the QBI deduction, including the application of the aggregation rules in Reg. §1.199A-4.

The IRS has issued a revenue procedure with a safe harbor that allows certain interests in rental real estate to be treated as a trade or business for purposes of the Code Sec. 199A qualified business income (QBI) deduction. The safe harbor is intended to lessen taxpayer uncertainty on whether a rental real estate interest qualifies as a trade or business for the QBI deduction, including the application of the aggregation rules in Reg. §1.199A-4.

QBI Deduction and Rental Real Estate
Under Code Sec. 199A, certain noncorporate taxpayers can deduct up to 20 percent of the taxpayer’s QBI from each of the taxpayer's qualified trades or businesses, including those operated through a partnership, S corporation, or sole proprietorship. Certain relevant passthrough entities (RPEs) (partnerships, S corporations, trust funds) calculate the deduction and pass it along to their owners or beneficiaries. A qualified trade or business is generally any trade or business under Code Sec. 162, but not a specified service trade or business (SSTB) or a trade or business of performing services as an employee.

Rental or licensing of tangible or intangible property (i.e., rental activity) that is not a Code Sec. 162 trade or business is still treated as a trade or business for the QBI deduction if the property is rented or licensed to a trade or business conducted by the individual or a RPE which is commonly controlled under Reg. §1.199A-4 ( Reg. §1.199A-1(b)(14)).

Earlier this year, the IRS released a proposed revenue procedure with a safe harbor for treating a rental real estate enterprise as a trade or business under Code Sec. 199A ( Notice 2019-7, I.R.B. 2019-9, 740). The IRS has issued the new revenue procedure after considering public comments on Notice 2019-7.

Rental Real Estate Enterprise
The new safe harbor applies to a "rental real estate enterprise." This is an interest in real property held for the production of rents, and may consist of an interest in a single property or interests in multiple properties. The taxpayer or RPE must hold each interest directly or through a disregarded entity, and may either:

• treat each interest in similar property held for the production of rents as a separate rental real estate enterprise; or
• treat interests in all similar properties held for the production of rents as a single rental real estate enterprise.

Properties are similar if they are part of the same rental real estate category: either residential or commercial. Commercial real estate held for the production of rents can only be part of the same enterprise with other commercial real estate. Residential properties can only be part of the same enterprise with other residential properties.

A taxpayer or RPE that treats interests in similar properties as a single rental real estate enterprise must continue to treat interests in all similar properties, including newly acquired properties, as a single rental real estate enterprise if it continues to rely on the safe harbor. However, a taxpayer or RPE that chooses to treat its interest in each residential or commercial property as a separate rental real estate enterprise can choose to treat its interests in all similar commercial or all similar residential properties as a single rental real estate enterprise in a future year.

An interest in mixed-use property—a single building that combines residential and commercial units—can be treated as a single rental real estate enterprise, or bifurcated into separate residential and commercial interests. A mixed-use property interest that is treated as a single rental real estate enterprise cannot be treated as part of the same enterprise as other residential, commercial, or mixed-use property.

Safe Harbor Requirements
The safe harbor determination must be made annually. For a rental real estate enterprise to qualify for the safe harbor, all of the following requirements must be met during the tax year:

• Separate books and records are maintained to reflect income and expenses for each rental real estate enterprise. If an enterprise has more than one property, the requirement can be met if income and expense information statements for each property are maintained and then consolidated.
• For rental real estate enterprises in existence for less than four years, 250 or more hours of rental services are performed per year. For rental real estate enterprises in existence for at least four years, 250 or more hours of rental services are performed per year in any three of the five consecutive tax years that end with the tax year.
• The taxpayer maintains contemporaneous records (including time reports, logs, or similar documents) on the hours of all services performed, a description of all services performed, the dates when the services were performed, and who performed the services. For services performed by employees or independent contractors, the taxpayer may provide a description of the rental services, the amount of time generally spent performing the services, and the time, wage, or payment records for the employee or independent contractor. Records must be made available for inspection at the IRS's request. (The contemporaneous records requirement does not apply to tax years that begin before January 1, 2020.)
• For each tax year for which it relies on the safe harbor, the taxpayer or RPE must attach a statement to a timely filed original return (or an amended return for the 2018 tax year only) that includes: (i) a description (including the address and rental category) of all rental real estate properties in each rental real estate enterprise; (ii) a description (including the address and rental category) of rental real estate properties acquired and disposed of during the tax year; and (iii) a representation that the requirements of Rev. Proc. 2019-38 have been satisfied.

"Rental services" include, but are not limited to:

• advertising to rent or lease the real estate;
• negotiating and executing leases;
• verifying information contained in prospective tenant applications;
• collecting rent;
• daily operation, maintenance, and repair of the property, including purchasing materials and
• supplies;
• managing the real estate; and
• supervising employees and independent contractors.

Rental services does not include:

• financial or investment management activities, such as arranging financing;
• procuring property;
• studying and reviewing financial statements or reports on operations;
• improving property under Reg. §1.263(a)-3(d); or
• time spent traveling to and from the real estate.

If an enterprise fails to satisfy the safe harbor requirements, it can still be treated as a trade or business for the QBI deduction if it otherwise meets the trade or business definition in Reg. §1.199A-1(b)(14).

Property Excluded From Safe Harbor
The safe harbor does not apply to:

• real estate used by the taxpayer (including an owner or beneficiary of an RPE) as a residence under Code Sec. 280A(d);
• real estate rented or leased under a triple net lease, which includes a lease agreement that requires the tenant or lessee to pay taxes, fees, and insurance, and to pay for maintenance activities for a property in addition to rent and utilities;
• real estate rented to a trade or business conducted by a taxpayer or an RPE that is commonly controlled under Reg. §1.199A-4(b)(1)(i); or
• the entire rental real estate interest, if any portion of it is treated as an SSTB under Reg. §1.199A-5(c)(2).

Effective Date
The safe harbor applies to tax years ending after December 31, 2017. However, taxpayers and RPEs can rely on the prior safe harbor in Notice 2019-7 for the 2018 tax year.

The IRS has issued final regulations that amend the rules relating to hardship distributions from Code Sec. 401(k) plans. The final regulations are substantially similar to the proposed regulations. Further, plans that complied with the proposed regulations satisfy the final regulations as well. The regulations are effective on September 23, 2019.

The IRS has issued final regulations that amend the rules relating to hardship distributions from Code Sec. 401(k) plans. The final regulations are substantially similar to the proposed regulations. Further, plans that complied with the proposed regulations satisfy the final regulations as well. The regulations are effective on September 23, 2019.

The final regulations:

• reflect statutory changes affecting Code Sec. 401(k) plans, including changes made by the Bipartisan Budget Act of 2018 ( P.L. 115-123); and
• affect participants in, beneficiaries of, employers maintaining, and administrators of plans that include cash or deferred arrangements or provide for employee or matching contributions.

Deemed Immediate and Heavy Financial Need
The final regulations modify the safe harbor list of expenses for which distributions are deemed to be made on account of an immediate and heavy financial need. The final regulations:

• add "primary beneficiary under the plan" as an individual for whom qualifying medical, educational, and funeral expenses may be incurred;
• modify the expense listed in existing Reg. §1.401(k)-1(d)(3)(iii)(B)(6) to provide that the limitations in Code Sec. 165(h)(5) do not apply for this purpose; and
• add to the list a new type of expense, relating to expenses incurred as a result of certain disasters.

Distribution Necessary to Satisfy Financial Need
The final regulations modify the rules for determining whether a distribution is necessary to satisfy an immediate and heavy financial need, by:

• eliminating any requirement that an employee be prohibited from making elective contributions and employee contributions after receipt of a hardship distribution; and
• eliminating any requirement to take plan loans prior to obtaining a hardship distribution.

In particular, the final regulations, like the proposed regulations, eliminate the safe harbor in existing Reg. §1.401(k)-1(d)(3)(iv)(E), under which a distribution is deemed necessary to satisfy the financial need only if elective contributions and employee contributions are suspended for at least six months after a hardship distribution is made and, if available, nontaxable plan loans are taken before the hardship distribution is made.

Expanded Sources for Hardship Distributions
The final regulations modify existing Reg. §1.401(k)-1(d)(3) to permit hardship distributions from Code Sec. 401(k) plans of elective contributions, qualified nonelective contributions (QNECs), qualified matching contributions (QMACs), and earnings on these amounts, regardless of when contributed or earned.

Section 403(b) Plans
A hardship distribution of Code Sec. 403(b) elective deferrals is subject to the rules and restrictions set forth in Reg. §1.401(k)-1(d)(3). Accordingly, the preamble to the proposed regulations had stated that the new rules relating to a hardship distribution of elective contributions from a Code Sec. 401(k) plan generally apply to Code Sec. 403(b) plans. Because this requirement is retained in the final regulations, at Reg. §1.401(k)-1(d)(3)(iii)(B), it applies to Code Sec. 403(b) plans.

Applicability Dates
The changes to the hardship distribution rules made by the Bipartisan Budget Act of 2018 are effective for plan years beginning after December 31, 2018.

Plan Amendments
The Treasury Department and IRS expect that plan sponsors will need to amend their plans’ hardship distribution provisions to reflect the final regulations, and any such amendment must be effective for distributions beginning no later than January 1, 2020. The deadline for amending a disqualifying provision is set forth in Rev. Proc. 2016-37, I.R.B. 2016-29,136.

Taxpayers may use the automatic consent procedures to change accounting methods to comply with the recent proposed regulations described above. Rev. Proc. 2018-31, I.R.B. 2018-22, 637, is modified.

Taxpayers may use the automatic consent procedures to change accounting methods to comply with the recent proposed regulations described above. Rev. Proc. 2018-31, I.R.B. 2018-22, 637, is modified.

The proposed regulations provide rules for:

• inclusion in gross income under the all events test for taxpayers with an applicable financial statement (AFS) ( NPRM REG-104870-18); and
• use of the deferral method for advance payments for taxpayers with or without an AFS ( NPRM REG-104554-18).

Certain qualifying taxpayers may apply for a change to comply with the proposed regulations without filing a Form 3115, Application for Change in Accounting Method.

Taxpayers Affected
The accounting change procedures for inclusion in gross income for taxpayers with an AFS generally apply to taxpayers with an AFS that want to:

• change to a method of accounting that treats an item of gross income as meeting the all events test no later than when the item is taken into account as revenue in its AFS under Code Sec. 451(b)(1)(A);
• in certain cases, allocate the transaction price to performance obligations under Code Sec. 451(b)(4);
• change to a method of accounting that complies with Proposed Reg. §1.451-3; or
• change to a method of accounting that complies with Proposed Reg. §1.451-8(c).

The procedures also apply to taxpayers that do not have an AFS and that want to change to a method of accounting that complies with Proposed Reg. §1.451-8(d).

In addition, the procedures apply to a change in AFS in order to apply certain revenue recognition methods of accounting.

Pending Nonautomatic Applications
The IRS will return any Form 3115 requesting a change in method of accounting available under this revenue procedure that:

• was filed on or before September 9, 2019, under the non-automatic procedures for a tax year beginning after December 31, 2017; and
• is pending with the National Office on September 9, 2019.

The National Office will send a letter to the taxpayer acknowledging the return of the Form 3115, and will return the user fee submitted with the form. A timely resubmitted Form 3115 will be considered filed as of the date the taxpayer originally filed the Form 3115 under the nonautomatic change procedures.

Effective Date
This revenue procedure is generally effective for tax years beginning after December 31, 2017. For specified credit card fees, it is effective for tax years beginning after December 31, 2018.

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."