Information Letters Released by IRS (INFO 2025-0006—2025-0008) IRS information letters have been released by the IRS National Office in response to a request for general information by taxpayers or by government officials on behalf of constituents or on their own...
PA - Fuel tax rates announced The Pennsylvania Department of Revenue (DOR) has announced motor fuel rates for 2026. The aviation gasoline tax rate remains at 5.7¢ per gallon, and the jet fuel rate remains at 1.7¢ per gallon thro...
In light of a recent Tax Court ruling, we are currently reviewing the files of our clients who are S corporation officers. It is possible that the decisions of the Tax Court may affect your corporation in the future.
In light of a recent Tax Court ruling, we are currently reviewing the files of our clients who are S corporation officers. It is possible that the decisions of the Tax Court may affect your corporation in the future. In their ruling, the Tax Court held that the sole shareholder and president of an S corporation performed duties similar to those an employee would perform and, therefore, had the status of employee for employment tax purposes. The IRS held the taxpayer liable for FICA and FUTA taxes that it failed to pay because of misclassification of the officer as an independent contractor.
Shareholder distributions versus salary payments may raise similar issues. For federal employment tax purposes, a corporate officer is considered an employee, unless the officer performs no services or only minor services to the corporation and neither receives nor is entitled to payment for these services. The form of payment is immaterial, the only relevant factor being whether the payments were actually received as compensation for employment. Distributions to shareholders may be reclassified as wages subject to FICA and FUTA taxes where compensation appears to be insufficient. Determining the range of reasonableness of compensation for your business where shareholder compensation should fall within that range depends upon many variables. With proper planning, we hope that you and your business can avoid similar scrutiny.
Please contact our office to review and discuss your corporation’s compensation structure.
The IRS has provided interim guidance on the deductions for qualified tips and qualified overtime compensation under the One Big Beautiful Bill Act (OBBBA) (P.L. 119-21). For tax year 2025, employers and other payors are not required to separately account for cash tips or qualified overtime compensation on Forms W-2, 1099-NEC, or 1099-MISC furnished to individual taxpayers.
The IRS has provided interim guidance on the deductions for qualified tips and qualified overtime compensation under the One Big Beautiful Bill Act (OBBBA) (P.L. 119-21). For tax year 2025, employers and other payors are not required to separately account for cash tips or qualified overtime compensation on Forms W-2, 1099-NEC, or 1099-MISC furnished to individual taxpayers. The notice addresses determining the amount of qualified tips and qualified overtime compensation for TY2025 and provides transition relief from the requirement that qualified tips must not be received in the course of a specified service trade or business.
Background
OBBBA added deductions for qualified tips underCode Sec. 224and qualified overtime compensation underCode Sec. 225. Both deductions are available for TYs beginning after December 31, 2024, and ending before January 1, 2029.
Deduction for Qualified Tips
Code Sec. 224(b)(2)limits the deduction amount based on a taxpayer’s modified adjusted gross income (MAGI). The deduction phases out for taxpayers with MAGI over $150,000 ($300,000 for joint filers). Qualified tips are defined as cash tips received by an individual taxpayer in an occupation that customarily and regularly received tips on or before December 31, 2024. Only cash tips that are separately accounted for on the Form W-2 or reported on Form 4137 are included in calculating the deduction.
Employers are not required to separately account for cash tips on the written statements furnished to individual taxpayers for 2025. Cash tips must be properly reported on the employee’s Form W-2. The employee is responsible for determining whether the tips were received in an occupation that customarily and regularly received tips on or before December 31, 2024.
For non-employees, cash tips must be included in the total amounts reported as other income on the Form 1099-MISC, or payment card/third-party network transactions on the Form 1099-K furnished to the non-employee.
Deduction for Qualified Overtime Compensation
Code Sec. 225(b)(1)limits this deduction amount not to exceed $12,500 per return ($25,000 in the case of a joint return) in a tax year. The deduction phases out for taxpayers with MAGI over $150,000 ($300,000 for joint filers). Qualified overtime compensation is the FLSA overtime premium, which is the additional half-time payment beyond an employee's regular rate for hours worked over 40 per week under FLSA section 207(a), as reported on a Form W-2, Form 1099-NEC, or Form 1099-MISC. The notice provides calculation methods for determining the FLSA-required portion when employers pay overtime at rates exceeding FLSA requirements.
A separate accounting of qualified overtime compensation will not appear on the written statement furnished to an individual for 2025. Individual taxpayers not receiving a separate accounting of qualified overtime compensation must determine whether they are FLSA-eligible employees, which may include asking their employers about their status under the FLSA. The notice provides reasonable methods and examples for determining the amount of qualified overtime compensation, including approaches for employees paid at rates exceeding time-and-a-half and special rules for public safety employees.
The IRS provided guidance on changes relating to health savings accounts (HSAs) under the One, Big, Beautiful Bill Act (OBBBA) (P.L. 119-21). These changes generally expand the availability of HSAs under Code Sec. 223.
The IRS provided guidance on changes relating to health savings accounts (HSAs) under the One, Big, Beautiful Bill Act (OBBBA) (P.L. 119-21). These changes generally expand the availability of HSAs underCode Sec. 223.
Background
To access HSAs, individual taxpayers (1) need to be covered under a high-deductible health plan (HDHP) and (2) should not have other disqualifying health coverage. The minimum annual deductible for an HDHP in 2025 is $1,650 for self-only coverage and $3,300 for family coverage. The out-of-pocket maximum for TY 2025 is $8,300 for self-only coverage and $16,600 for family coverage.
OBBBA Changes
The OBBA made a few key changes to HDHPs and, by extension, HSAs. First, it made permanent a safe harbor for HDHPs that have no deductible for telehealth and other remote care services. The OBBBA permanent extension applies retroactively after December 31, 2024.
Second, the term HDHP now includes any plan under the Patient Protection and Affordable Care Act (ACA) (P.L. 111-148) that is available as individual coverage through an exchange, including bronze and catastrophic plans. Before the OBBBA was enacted, many bronze plans did not qualify as HDHPs because the plans’ out-of-pocket maximum exceeded the statutory limits for HDHPs or because they provided benefits that were not preventive care without a deductible. Similarly, catastrophic plans could not be HDHPs because they were required to provide three primary care visits before the minimum deductible was satisfied and to have an out-of-pocket maximum that exceeded the statutory limits for HDHPs. This provision amending the definition of an HDHP applies for months after December 31, 2025.
Finally, direct primary care service arrangements (DPCSA) underCode Sec. 223(c)(1)(E)(ii)are no longer treated as a health plan for purposes of determining HSA eligibility and enrollment, and enrolling in a DPCSA will not cause a taxpayer to fail eligibility to contribute to an HSA. These DPCSAs changes would apply after December 31, 2025.
Q&As
The IRS answered several common questions from the public regarding these three provisions with regards to administration and eligibility.
The IRS has answered initial questions regarding Trump accounts, which it intends to address in forthcoming proposed regulations. The guidance addresses general questions relating to the establishment of the accounts, contributions to the accounts, and distributions from the accounts under Code Secs. 128, 530A, and 6434. Comments, specifically on issues identified in the notice, should be submitted in writing on or before February 20, 2026, by mail or electronically.
The IRS has answered initial questions regarding Trump accounts, which it intends to address in forthcoming proposed regulations. The guidance addresses general questions relating to the establishment of the accounts, contributions to the accounts, and distributions from the accounts underCode Secs. 128,530A, and6434. Comments, specifically on issues identified in the notice, should be submitted in writing on or before February 20, 2026, by mail or electronically.
Establishment of the Accounts
An account may be established for the benefit of an eligible individual by making an election on Form 4547, Trump Account Election(s), or through an online tool or application ontrumpaccounts.gov. A Trump account may be created at the same time that an election is made to receive a pilot program contribution. A Trump account is a traditional IRA underCode Sec. 408(a).
A rollover Trump account can only be established after the initial Trump account is created and during the growth period of the account, which is the period that ends before January 1 of the calendar year in which the account beneficiary attains age 18. A rollover account must first be funded by a qualified rollover contribution before receiving any other contribution. Additional rules regarding the choice of trustee, rollover accounts, and the written government instrument requirements are discussed in section III.A of the notice.
Pilot Program and Contributions
The election to receive a pilot program contribution is made on Form 4547 or through the online tool, once available. Pilot program contributions will be deposited into the Trump account of an eligible child no earlier than July 4, 2026.
Trustees of Trump accounts must maintain procedures to prevent contributions from exceeding the annual limit ofCode Sec. 530A(c)(2)(A). Trustees are required to collect and report the amount and sources of contributions. Contributions may be made to a Trump account and to an individual retirement arrangement for the same individual during the growth period in accordance with the rules ofCode Secs. 408and530A(c)(2).
Qualified general contributions will be transferred by the Treasury Department or its agent to the trustee of a Trump account pursuant to a general funding contribution. More information on how and where permitted entities will make an application to make a general funding contribution will be provided before the application process opens.
An employer can exclude up to $2,500 from the gross income of an employee for a contribution made by the employer to a Trump account contribution program. The annual limit is per employee, not per dependent. A Trump account contribution may be made by salary reduction under aCode Sec. 125cafeteria plan if the contribution is made to the Trump account of the employee's dependent and not if the contribution is made to the Trump account of the employee.
Eligible Investments
The terms "mutual fund" and "exchange traded fund" are explained, with additional comments requested on their definitions. The tracking of returns of an index and leverage for purposes of Trump accounts are also described. A mutual fund or exchange traded fund will meet the requirements of having annual fees and expenses of no more than 0.1% of the balance of the investment fund if the sum of its annual fees and expenses is less than 0.1% of the value of the fund's net assets. Additional questions regarding eligible investments are discussed in section III.D of the notice.
Distributions
Only permitted distributions, which are qualified rollover contributions or qualified ABLE rollover contributions, excess contributions, or distributions upon the death of an account beneficiary, are allowed during the growth period. Hardship distributions during the growth period are not allowed. If an account beneficiary dies after the growth period, the rules that apply to other individual retirement accounts after the death of the account owner apply. If the Trump account beneficiary dies during the growth period, the account ceases to be a Trump account and an IRA as of the date of death.
Reporting and Coordination with IRA Rules
Annual reporting by the Trump account trustee is required. Forms and instructions will be issued in the future. After the growth period, distributions from Trump accounts are governed by the IRA distribution rules ofCode Sec. 408(d).
The IRS intends to issue proposed regulations to implement Code Sec. 25F, as added by the One Big Beautiful Bill Act (OBBBA) (P.L. 119-21). Code Sec. 25Fallows a credit for an individual taxpayer's qualified contribution to a scholarship granting organization (SGO) providing qualified elementary and secondary scholarships.
The IRS intends to issue proposed regulations to implementCode Sec. 25F, as added by the One Big Beautiful Bill Act (OBBBA) (P.L. 119-21).Code Sec. 25Fallows a credit for an individual taxpayer's qualified contribution to a scholarship granting organization (SGO) providing qualified elementary and secondary scholarships.
Tax Credit
Beginning January 1, 2027, individual taxpayers may claim a nonrefundable federal tax credit for cash contributions to SGOs. Taxpayers must be citizens or residents of the United States. The credit allowed to any taxpayer is limited to $1,700. The credit is reduced by the amount allowed as a credit on any state tax return. Additionally, to prevent a double benefit, no deduction is allowed underCode Sec. 170for any amount taken into account as a qualified contribution for purposes of theCode Sec. 25Fcredit.
SGO Requirements
An organization can qualify as an SGO after satisfying conditions that include (1) being aCode Sec. 501(c)(3)organization that is exempt from tax underCode Sec. 501(a)and not a private foundation; (2) maintaining one or more separate accounts exclusively for qualified contributions; (3) appearing on the list submitted for the applicable covered state underCode Sec. 25F(g); and (4) providing scholarships to 10 or more students who do not all attend the same school, as well as meeting certain other requirements.
Request for Comments
The forthcoming proposed regulations describe the certification process currently envisioned by the Treasury Department and the IRS for covered states to elect to participate underCode Sec. 25F. The IRS requests comments on these matters before December 26, 2025, through theFederal e-Rulemaking portal(indicate “IRS-2025-0466”). Paper submissions should be sent to: Internal Revenue Service, CC:PA:01:PR (Notice 2025-70), Room 5503, P.O. Box 7604, Ben Franklin Station, Washington, DC 20044.
The IRS has disclosed the first set of certifications for the qualifying advanced energy project credit under Code Sec. 48C(e).
The IRS has disclosed the first set of certifications for the qualifying advanced energy project credit underCode Sec. 48C(e)for the period beginning:
March 29, 2024, through September 30, 2025, resulting from the Round 1 allocation; and
January 10, 2025, through September 30, 2025, resulting from the Round 2 allocation.
The Service also disclosed the identities of taxpayers and amounts of theCode Sec. 48Ccredits allocated to said taxpayers.
Background
Notice 2023-18, I.R.B. 2023-10, established a program to allocate $10 billion of credits for qualified investments in eligible qualifying advanced energy projects underCode Sec. 48C(e)(1).Code Sec. 48C(e)(4)(A)provides a base credit rate of 6 percent of the qualified investment. In cases where projects satisfyCode Secs. 48C(e)(5)(A)and(6), the Service would provide an alternative rate of 30 percent of the qualified investment.
Certification
Each applicant for certification has two years from the date of acceptance of theCode Sec. 48C(e)application. During this time, the applicant needs to submit evidence that the requirements of the certification have been met. The IRS will publish additional notices annually for certifications issued during each successive 12-month period beginning on October 1, 2025 for both Round 1 and 2.
The IRS and Treasury Department have provided procedures for a state to elect to be a “covered state” to participate with the Code Sec. 25F credit program for calendar year 2027 prior to identifying any scholarship granting organizations (SGOs) in the state. Form 15714 is used by a state to make the advanced election.
The IRS and Treasury Department have provided procedures for a state to elect to be a “covered state” to participate with theCode Sec. 25Fcredit program for calendar year 2027 prior to identifying any scholarship granting organizations (SGOs) in the state. Form 15714 is used by a state to make the advanced election.
Background
For tax years beginning after 2026, a U.S. citizen or resident alien may claim a nonrefundable personal tax credit of up to $1,700 for qualified contributions made to a scholarship granting organization (SGO). A qualified contribution is a charitable contribution of cash to an SGO that uses the contribution to fund scholarship for eligible K-12 students.
In order for a contribution made by a taxpayer to an SGO in a state (or the District of Columbia) to be a qualified contribution eligible for the credit, the state must elect participate in the credit program and must identify by January 1 of each calendar year a list of qualified SGOs in the state.
Advanced Election for 2027
A state may make an advanced election using Form 15714 to be a covered state for theCode Sec. 25Fcredit for the 2027. The form may be submitted any time after December 31, 2026, and before the day before the final date on which the State is permitted to submit the State SGO list (as will be specified in future guidance).
The advance election will allow a state to inform potential SGOs of the state’s participation in the credit before submitting a full SGO limit to the IRS. Any SGO list submitted with Form 15714 will not be processed by the IRS and the state will need to resubmit the list as specified in future guidance. Once a state’s advance election has been made on Form 15714 for calendar year 2027, the only subsequent submission the IRS will accept is the official submission of the state’s SGO list for the calendar year.
The IRS has formally withdrawn two proposed regulations that would have clarified how married individuals may obtain relief from joint and several tax liability. The withdrawal affects taxpayers seeking protection under Code Sec. 6015 and relief from federal income tax obligations tied to State community property laws under Code Sec. 66.
The IRS has formally withdrawn two proposed regulations that would have clarified how married individuals may obtain relief from joint and several tax liability. The withdrawal affects taxpayers seeking protection underCode Sec. 6015and relief from federal income tax obligations tied to State community property laws underCode Sec. 66.
The two notices of proposed rulemaking—originally issued on August 13, 2013 (78 FR 49242), and November 20, 2015 (80 FR 72649)—offered procedural guidance for requesting equitable, innocent spouse, or separation of liability relief. These proposals also reflected statutory amendments introduced by the Tax Relief and Health Care Act of 2006 and evolving jurisprudence. The Treasury Department and the IRS decided to halt progress on these rules due to the passage of time, the scope of public comments, and resource prioritization.
While the agency acknowledged the regulatory need in this area, it cited the volume and breadth of feedback as grounds for reassessment. The IRS clarified that any future rules addressing these issues would require new proposals and another round of public comment, in line with current statutory frameworks and legal developments.
Importantly, this withdrawal does not prevent the issuance of new regulations on joint and several liability relief. Nor does it alter existing statutory or regulatory obligations in place under current law. The IRS retains authority under 26 U.S.C. 7805 to revisit and re-propose rules as necessary.
The withdrawal was announced by the IRS and Treasury on December 15, 2025, and was signed by Frank J. Bisignano, Chief Executive Officer. Tax professionals and affected individuals should continue to rely on existing law and procedures when seeking relief underCode Secs. 6015and66.
The American Institute of CPAs has voiced its opposition to the Internal Revenue Service’s proposal to combine the Office of Personal Responsibility and the Return Preparer Office
The American Institute of CPAs has voiced its opposition to the Internal Revenue Service’s proposal to combine the Office of Personal Responsibility and the Return Preparer Office.
“The AICPA has an extensive and resolute history of steadfastly supporting initiatives that would enhance compliance, elevate ethical conduct, and protect taxpayer confidence in our tax system,” the organization said in a November 14, 2025, letter to the directors of the two offices. “The proposed combination of OPR and RPO contravenes those principles.” A copy of this and other AICPA 2025 tax policy and advocacy comment letters can be foundhere.
AICPA said it “strongly opposes any efforts to combine OPR and RPO because it would inappropriately consolidate credentialed and uncredentialed return preparers under OPR, create potential conflicts of interest, and divert resources from the primary role of OPR.”
It added that the merger “would sow confusion among taxpayers trying to understand the differing qualifications and practice rights of preparers, which would harm taxpayers and erode taxpayer confidence in our tax system.”
AICPA noted that OPR “has the exclusive delegated authority to interpret and enforce the regulations in Treasury Department Circular 230 (Circular 230), which governs tax practitioners interacting with the tax administration system,” while RPO “administers the Preparer Tax Identification Number (PTIN) program, manages the enrolled agent practitioner program, encourages enrollment in the Annual Filing Season Program (AFSP), and processes some complaints against return preparers.”
“These two offices perform dissimilar government functions, oversee different types of preparers, and, therefore, should remain separate to avoid potential conflicts of interest,” AICPA said in the letter.
AICPA argued that the combination would divert resources away from the primary role of OPR and could undermine the credibility of OPR’s enforcement objective.
“Under a combined OPR unit, unscrupulous and incompetent preparers could readily misrepresent that they are subject to ethical obligations overseen by the ‘Office of Professional Responsibility,’ which would give such preparers a foothold to abuse taxpayers and undermine public trust and accountability in the tax profession,” AICPA stated in the letter.
As an individual or business, it is your responsibility to be aware of and to meet your tax filing/reporting deadlines. This calendar summarizes important federal tax reporting and filing data for individuals, businesses and other taxpayers for the month of June 2014.
As an individual or business, it is your responsibility to be aware of and to meet your tax filing/reporting deadlines. This calendar summarizes important federal tax reporting and filing data for individuals, businesses and other taxpayers for the month of June 2014.
June 4 Employers. Semi-weekly depositors must deposit employment taxes for payroll dates May 28-30.
June 6 Employers. Semi-weekly depositors must deposit employment taxes for payroll dates May 31-June 3.
June 10 Employees who work for tips. Employees who received $20 or more in tips during May must report them to their employer using Form 4070.
June 11 Employers. Semi-weekly depositors must deposit employment taxes for payroll dates June 4-6.
June 13 Employers. Semi-weekly depositors must deposit employment taxes for payroll dates June 7-10.
June 16 Individuals. Individuals, partnerships, passthrough entities and corporations make the second installment of 2014 estimated quarterly tax payments.
Individuals. U.S. citizens or resident aliens living and working (or on military duty) outside the United States and Puerto Rico must file Form 1040 and pay any tax, interest, and penalties due.
June 18 Employers. Semi-weekly depositors must deposit employment taxes for payroll dates June 11-13.
June 20 Employers. Semi-weekly depositors must deposit employment taxes for payroll dates June 14-17.
June 25 Employers. Semi-weekly depositors must deposit employment taxes for payroll dates June 18-20.
June 27 Employers. Semi-weekly depositors must deposit employment taxes for payroll dates June 21-24.
June 30 Foreign Assets. FinCEN Form 114, Report of Foreign Bank and Financial Accounts (FBAR) (formerly Form TD F 90-22.1) due. FinCEN Notice 2013-1 extended the due date for filing FBARs by certain individuals with signature authority over, but no financial interest in, foreign financial accounts of their employer or a closely related entity, to June 30, 2015.
July 2 Employers. Semi-weekly depositors must deposit employment taxes for payroll dates June 25-27.
July 7 Employers. Semi-weekly depositors must deposit employment taxes for payroll dates June 28-30.
Retired employees often start taking benefits by age 65 and, under the minimum distribution rules, must begin taking distributions from their retirement plans when they reach age 70 ½. According to Treasury, a 65-year old female has an even chance of living past age 86, while a 65-year old male has an even chance of living past age 84. The government has become concerned that taxpayers who normally retire at age 65 or even age 70 will outlive their retirement benefits.
Retired employees often start taking benefits by age 65 and, under the minimum distribution rules, must begin taking distributions from their retirement plans when they reach age 70 ½. According to Treasury, a 65-year old female has an even chance of living past age 86, while a 65-year old male has an even chance of living past age 84. The government has become concerned that taxpayers who normally retire at age 65 or even age 70 will outlive their retirement benefits.
The government has found that most employees want at least a partial lump sum payment at retirement, so that some cash is currently available for living expenses. However, under current rules, most employer plans do not offer a partial lump sum coupled with a partial annuity. Employees often are faced with an “all or nothing” decision, where they would have to take their entire retirement benefit either as a lump sum payment when they retire, or as an annuity that does not make available any immediate lump-sum cash cushion. For retirees who live longer, it becomes difficult to stretch their lump sum benefits.
Longevity solution
To address this dilemma, the government is proposing new retirement plan rules to allow plans to make available a partial lump sum payment while allowing participants to take an annuity with the other portion of their benefits. Furthermore, to address the problem of employees outliving their benefits, the government would also encourage plans to offer “longevity” annuities. These annuities would not begin paying benefits until ages 80 or 85. They would provide you a larger annual payment for the same funds than would an annuity starting at age 70 ½. Of course, one reason for the better buy-in price is that you or your heirs would receive nothing if you die before the age 80 or 85 starting date. But many experts believe that it is worth the cost to have the security of knowing that this will help prevent you from “outliving your money.”
To streamline the calculation of partial annuities, the government would allow employees receiving lump-sum payouts from their 401(k) plans to transfer assets into the employer’s existing defined benefit (DB) plan and to purchase an annuity through the DB plan. This would give employees access to the DB plans low-cost annuity purchase rates.
According to the government, the required minimum distribution (RMD) rules are a deterrent to longevity annuities. Because of the minimum distribution rules, plan benefits that could otherwise be deferred until ages 80 or 85 have to start being distributed to a retired employee at age 70 ½. These rules can affect distributions from 401(k) plans, 403(b) tax-sheltered annuities, individual retirement accounts under Code Sec. 408, and eligible governmental deferred compensation plans under Code Sec. 457.
Tentative limitations
The IRS proposes to modify the RMD rules to allow a portion of a participant’s retirement account to be set aside to fund the purchase of a deferred annuity. Participants would be able to exclude the value of this qualified longevity annuity contract (QLAC) from the account balance used to calculate RMDs. Under this approach, up to 25 percent of the account balance could be excluded. The amount is limited to 25 percent to deter the use of longevity annuities as an estate planning device to pass on assets to descendants.
Coming soon
Many of these changes are in proposed regulations and would not take effect until the government issues final regulations. The changes would apply to distributions with annuity starting dates in plan years beginning after final regulations are published, which could be before the end of 2012. Our office will continue to monitor the progress of this important development.
A consequence of the economic downturn for many investors has been significant losses on their investments in retirement accounts, including traditional and Roth individual retirement accounts (IRAs). This article discusses when and how taxpayers can deduct losses suffered in Roth IRAs and traditional IRAs ...and when no deduction will be allowed.
A consequence of the economic downturn for many investors has been significant losses on their investments in retirement accounts, including traditional and Roth individual retirement accounts (IRAs). This article discusses when and how taxpayers can deduct losses suffered in Roth IRAs and traditional IRAs ...and when no deduction will be allowed.
Traditional IRAs
Losses on investments held in a traditional IRA, funded only by contributions that you deducted when you made them, are never deductible. Even when you cash out the IRA after retirement, losses cannot be deducted. The theory behind this rule is that you already received a tax benefit in your deduction for making contributions and any loss lowers the amount of taxable income you must realize when you make retirement withdrawals. The technical explanation is that you are presumed to have a zero basis in your account.
On the other hand, if you make nondeductible traditional IRA contributions, and liquidate all of the investments in your traditional IRA, a loss can be recognized if the amounts distributed are less than the remaining unrecovered basis in the traditional IRA. You claim a loss in a traditional IRA on Schedule A, Form 1040, as a miscellaneous itemized deduction subject to the two percent AGI floor.
Example. During 2008, you made $2,000 in nondeductible contributions to a traditional IRA. Your basis in the IRA at the end of 2008 is $2,000. During 2008, the IRA earned $400 in dividend income and you withdrew $600 from the account. As a result, at the end of 2008 the value of your IRA was $1,800 ($2,000 contributed plus $400 dividends minus $600 withdrawal). You compute and report the taxable portion of your $600 withdrawal and your remaining basis on Form 8606, Nondeductible IRA.
In 2009, the year you retired, your IRA lost $500 in value. At the end of 2009, your IRA balance was $1,300 ($1,800 balance at the end of 2008 minus the $500 loss). Your remaining basis at that time in your IRA is $1,500 ($2,000 nondeductible contributions minus the $500 basis in the prior withdrawal). You withdraw the $1,300 balance remaining in the IRA. You can claim a loss of $200 (your $1,500 basis minus the $1,300 withdrawn) on Form 1040, Schedule A. The allowable loss is further subject to the two percent adjusted gross income (AGI) floor on miscellaneous itemized deductions.
If you made significant nondeductible contributions to an IRA over the last few years, and may be considering withdrawing the entire balance in all of your traditional IRAs before the end of the year in order to recognize a loss, keep in mind doing so will mean losing the opportunity to defer gain if the value of your investments in the accounts increases. Those withdrawn amounts cannot be recontributed at a later date.
Roth IRA losses
When you experience losses on Roth IRA investments, you can only recognize the loss for income tax purposes, if and when all the amounts in the Roth IRA accounts have been distributed and the total distributions are less than your basis (e.g. regular and conversion contributions).
To report a loss in a Roth IRA, all the investments held in your Roth IRA (but not traditional IRAs) must be liquidated. Moreover, the loss is an ordinary loss for income tax purposes, not a capital loss, and can only be claimed as a miscellaneous itemized deduction subject to the two percent of AGI floor that applies to miscellaneous itemized deductions on Form 1040, Schedule A.
Since all Roth IRAs must be completely liquidated to generate a loss deduction, it generally provides only a small comfort to investments gone sour. Closing all your Roth IRAs generally forgoes future appreciation on that amount.
If you are considering liquidating your Roth IRA or traditional IRA to take the loss, please contact our office and we can discuss the tax and financial consequences before finalizing any plans.
In order to be tax deductible, compensation must be a reasonable payment for services. Smaller companies, whose employees frequently hold significant ownership interests, are particularly vulnerable to IRS attack on their compensation deductions.
In order to be tax deductible, compensation must be a reasonable payment for services. Smaller companies, whose employees frequently hold significant ownership interests, are particularly vulnerable to IRS attack on their compensation deductions.
Reasonable compensation is generally defined as the amount that would ordinarily be paid for like services by like enterprises under like circumstances. This broad definition is supplemented, for purposes of determining whether compensation is deductible as an ordinary and necessary expense, by a number of more specific factors expressed in varying forms by the IRS, the Tax Court and the Circuit Courts of Appeal, and generally relating to the type and extent of services provided, the financial concerns of the company, and the nature of the relationship between the employee and the employer.
Why IRS Is Interested
A chief concern behind the IRS's keen interest in what a company calls "compensation" is the possibility that what is being labeled compensation is in fact a constructive dividend. If employees with ownership interests are being paid excessive amounts by the company, the IRS may challenge compensation deductions on the grounds that what is being called deductible compensation is, in fact, a nondeductible dividend.
Another area of concern for the IRS is the payment of personal expenses of an employee that are disguised as businesses expenses. There, the business is trying to obtain a business expense deduction without the offsetting tax paid by the employee in recognizing income. In such cases, a business and its owners can end up with a triple loss after an IRS audit: taxable income to the individual, no deduction to the business and a tax penalty due from both parties.
Factors Examined
The factors most often examined by the IRS in deciding whether payments are reasonable compensation for services or are, instead, disguised dividend payments, include:
The salary history of the individual employee
Compensation paid by comparable employers to comparable employees
The salary history of other employees of the company
Special employee expertise or efforts
Year-end payments
Independent inactive investor analysis
Deferred compensation plan contributions
Independence of the board of directors
Viewpoint of a hypothetical investor contemplating purchase of the company as to whether such potential investor would be willing to pay the compensation.
Failure to pass the reasonable compensation test will result in the company's loss of all or part of its deduction. Analysis and examination of a company's compensation deductions in light of the relevant listed factors can provide the company with the assurance that the compensation it pays will be treated as reasonable -- and may in the process prevent the loss of its deductions.
Note: In the case of publicly held corporations, a separate $1 million dollar per person cap is also placed on deductible compensation paid to the CEO and each of the four other highest-paid officers identified for SEC purposes. (Certain types of compensation, including performance-based compensation approved by outside directors, are not included in the $1 million limitation.)
The S Corp Enigma
The opposite side of the reasonable compensation coin is present in the case of some S corporations. By characterizing compensation payments as dividends, the owners of these corporations seek to reduce employment taxes due on amounts paid to them by their companies. In these cases, the IRS attempts to recharacterize dividends as salary if the amounts were, in fact, paid to the shareholders for services rendered to the corporation.
Caution. In the course of performing the compensation-dividend analysis, watch out for contingent compensation arrangements and for compensation that is proportional to stock ownership. While not always indicators that payments are distributions of dividends instead of compensation for services, their presence does suggest the possibility. Compensation plans should not be keyed to ownership interests. Contingent and incentive arrangements are also scrutinized by the IRS. The courts have frequently ruled that a shareholder has a built-in interest in seeing that the company is successful and rewarding him for increasing the value of his own property is inappropriate. Similar to the reasonable compensation test, however, this rule is not hard and fast. Accordingly, the rules followed in each jurisdiction will control there.
Conclusions
Determining whether a shareholder-employee's compensation is reasonable depends upon many variables, such as the contributions that employee makes to your business, the compensation levels within your industry, and whether an independent investor in your company would accept the employee's compensation as reasonable.
Please call our office for a more customized analysis of how your particular compensation package fits into the various rules and guidelines. Further examination of your practices not only may help your business better sustain its compensation deductions; it may also help you take advantage of other compensation arrangements and opportunities.
