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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 released the 2021-2022 special per diem rates. Taxpayers use the per diem rates to substantiate certain expenses incurred while traveling away from home.

The IRS has released the 2021-2022 special per diem rates. Taxpayers use the per diem rates to substantiate certain expenses incurred while traveling away from home. These special per diem rates include:

1. the special transportation industry meal and incidental expenses (M&IE) rates;
2. the rate for the incidental expenses only deduction; and
3. the rates and list of high-cost localities for purposes of the high-low substantiation method.

Transportation Industry Special Per Diem Rates
The special M&IE rates for taxpayers in the transportation industry are:

• $69 for any locality of travel in the continental United States (CONUS); and
• $74 for any locality of travel outside the continental United States (OCONUS).

Incidental Expenses Only Rate
The rate is $5 per day for any CONUS or OCONUS travel for the incidental expenses only deduction.

High-Low Substantiation Method
For purposes of the high-low substantiation method, the 2021-2022 special per diem rates are:

• $296 for travel to any high-cost locality; and
• $202 for travel to any other locality within CONUS.

The amount treated as paid for meals is:

• $74 for travel to any high-cost locality; and
• $64 for travel to any other locality within CONUS.

Instead of the meal and incidental expenses only substantiation method, taxpayers may use:

• $74 for travel to any high-cost locality; and
• $64 for travel to any other locality within CONUS.

Taxpayers using the high-low method must comply with Rev. Proc. 2019-48, I.R.B. 2019-51, 1390. That procedure provides the rules for using a per diem rate to substantiate the amount of ordinary and necessary business expenses paid or incurred while traveling away from home.

The IRS and the Treasury Department have issued guidance to employers about reporting the amount of qualified sick and family leave wages paid to employees for leave taken in 2021 on Form W-2, Wage and Tax Statement.

The IRS and the Treasury Department have issued guidance to employers about reporting the amount of qualified sick and family leave wages paid to employees for leave taken in 2021 on Form W-2, Wage and Tax Statement. Further, the notice provides guidance under recent legislation, including: the Families First Coronavirus Response Act (FFCRA) ( P.L. 116-127), as amended by the COVID-Related Tax Relief Act of 2020 (Division N of P.L. 116-260) and the American Rescue Plan Act of 2021 ( P.L. 117-2). Employers are required to report these amounts to employees either on Form W-2, Box 14, or in a separate statement provided with the Form W-2. The wage amount that the notice requires employers to report on Form W-2 will provide employees who are also self-employed with the information necessary to determine the amount of any sick and family leave equivalent credits they may claim in their self-employed capacities.

Reporting Requirements
The guidance requires eligible employers to report to employees the amount of qualified sick leave wages and qualified family leave wages paid to the employees under (i) sections 7001 or 7003 of the Families First Act for leave provided during the period beginning January 1, 2021, through March 31, 2021, and (ii) Code Secs. 3131 and 3132 for leave provided during the period beginning April 1, 2021, through September 30, 2021. Moreover, eligible employers have separate reporting requirements for (i) leave provided to employees during the period beginning January 1, 2021, through March 31, 2021, under the Families First Act; and (ii) leave provided to employees during the period beginning April 1, 2021, through September 30, 2021, under Code Secs. 3131 and 3132.

Specific Reporting Instructions
Qualified leave wages paid in 2021 under the Families First Act and Code Secs. 3131 and 3132 are to be reported in Box 1 of Form W-2. To the extent that qualified leave wages are social security wages or Medicare wages, they must also be included in Box 3 (up to the social security wage base) and Box 5, respectively.

In addition to the regular reporting requirements, employers must report the following types and amounts of the wages that were paid, with each amount separately reported either in Box 14 of Form W-2 or on a separate statement to the employee:

• the total amount of qualified sick leave wages paid for reasons described in paragraphs (1), (2), or (3) of section 5102(a) of the Emergency Paid Sick Leave Act (EPSLA) with respect to leave provided to employees during the period beginning on January 1, 2021, through March 31, 2021 (sick leave wages subject to the $511 per day limit);
• the total amount of qualified sick leave wages paid for reasons described in paragraphs (4), (5), or (6) of section 5102(a) of EPSLA with respect to leave provided to employees during the period beginning on January 1, 2021, through March 31, 2021 (sick leave wages subject to the $200 per day limit);
• the total amount of qualified family leave wages paid to the employee under the Emergency Family and Medical Leave Expansion Act (EFMLEA) with respect to leave provided to employees during the period beginning on January 1, 2021, through March 31, 2021;
• the total amount of qualified sick leave wages paid for reasons described in paragraphs (1), (2), or (3) of section 5102(a) of section 5102(a) of EPSLA with respect to leave provided to employees during the period beginning on April 1, 2021, through September 30, 2021;
• the total amount of qualified sick leave wages paid for reasons described in paragraphs (4), (5), or (6) of section 5102(a) of EPSLA with respect to leave provided to employees during the period beginning on April 1, 2021, through September 30, 2021;
• the total amount of qualified family leave wages paid to the employee under EFMLEA with respect to leave provided to employees during the period beginning on April 1, 2021, through September 30, 2021.

Model Language for Employee Instructions
As part of the Instructions for Employee, under the instructions for Box 14, for the Forms W-2, or in a separate statement sent to the employee, the employer may provide additional information about qualified sick leave wages and qualified family leave wages, and explain that these wages may limit the amount of the qualified sick leave equivalent or qualified family leave equivalent credits to which the employee may be entitled with respect to any self-employment income. The guidance provides model language for employee instructions.

Self-Employment Tax Reporting
If taxpayers have self-employment income in addition to wages paid by an employer, and they intend to claim any qualified sick leave or qualified family leave equivalent credits, they must report the qualified sick leave or qualified family leave wages on Form 7202, Credits for Sick Leave and Family Leave for Certain Self-Employed Individuals, included with their income tax return. The self-employed taxpayer may have to reduce (but not below zero) any qualified sick leave or qualified family leave equivalent amounts by these qualified leave wages.

The IRS reminded taxpayers that their website (www.irs.gov) provides millions of visitors with the answers they need to fit their busy summer schedules.

The IRS reminded taxpayers that their website ( www.irs.gov) provides millions of visitors with the answers they need to fit their busy summer schedules. Taxpayers who requested an extension to October 15 or missed the May 17 deadline can still prepare and e-file tax returns for free with the IRS Free File tool. Further, taxpayers can view, download or print tax products, and do the following:

Use the "File" tab on the home page for most federal income tax needs. Access the Interactive Tax Assistant tool that can answer many tax law questions.
See their tax account with the View Your Account tool. With this, they can find information such as a payoff amount, the balance for each tax year owed, up to 24 months of their payment history and key information from their current tax year return as originally filed.
Use the Get Transcript tool to view, print or download their tax transcripts after the IRS has processed the return.
Find the most up-to-date information about tax refunds using the Where's My Refund? tool on the IRS website and on the official IRS mobile app, IRS2Go. Taxpayers can start checking on the status of their refund 24 hours after the IRS acknowledges receipt of an e-filed return.
Additionally, many pages on the IRS website are now available in Spanish, Vietnamese, Russian, Korean, Haitian, Creole, and Chinese—simplified and traditional. Earlier this year, the agency posted a Spanish language version of Form 1040 PDF and the related instructions.

Assistive Technology
Moreover, at the online Alternative Media Center (AMC), taxpayers can find a variety of accessible products like screen reading software, refreshable Braille displays, and screen magnifying software. These products include tax forms, instructions, and publications that can be downloaded or viewed online as Section 508 compliant PDF, HTML, eBraille, text, and large print. However, every product is not available in all formats. For example, tax forms are not available as HTML. To request paper copies of tax forms, instructions or publications in Braille or large print, taxpayers must call the tax form telephone number at 800-829-3676.

Coronavirus Tax Relief Information
Further, the IRS has published ready-to-use articles, e-posters, videos, and much more on the website about Economic Impact Payments, the Recovery Rebate Credit, and the Advance Child Tax Credit. The IRS placed a special emphasis on partnering with organizations that work with groups focusing on veterans, homeless and low-income taxpayers as well as non-English speaking audiences to share information. In all, the IRS worked with thousands of partners across the country reaching organizations representing hundreds of millions of taxpayers.

IRS Tax Withholding Estimator
Finally, the IRS Tax Withholding Estimator helps employees assess their income tax, credits, adjustments and deductions and determine whether they need to change their withholding by submitting a new Form W-4, Employee's Withholding Allowance Certificate. However, taxpayers should remember that, if needed, they should submit their new W-4 to their employer, not the IRS.

The IRS reminds taxpayers that May includes National Hurricane Preparedness Week and National Wildfire Awareness Month. It urges taxpayers to create or review emergency preparedness plans for surviving natural disasters.

The IRS reminds taxpayers that May includes National Hurricane Preparedness Week and National Wildfire Awareness Month. It urges taxpayers to create or review emergency preparedness plans for surviving natural disasters.

The IRS advises taxpayers to do the following:

• Secure key documents such as tax returns, birth certificates, deeds, titles and insurance policies inside waterproof containers in a secure space. Keep duplicates of these documents with a trusted person outside the area of the taxpayer. Scan these documents for backup storage on electronic media such as a flash drive.
• Take current photos or videos of a home or business’s contents, especially expensive and high value items. The IRS disaster-loss workbooks in IRS Pub. 584-B can help individuals and businesses compile lists of belongings or business equipment.
• Employers who use payroll service providers should ask the provider if it has a fiduciary bond in place. The bond could protect the employer in the event of default by the payroll service provider.
• Reconstructing records after a disaster may be required for tax purposes, getting federal assistance or insurance reimbursement. Taxpayers who have lost some or all their records during a disaster can visit IRS’s Reconstructing Records webpage as one of their first steps.

The termination date for an empowerment zone designation under Code Sec. 1391 is generally deemed to extend until December 31, 2025. However, the state or local government that nominated the zone may decline the deemed extension.

The termination date for an empowerment zone designation under Code Sec. 1391 is generally deemed to extend until December 31, 2025. However, the state or local government that nominated the zone may decline the deemed extension.

Empowerment Zone Designation Termination Dates
Empowerment zone designations generally continue until the termination date selected by the government that nominated the zone (the designated termination date), or the termination date established by legislation (the statutory termination date).

The statutory termination date has been extended multiple times, with each extension deemed to extend the designated termination date as well. Most recently, the Taxpayer Certainty and Disaster Tax Relief Act of 2020 ( P.L. 116-260) extended the statutory termination date to December 31, 2025. Thus, the designated termination dates for all empowerment zones are also deemed to be extended to December 31 2025.

A state or local government may decline the extension via a written notification to the IRS by May 25, 2021. The notification must be faxed to Bruce Chang, CC:ITA:B07, at (855) 576-2341.

Rev. Proc. 2020-16, I.R.B. 2020-27, 10, is obsoleted for tax years beginning after 2020.

IRS Commissioner Charles "Chuck" Rettig told Congress on February 23 that the backlog of 20 million unopened pieces of mail is gone.

IRS Commissioner Charles "Chuck" Rettig told Congress on February 23 that the backlog of 20 million unopened pieces of mail is gone.

"There were trailers in June filled (with unopened paper returns). There are none today," Rettig said in an appearance before the House Appropriations Committee Financial Services Subcommittee.

When there was a delay in getting to a return, Rettig said that a taxpayer was credited on the date the mail was received, not the day the payment was processed.

The IRS leader stated that virtual currency, which is designed to be anonymous, has probably significantly increased the amount of money taxpayers owed but have not paid since the last formal figure of $381 billion was estimated in 2013.

To close the gap between money owed and money paid, Rettig said there has to be an increase in guidance as well as enforcement. "The two go together," said Rettig, who pointed out that the IRS must support the people who are working to get their tax payments right as well as working against those who are trying to thwart the agency’s efforts.

Rettig cited high-income/high-wealth taxpayers, including high-income non-filers, as high enforcement priorities. "We have not pulled back enforcement efforts for higher income individuals during the pandemic. We can be impactful," said Rettig. He added that the IRS is using artificial intelligence and other information technology (IT) advances to catch wealthy tax law and tax rule breakers. "Our advanced data and analytic strategies allow us to catch instances of tax evasion that would not have been possible just a few years ago," said the IRS leader.

Rettig contended that the agency’s IT improvement efforts are being hampered by a shortage of funding. According to Rettig, three years into a six-year business modernization plan, the IRS has received half of the money it requested from Congress for the initiative.

One of the impacts of the pandemic on the IRS and the taxpayers and tax professionals it serves, said Rettig, is the average length of phone calls has risen to 17 minutes from 12 minutes because the issues have been more complex.

On another issue related to COVID-19, Rettig said the IRS has been diligently working to alert taxpayers and tax professionals to scams related to COVID-19, especially calls and email phishing attempts tied to the Economic Impact Payments (EIPs). He said people can reduce the chances of missing their EIP payments through lost, stolen or thrown-away debit cards by filing their tax returns electronically.

The Commissioner told the panel that the delay in starting the tax filing season this year will not add to any additional delays to refunds on returns claiming the Earned Income Tax Credit (EITC) or the Additional Child Tax Credit (ACTC).

Rettig also noted that taxpayers who interact with an IRS representative now have access to over-the-phone interpreter services in more than 350 languages.

The IRS has released new Form 7202, Credits for Sick Leave and Family Leave for Certain Self-Employed Individuals. The form allows eligible self-employed individuals to calculate the amount to claim for qualified sick and family leave tax credits under the Families First Coronavirus Response Act (FFCRA) ( P.L. 116-127). They can claim the credits on their 2020 Form 1040 for leave taken between April 1, 2020, and December 31, 2020, and on their 2021 Form 1040 for leave taken between January 1, 2021, and March 31, 2021.

The IRS has released new Form 7202, Credits for Sick Leave and Family Leave for Certain Self-Employed Individuals. The form allows eligible self-employed individuals to calculate the amount to claim for qualified sick and family leave tax credits under the Families First Coronavirus Response Act (FFCRA) ( P.L. 116-127). They can claim the credits on their 2020 Form 1040 for leave taken between April 1, 2020, and December 31, 2020, and on their 2021 Form 1040 for leave taken between January 1, 2021, and March 31, 2021.

The FFCRA allows eligible self-employed individuals who, due to COVID-19, are unable to work or telework for reasons relating to their own health or to care for a family member, to claim the refundable tax credits. The credits are equal to either a qualified sick leave or family leave equivalent amount, depending on circumstances. To be eligible for the credits, self-employed individuals must:

• conduct a trade or business that qualifies as self-employment income; and
• be eligible to receive qualified sick or family leave wages under the Emergency Paid Sick Leave Act as if the taxpayer was an employee.

For IRS frequently asked questions on the credits, go to https://www.irs.gov/newsroom/covid-19-related-tax-credits-for-required-paid-leave-provided-by-small-and-midsize-businesses-faqs. The FAQs include a special section on provisions related to self-employed individuals.

The IRS is urging employers to take advantage of the newly-extended employee retention credit (ERC), which makes it easier for businesses that have chosen to keep their employees on the payroll despite challenges posed by COVID-19. The Taxpayer Certainty and Disaster Tax Relief Act of 2020 (Division EE of P.L. 116-260), which was enacted December 27, 2020, made a number of changes to the ERC previously made available under the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) ( P.L. 116-136), including modifying and extending the ERC, for six months through June 30, 2021.

The IRS is urging employers to take advantage of the newly-extended employee retention credit (ERC), which makes it easier for businesses that have chosen to keep their employees on the payroll despite challenges posed by COVID-19. The Taxpayer Certainty and Disaster Tax Relief Act of 2020 (Division EE of P.L. 116-260), which was enacted December 27, 2020, made a number of changes to the ERC previously made available under the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) ( P.L. 116-136), including modifying and extending the ERC, for six months through June 30, 2021.

Eligible employers can now claim a refundable tax credit against the employer share of Social Security tax equal to 70-percent of the qualified wages they pay to employees after December 31, 2020, through June 30, 2021. Qualified wages are limited to $10,000 per employee per calendar quarter in 2021. Thus, the maximum ERC amount available is $7,000 per employee per calendar quarter, for a total of $14,000 in 2021.

Effective January 1, 2021, employers are eligible if they operate a trade or business during January 1, 2021, through June 30, 2021, and experience either:

• a full or partial suspension of the operation of their trade or business during this period because of governmental orders limiting commerce, travel or group meetings due to COVID-19; or
• a decline in gross receipts in a calendar quarter in 2021 where the gross receipts for that calendar quarter are less than 80% of the gross receipts in the same calendar quarter in 2019 (to be eligible based on a decline in gross receipts in 2020, the gross receipts were required to be less than 50-percent of those in the same 2019 calendar quarter).

In addition, effective January 1, 2021, the definition of "qualified wages" for the ERC has been changed:

• For an employer that averaged more than 500 full-time employees in 2019, qualified wages are generally those wages paid to employees that are not providing services because operations were fully or partially suspended or due to the decline in gross receipts.
• For an employer that averaged 500 or fewer full-time employees in 2019, qualified wages are generally those wages paid to all employees during a period that operations were fully or partially suspended or during the quarter that the employer had a decline in gross receipts, regardless of whether the employees are providing services.

The IRS points out that, retroactive to the enactment of the CARES Act on March 27, 2020, the law now allows employers who received Paycheck Protection Program (PPP) loans to claim the ERC for qualified wages that are not treated as payroll costs in obtaining forgiveness of the PPP loan.

PPP Loan Forgiveness

In a recent posting on its webpage (see "Didn’t Get Requested PPP Loan Forgiveness? You Can Claim the Employee Retention Credit for 2020 on the 4th Quarter Form 941"), the IRS has clarified that, under section 206(c) of the 2020 Taxpayer Certainty Act, an employer that is eligible for the ERC can claim the credit even if the employer received a Small Business Interruption Loan under the PPP. Accordingly, eligible employers can claim ERS on any qualified wages that are not counted as payroll costs in obtaining PPP loan forgiveness. Note, however, that any wages that could count toward eligibility for ERC or PPP loan forgiveness can be applied to either program, but not to both programs.

If an employer received a PPP loan and included wages paid in the 2nd and/or 3rd quarter of 2020 as payroll costs in support of an application to obtain forgiveness of the loan (rather than claiming ERC for those wages), and the employer's request for forgiveness was denied, the employer an claim the ERC related to those qualified wages on its 4th quarter 2020 Form 941, Employer's Quarterly Federal Tax Return. An employer can could report on its 4th quarter Form 941 any ERC attributable to health expenses that are qualified wages that it did not include in its 2nd and/or 3rd quarter Form 941.

Employers that choose to use this limited 4th quarter procedure must:

• Add the ERC attributable to these 2nd and/or 3rd quarter qualified wages and health expenses on line 11c or line 13d (as relevant) of their original 4th quarter Form 941 (along with any other ERC for qualified wages paid in the 4th quarter).
• Include the amount of these qualified wages paid during the 2nd and/or 3rd quarter (excluding health plan expenses) on line 21 of its original 4th quarter Form 941 (along with any qualified wages paid in the 4th quarter).
• Enter the same amount on Worksheet 1, Step 3, line 3a (in the 941 Instructions).
• Include the amount of these health plan expenses from the 2nd and/or 3rd quarter on line 22 of the 4th quarter Form 941 (along with any health expenses for the 4th quarter).
• Enter the same amount on Worksheet 1, Step 3, line 3b.

The IRS recognized that it might be difficult to implement these special procedures so late in the timeframe to file 4th quarter returns. Therefore, employers can instead choose the regular process of filing an adjusted return or claim for refund for the appropriate quarter to which the additional ERC relates using Form 941-X.

More Information

For more information on the employee retention credit, the IRS urges taxpayers to visit its "COVID-19-Related Employee Retention Credits: How to Claim the Employee Retention Credit FAQs" webpage (at https://www.irs.gov/newsroom/covid-19-related-employee-retention-credits-how-to-claim-the-employee-retention-credit-faqs).

The IRS has adopted previously issued proposed regulations ( REG-106808-19) dealing with the 100 percent bonus depreciation deduction. In addition, some clarifying changes have been made to previously issued final regulations ( T.D. 9874). Changes to the proposed and earlier final regulations are largely in response to various comments submitted by practitioners, and generally relate to:

The IRS has adopted previously issued proposed regulations ( REG-106808-19) dealing with the 100 percent bonus depreciation deduction. In addition, some clarifying changes have been made to previously issued final regulations ( T.D. 9874). Changes to the proposed and earlier final regulations are largely in response to various comments submitted by practitioners, and generally relate to:

• the definition of qualified used property;
• the election to claim bonus depreciation on components acquired or self-constructed after September 27, 2017, for larger self-constructed property for which manufacture, construction, or production began before September 28, 2017;
• application of the mid-quarter convention;
• clarifications to the definition of qualified improvement property, predecessor, and class of property; and
• clarifications to the rules for consolidated groups
  The rules for consolidated groups have also been moved from Proposed Reg. §1.168(k)-2(b)(3)(v) to new Reg. §1.1502-68.

Used Property
The 2019 final regulations provide that in determining whether the taxpayer or a predecessor had a depreciation interest in property prior to its acquisition, only the five calendar years immediately prior to the current placed-in-service year are considered. The latest IRS regulations clarify that the five calendar years immediately prior to the current calendar year in which the property is placed in service by the taxpayer, and the portion of such current calendar year before the placed-in-service date of the property without taking into account the applicable convention, are taken into account. In addition, the five-year look-back period applies separately to the taxpayer and a predecessor.

Furthermore, if the taxpayer or a predecessor, or both, have not been in existence during the entire look-back period, then only the portion of the look-back period during which the taxpayer or a predecessor, or both, have been in existence is taken into account.

Expanded Component Election
The prior regulations allow taxpayers to election to claim 100 percent bonus depreciation on components of certain larger constructed property that qualifies for bonus depreciation if the construction of the larger property began before September 28, 2017. The components must be acquired or constructed after September 27, 2017, and the larger property must be placed in service before 2020 (2021 in the case of property with a longer construction period). The final regulations remove the 2020/2021 cutoff date. In addition, the final regulations provide that eligible larger self-constructed property also includes property that is constructed for a taxpayer under a written contract that is not binding and that is entered into prior to construction for use in the taxpayer’s trade or business. The definition of a larger constructed property is also clarified.

Qualified Improvement Property
The 15-year recovery period for qualified improvement property applies only to improvements "made by the taxpayer." The final regulations clarify that an improvement is considered made by a taxpayer if the property is constructed for the taxpayer. However, qualified improvement property received by a transferee taxpayer in a nonrecognition transaction described in Code Sec. 168(i)(7) is not eligible for bonus depreciation.

Mid-Quarter Convention
The final regulations clarify that depreciable basis is not reduced by the amount of bonus deduction in determining whether the mid-quarter convention applies.

Binding Contracts
Generally, property acquired pursuant to a binding contract entered into after September 27, 2017, does not qualify for bonus depreciation at the 100 percent rate. The final regulations clarify that a contract for a sale of stock of a corporation that is treated as an asset sale as the result of a Code Sec. 336(e) election made for a disposition described in Reg. §1.336-2(b)(1) is a binding contract if enforceable under state law.

Floor Plan Financing
The IRS intends to issue guidance relating to transition relief for taxpayers with a trade or business with floor plan financing indebtedness that want to revoke elections not to claim bonus depreciation for property placed in service during 2018.

The IRS will not allow a taxpayer to limit the amount of its otherwise deductible floor plan interest in order to qualify for bonus depreciation. However, guidance will address transition relief for the 2018 tax year for taxpayers that treated Code Sec. 168(j)(1) as providing an option for a business with floor plan financing indebtedness to include or exclude its floor plan financing interest expense in determining the amount allowed as a deduction for business interest expense for the tax year.

Effective Date
In general, the regulations apply to property acquired after September 27, 2017, and placed in service during or after a tax years that begins on or after January 1, 2021. However, they may be relied on for earlier tax years.

The 2017 tax filing season launched on January 23. The IRS predicted a few speedbumps for taxpayers, especially for taxpayers who file early in anticipation of early refunds. The agency expects to receive more than 150 million individual income tax returns. The vast majority of individual income tax returns will be filed electronically and the IRS has extra safeguards in place to protect taxpayers from cybercrime.

The 2017 tax filing season launched on January 23. The IRS predicted a few speedbumps for taxpayers, especially for taxpayers who file early in anticipation of early refunds. The agency expects to receive more than 150 million individual income tax returns. The vast majority of individual income tax returns will be filed electronically and the IRS has extra safeguards in place to protect taxpayers from cybercrime.

Refunds

Traditionally, the start of the filing season is busy with the IRS processing returns from taxpayers anticipating refunds. This year is no exception but a law passed in 2015 may hold up some refunds. Over the past several months, the IRS has been alerting taxpayers to the change. The law – the Protecting Americans from Tax Hikes Act of 2015 (PATH Act) – impacts taxpayers claiming the earned income tax credit (EITC) and the additional child tax credit (ACTC).

The PATH Act generally requires that no refund will be made to a taxpayer before the 15th day of the second month following the close of that tax year, if the taxpayer claimed the EITC or ACTC on his or her return. This rule in the PATH Act applies to refunds made after December 31, 2016. So this is the first filing season impacted by the new rule.

The IRS has reported that it will begin releasing refunds affected by the PATH Act’s new rule on February 15, 2017. However, many early filers likely will not have access to their refunds until at least the week of February 27, according to the IRS. The additional delay is due to several factors, including the time needed by banks and financial institutions to process direct deposits of refunds, the agency explained.

Cybercrime

Along with the advising taxpayers about the possibility of delayed refunds, the IRS also has been stepping up its education about tax-related identity theft. Cybercriminals use a variety of tools to scam taxpayers. Identity thieves call taxpayers and claim to be IRS employees. They demand payment of nonexistent tax debts or they tell taxpayers that the IRS needs to “verify” their personal financial information. Cybercriminals also use emails and social media to trick taxpayers into revealing their personal financial information. These scams are nationwide and leave no one untouched.

The IRS has partnered with tax professionals and the tax preparation industry to protect taxpayers from cybercriminals. Tax professionals must adhere to strict IRS security standards.

Many of these protections are unseen to taxpayers. The IRS has upgraded its return processing filters to discover fraudulent returns. The agency also has safeguards built into electronic filing. Several years ago, cybercriminals breached an IRS app but, according to the agency, criminals have not succeeded in penetrating the agency’s core processing functions.

Keep in mind that cybercriminals are most active early in the filing season. Identity thieves seek to file fraudulent returns early; before taxpayers file their legitimate returns. All too often, taxpayers first learn they are victims of identity theft when the IRS rejects their return. If you have any concerns that your personal information may have been stolen or compromised, please contact our office. Together, we can work with the IRS. The IRS has a special program for victims of identity theft.

As the filing season progresses, our office will keep you posted of developments. As always, please contact us if you have any questions.

An S corporation can own an interest in another business entity. It can also be a partner in a partnership or a member of a limited liability company (LLC). An S corporation can own 80 percent or more of the stock of a C corporation, which can elect to join in the filing of a consolidated return with its affiliated C corporations. However, an S corporation is ineligible to be a member of the affiliated group and to join in the election to file a consolidated return.

An S corporation can own an interest in another business entity. It can also be a partner in a partnership or a member of a limited liability company (LLC). An S corporation can own 80 percent or more of the stock of a C corporation, which can elect to join in the filing of a consolidated return with its affiliated C corporations. However, an S corporation is ineligible to be a member of the affiliated group and to join in the election to file a consolidated return.

The primary mechanism for ownership of another entity is for an S corporation to own a subsidiary S corporation, known as a qualified Subchapter S subsidiary. The subsidiary must be otherwise eligible to be an S corporation if the parent’s shareholders directly owned the subsidiary’s stock. The parent S corporation must own the subsidiary’s stock directly and must own 100 percent of the subsidiary’s stock.

Finally, the parent must elect, on Form 8869, to treat the corporation as a qualified Subchapter S subsidiary. The election of qualified S corporation subsidiary status results in a deemed liquidation of the subsidiary into the parent. If the election later is revoked or terminates, the former subsidiary is treated as a new corporation that acquired all of its assets and assumed all of its liabilities immediately before the termination.

For tax purposes, the separate existence of the subsidiary is ignored. All the assets, liabilities and items of income, deduction or credit of the subsidiary are treated as belonging to the parent S corporation. However, the subsidiary is treated as a separate entity for employment tax liabilities paid in 2009 or later, and certain excise taxes paid in 2008 or later. If the subsidiary was a separate corporation before joining with the parent, the subsidiary remains liable for any taxes that arose during the period when it was separate.

Foreign travel expenses may be subject to allocation if the taxpayer engages in personal activities while traveling on business. A portion of the foreign travel expenses may be nondeductible if the individual engages in substantial nonbusiness activity. The allocation rules apply where the individual engages in substantial nonbusiness activity at, near, or beyond the business destination; or, when the personal destination is en route to and from the business destination.

Foreign travel expenses may be subject to allocation if the taxpayer engages in personal activities while traveling on business. A portion of the foreign travel expenses may be nondeductible if the individual engages in substantial nonbusiness activity. The allocation rules apply where the individual engages in substantial nonbusiness activity at, near, or beyond the business destination; or, when the personal destination is en route to and from the business destination.

The rules apply for travel outside the 50 states and the District of Columbia. Travel to the possessions is considered travel outside the U.S. Travel outside the U.S. does not include any travel from one point in the U.S. to another point in the United States, even though part of the trip is outside the United States.

Allocation is done on a day-to-day basis, in proportion to the number of nonbusiness days during the trip to the entire trip. Each day is considered either entirely a business day or entirely a nonbusiness day. A day spent outside the U.S. is deemed a business day, even though only part of the day was spent on business, if any of the following apply:

• The taxpayer was traveling to or returning from a destination outside the U.S. in pursuit of a trade or business.
• The taxpayer's presence outside the U.S. on that day was required at a particular place for a specific business purpose.
• During hours that are normally considered appropriate for business activity the taxpayer's principal activity was the pursuit of a trade or business.

If the trip is primarily personal in nature, travel expenses to and from the destination are not deductible, even if the taxpayer engages in business activities while at the destination.

Once the amount of travel expenses subject to the allocation and disallowance rules is determined, that amount is multiplied by a fraction, equal to the number of nonbusiness days during the trip, divided by the total number of business and nonbusiness days during the trip.

These restrictions do not apply when any of the following conditions applies:

• Travel time outside the United States do not exceed one week.
• Nonbusiness travel time is less than 25 percent of the total time.
• The individual lacks substantial control over the travel arrangements (other than the timing of the trip).
• The vacation portion of the trip is a not a major consideration of the taxpayer.

An employer must withhold income taxes from compensation paid to common-law employees (but not from compensation paid to independent contractors). The amount withheld from an employee's wages is determined in part by the number of withholding exemptions and allowances the employee claims. Note that although the Tax Code and regulations distinguish between withholding exemptions and withholding allowances, the terms are interchangeable. The amount of reduction attributable to one withholding allowance is the same as that attributable to one withholding exemption. Form W-4 and most informal IRS publications refer to both as withholding allowances, probably to avoid confusion with the complete exemption from withholding for employees with no tax liability.

An employer must withhold income taxes from compensation paid to common-law employees (but not from compensation paid to independent contractors). The amount withheld from an employee's wages is determined in part by the number of withholding exemptions and allowances the employee claims. Note that although the Tax Code and regulations distinguish between "withholding exemptions" and "withholding allowances," the terms are interchangeable. The amount of reduction attributable to one withholding allowance is the same as that attributable to one withholding exemption. Form W-4 and most informal IRS publications refer to both as withholding allowances, probably to avoid confusion with the complete exemption from withholding for employees with no tax liability.

An employee may change the number of withholding exemptions and/or allowances she claims on Form W-4, Employee's Withholding Allowance Certificate. It is generally advisable for an employee to change his or her withholding so that it matches his or her projected federal tax liability as closely as possible. If an employer overwithholds through Form W-4 instructions, then the employee has essentially provided the IRS with an interest-free loan. If, on the other hand, the employer underwithholds, the employee could be liable for a large income tax bill at the end of the year, as well as interest and potential penalties.

How allowances affect withholding

For each exemption or allowance claimed, an amount equal to one personal exemption, prorated to the payroll period, is subtracted from the total amount of wages paid. This reduced amount, rather than the total wage amount, is subject to withholding. In other words, the personal exemption amount is $4,000 for 2015, meaning the prorated exemption amount for an employee receiving a biweekly paycheck is $153.85 ($4,000 divided by 26 paychecks per year) for 2015.

In addition, if an employee's expected income when offset by deductions and credits is low enough so that the employee will not have any income tax liability for the year, the employee may be able to claim a complete exemption from withholding.

Changing the amount withheld

Taxpayers may change the number of withholding allowances they claim based on their estimated and anticipated deductions, credits, and losses for the year.  For example, an employee who anticipates claiming a large number of itemized deductions and tax credits may wish to claim additional withholding allowances if the current number of withholding exemptions he is currently claiming for the year is too low and would result in overwithholding.

Withholding allowances are claimed on Form W-4, Employee's Withholding Allowance Certificate, with the withholding exemptions. An employer should have a Form W-4 on file for each employee. New employees generally must complete Form W-4 for their employer. Existing employees may update that Form W-4 at any time during the year, and should be encouraged to do so as early as possible in 2015 if they either owed significant taxes or received a large refund when filing their 2014 tax return.

The IRS provides an IRS Withholding Calculator at www.irs.gov/individuals that can help individuals to determine how many withholding allowances to claim on their Forms-W-4. In the alternative, employees can use the worksheets and tables that accompany the Form W-4 to compute the appropriate number of allowances.

Employers should note that a Form W-4 remains in effect until an employee provides a new one. If an employee does update her Form W-4, the employer should not adjust withholding for pay periods before the effective date of the new form. If an employee provides the employer with a Form W-4 that replaces an existing Form W-4, the employer should begin to withhold in accordance with the new Form W-4 no later than the start of the first payroll period ending on or after the 30th day from the date on which the employer received the replacement Form W-4.

Taxpayers who are self-employed must pay self-employment tax on their income from self-employment. The self-employment tax applies in lieu of Federal Insurance Contributions Act (FICA) taxes paid by employees and employers on compensation from employment. Like FICA taxes, the self-employment tax consists of taxes collected for Social Security and for Medicare (hospital insurance or HI).

Taxpayers who are self-employed must pay self-employment tax on their income from self-employment. The self-employment tax applies in lieu of Federal Insurance Contributions Act (FICA) taxes paid by employees and employers on compensation from employment. Like FICA taxes, the self-employment tax consists of taxes collected for Social Security and for Medicare (hospital insurance or HI).

The self-employment tax is levied and collected as part of the income tax. The tax must be taken into account in determining an individual's estimated taxes. The self-employed taxpayer is responsible for the self-employment tax, in effect paying both the employer's and the employee's share of the tax. The tax is calculated on Schedule SE, filed with the individual's income tax return, and is then reported on the Form 1040.

Self-Employment Tax Rate

The self-employment tax rate is 15.3 percent of self-employment income. This is the same overall percentage that applies to an employee's compensation. The rate combines the 12.4 percent Social Security tax and the 2.9 percent Medicare tax. Self-employed individuals can deduct one-half of the self-employment tax. (For 2011 and 2012, the Social Security tax rate was reduced from 12.4 to 10.4 percent.) If the individual's net earnings from self-employment are less than $400 (or $100 for a church employee), the individual does not owe self-employment tax.

Like FICA taxes, the 12.4 percent Social Security tax only applies to earning up to a specified threshold. For 2013, this threshold was $113,700; for 2014, the threshold is $117,000. There is no ceiling for applying the 2.9 percent Medicare tax.

Self-Employment

The tax applies to net earnings from self-employment. This is the taxpayer's gross income for the year from operating a trade or business, minus the deductions allowable to the trade or business, plus the taxpayer's distributive share of income or loss from a partnership.

A person is self-employed if he or she carries on a trade or business as a sole proprietor or independent contractor. A general partner of a partnership that carries on a trade or business is also considered to be self-employed. Self-employment does not include the performance of services by an employee. However, an employee who also carries on a separate business part-time can be self-employed with respect to the business.

Additional Medicare Tax

Effective for 2013 and subsequent years, both employees and self-employed individuals must pay an additional 0.9 percent Medicare tax if their FICA wages or self-employment income exceeds specified thresholds $250,000 for joint filers; $125,000 for married filing separately; and $200,000 for all other taxpayers. This tax is determined on Form 8959.

The American Taxpayer Relief Act of 2012, signed into law on January 2, 2013, extended the American Opportunity Tax Credit through (and including) the 2017 tax year. The credit, which is an enhanced version of the Hope tax credit for tuition, allows taxpayers to claim a credit against federal income taxes for costs of tuition and other qualified educational expenses paid for the taxpayer, his or her spouse, or a dependent claimed on the tax return who is enrolled at an eligible educational institution. An eligible educational institution would include any accredited public, nonprofit, or private college, university, vocational school, or other post-secondary institution.

The American Taxpayer Relief Act of 2012, signed into law on January 2, 2013, extended the American Opportunity Tax Credit through (and including) the 2017 tax year. The credit, which is an enhanced version of the Hope tax credit for tuition, allows taxpayers to claim a credit against federal income taxes for costs of tuition and other qualified educational expenses paid for the taxpayer, his or her spouse, or a dependent claimed on the tax return who is enrolled at an eligible educational institution. An eligible educational institution would include any accredited public, nonprofit, or private college, university, vocational school, or other post-secondary institution.

The maximum American Opportunity Tax Credit amount is $2,500 per eligible student per year, and it is available for each of the first four years of a student's post-secondary education. (This represents an increase from the Hope credit maximum amount of $1,800 for each of the first two years of post-secondary education.)

The American Opportunity Tax Credit amount is not $2,500 across the board for each claimant, however. Broken down, the maximum credit amount is more accurately stated as being 100 percent of the first $2,000 of qualified tuition and related expenses, plus 25 percent of the next $2,000 of qualified tuition and related expenses. If, by way of an example, a taxpayer had only $3,000 of total qualified tuition and other related expenses, the maximum credit amount the taxpayer could claim would be $2,250. In addition, the credit is also partially refundable if a taxpayer's total tax liability is less than the amount of the credit. Up to 40 percent of the credit amount is refundable.

The American Opportunity Tax Credit v. other educational benefits

The American Opportunity Tax Credit is one of several education tax benefits available to taxpayers, but because it cannot always be used in conjunction with these other benefits, taxpayers should compute their tax savings for each tax benefit and then decide which one claim. For example, a taxpayer cannot claim a tuition and fees tax deduction in the same taxable year that he or she claims either the American Opportunity Tax Credit or the Lifetime Learning Credit. Neither can a taxpayer claim the Lifetime Learning Credit for any student if he or she has opted to claim the American Opportunity Credit for that same student for the same tax year.

A taxpayer may, however, claim both an education tax credit and take distributions from a Coverdell Education Savings Account or a Qualified Tuition Program. The taxpayer must, however, subtract any qualified expenses used to figure the education credit from the amount of qualified expenses he or she subsequently uses to determine what portion of a distribution from a Coverdell ESA or a qualified tuition program is tax-free.

Before computing an education credit or deduction, the taxpayer should also determine whether or not the credit can be used towards those particular educational expenses. For example, the American Opportunity Tax Credit can be used not just toward tuition, but also toward expenses for books, equipment, and supplies that are required for coursework, but are not required as a condition of enrollment. The Lifetime Learning Credit on the other hand cannot be used for such expenses unless they are a condition of enrollment. However, the American Opportunity Tax credit can only be used for qualified education expenses incurred during each of the first four years of post-secondary education, whereas the Lifetime Learning Credit can be used toward graduate school expenses.

Other differences include that the American Opportunity Tax Credit can be used on a per student basis, meaning if one household has two qualified students, the tax return can claim two American Opportunity Tax Credits. But only one Lifetime Learning Credit can be claimed per return.

The American Opportunity Tax Credit, however, imposes a requirement that the student for whom the credit is claimed has no felony drug convictions. The Lifetime Learning Credit has no such requirement.

We will assume for now that the taxpayer has decided to go ahead and calculate the amount he or she can claim for an American Opportunity Tax Credit. The next question to ask is whether a taxpayer's adjusted gross income (AGI) falls beneath the phase-out limit. The credit was designed for lower- and middle- income families, meaning higher-income families generally cannot claim the credit.

Who is eligible?

A taxpayer can claim the American Opportunity Tax Credit for qualified expenses paid by the taxpayer for the post-secondary education of the taxpayer, the taxpayer's spouse, or the taxpayer's claimed dependent for the tax year for which the credit is claimed. There is a threshold on the amount of adjusted gross income (AGI) a taxpayer can have before the credit amount begins to phase out. The credit amount begins to phase out for single filers, heads of household, and qualifying widowers with AGI of $80,000 and completely phases out for these taxpayers if their AGI exceeds $90,000. The threshold range for married taxpayers who file jointly is from $160,000 to $180,000. Married taxpayers who file separately cannot claim the credit.

Computing the credit

Step One: Computing total qualified education expenses. In order to compute the amount of the American Opportunity Tax Credit a taxpayer must first add up all his or her qualified education expenses. Generally, qualified education expenses are amounts paid during the tax year toward tuition and fees required for the student's enrollment or attendance at an eligible educational institution. Often an educational institution will issue to the taxpayer a Form 1098-T, Tuition Statement, which includes the amount of tuition a taxpayer paid for that tax year. However, the IRS has warned that this amount can differ from the amount the taxpayer actually paid. For purposes of computing the credit, the IRS directs the taxpayer to use only the tuition amounts that he or she actually paid during the tax year.

Qualified education expenses do not include costs of room and board, insurance, medical expenses (including student health fees), transportation, and other similar personal, living, or family expenses. The costs associated with courses involving sports, games, or hobbies, or any noncredit course are generally not qualified education expenses unless such course or other education is part of the student's degree program. As we stated above, taxpayers calculating the American Opportunity Tax Credit can also include amounts spent on books, supplies, and equipment that are required for a course of study in their qualified education expenses.

Step Two: Adjusting the amount of qualified educational expenses. The taxpayer must subtract from his or her total qualified educational expenses amounts received as tax-free educational assistance received during the tax year that are allocable to the particular academic period in question. Tax-free educational assistance includes:

• The tax-free part of any scholarship or fellowship;
• The tax-free part of any employer-provided educational assistance;
• Tax-free veterans' educational assistance, and
• Any other educational assistance that is excludable from gross income (tax free).

"Tax-free" assistance does not include a gift, bequest, devise, or inheritance. It also does not include any portion of a scholarship or fellowship that must be included in gross income.

If after making these adjustments the amount of qualified education expenses exceeds the maximum credit of $2,500, the taxpayer can only claim $2,500. If the amount is lower than $2,500, the taxpayer can claim the whole amount. (Or less, if the taxpayer's AGI is within the phase-out range. See Step Three, below.)

Step Three: Calculating any phase-out of the credit. A taxpayer whose AGI falls within the phase out ranges must reduce his or her credit amount ratably. To do this, the taxpayer should subtract his or her AGI from the top threshold amount ($180,000 for married joint filers; $90,000 for single filers, heads of household, and qualifying widowers). Next the taxpayer must divide the difference by either $20,000 (married joint filers) or $10,000 (single filers, heads of household, and qualifying widowers). The resulting quotient should be multiplied by the total amount of qualified education expenses after adjustments for tax-free educational assistance. The product of that should be subtracted from the total amount of qualified education expenses, after adjustments. The result is the amount of the American Opportunity Tax Credit the taxpayer can claim.

For example, if a single taxpayer in 2012 had $85,670 in AGI, he or she must subtract that amount from the top threshold amount for single taxpayers ($90,000). Then he would take the difference ($4,330) and divide it by $10,000. The quotient is .433, meaning the taxpayer must reduce his American Opportunity tax credit amount by 43.3 percent. If, the amount of the taxpayer's qualified education expenses, after adjustments for scholarships, was $1,600, then the total credit amount that he could claim would be $891.20 because:

$1,600 - ($1,600 × .443) = $891.20

The refundable American Opportunity Tax Credit

If a taxpayer has a tax liability that is lower than the amount of the credit claimed, he or she may be eligible to receive a refundable tax credit of up to 40 percent of the credit amount (a maximum of $1,000). This means, that beyond just lowering a taxpayer's federal tax liability, a portion of the full credit amount will be returned to the taxpayer in cash as part of the tax refund.

Another set of rules applies for purposes of determining who is eligible for the refundable portion. Generally the rules on refundability appear to be designed to benefit to low-income households with little or no tax liability. Thus, the refundable portion rules seem to exclude from eligibility single filing students, who may have some earned income from a summer job or work-study. The rules state that a taxpayer cannot receive a refundable American Opportunity Tax Credit if the taxpayer:

• Is under age 18 at the end of the tax year; or
• Is over age 18 at the end of the tax year and has income that was less than one-half of the taxpayer's support; or
• Is between age 18 and 24 at the end of the tax year, a full-time student, and has earned income that was less than one-half of his or her support; and
• Has at least one living parent at the end of the tax year; and
• Is not filing a joint return for 2012.

If the taxpayer is eligible for the refundable portion, the taxpayer multiplies the total amount of qualified educational expenses, after adjustments, that he or she is able to claim as an American Opportunity Tax Credit by 40 percent (or .40). That product becomes refundable and is entered onto Form 1040, line 66, in the Payments section of the tax return.

The rules for computing education credits and deductions can be confusing. Please contact our offices with any questions.

Taxpayers with children should be aware of the numerous tax breaks for which they may qualify. Among them are: the dependency exemption, child tax credit, child care credit, and adoption credit. As they get older, education tax credits for higher education may be available; as is a new tax code requirement for employer-sponsored health care to cover young adults up to age 26. Employers of parents with young children may also qualify for the child care assistance credit.

Dependency Exemption

In addition to the personal exemption an individual taxpayer may take for him or herself to reduce taxable income (Line 42 on Form 1040), that taxpayer may also take an exemption for each qualifying dependent who has lived with the taxpayer for more than half of the tax year. A dependent may be a natural child, step-child, step-sibling, half-sibling, adopted child, eligible foster child, or grandchild, and generally must be under age 19, a full-time student under age 24, or have special needs. The amount of the exemption is the same as the taxpayer’s personal exemption, $3,700 for the 2011 tax year and $3,800 for the 2012 tax year.

Child Tax Credit

Parents of children who are under age 17 at the end of the tax year may qualify for a refundable $1,000 tax credit. The credit is a dollar-for-dollar reduction of tax liability, and may be listed on Line 51 of Form 1040. For every $1,000 of adjusted gross income above the threshold limit ($110,000 for married joint filers; $75,000 for single filers), the amount of the credit decreases by $50.

Child and Dependent Care Credit

If a taxpayer must pay for childcare for a child under age 13 in order to pursue or maintain gainful employment, he or she may claim up to $3,000 of his or her eligible expenses for dependent care. If one parent stays home full-time, however, no child care costs are eligible for the credit.

Adoption Credit

Taxpayers who have incurred qualified adoption expenses in 2011 may claim either a $13,360 credit against tax owed or a $13,360 income exclusion if the taxpayer has received payments or reimbursements from his or her employer for adoption expenses. For 2012, the amount of the credit will decrease to $12,650, and in 2013 to $5,000.

Higher Education Credits

There are two education-related credits available for 2012: the American Opportunity credit and the lifetime learning credit. The American Opportunity credit amount is the sum of 100 percent of the first $2,000 of qualified tuition and related expenses plus 25 percent of the next $2,000 of qualified tuition and related expenses, for a total maximum credit of $2,500 per eligible student per year. The credit is available for the first four years of a student's post-secondary education. The credit amount phases out ratably for taxpayers with modified AGI between $80,000 and $90,000 ($160,000 and $180,000 for joint filers). The lifetime learning credit is equal to 20 percent of the amount of qualified tuition expenses paid on the first $10,000 of tuition per family. The phaseout for 2012 ranges from $52,000 to $62,000 ($104,000 to $124,000 for joint filers). Parents also find tax relief in saving for college though Coverdell accounts, section 529 plans and specified U.S.. savings bonds.

Extended Health Care Coverage

Effective since September 23, 2010, the new health care law requires plans to provide coverage for children until they attain age 26. Further, effective on or after March 30, 2010, children under the age of 27 are considered dependents of a taxpayer for purposes of the general exclusion from income for reimbursements for medical care expenses of an employee, spouse, and dependents under an employer-provided accident or health plan. Therefore, a plan must provide coverage to a child who is still a dependent up to age 26; but can do so up to age 27 without income tax consequences. A child includes a son, daughter, stepson, or stepdaughter of the taxpayer; a foster child placed with the taxpayer by an authorized placement agency or by judgment, decree, or other order of any court of competent jurisdiction; and a legally adopted child of the taxpayer or a child who has been lawfully placed with the taxpayer for legal adoption.

Child Care Assistance Credit (for businesses)

Employers may take up to $150,000 of the eligible costs of providing employees with child care assistance as tax credit. These costs may include a portion of the costs of acquiring, constructing, improving, and operating a child care facility.

If you have any questions about these provisions and how they may benefit you, please contact our office.

Often, individuals end up with an unexpected tax liability on April 15. There are several options available to pay off your tax debt, stop accruing penalties and interest and secure peace of mind. Each payment method has its advantages and disadvantages depending on your financial, and personal, circumstances, and each option should be discussed with a tax professional prior to making a decision. Our office would be glad to answer any questions you have about each payment method.  

Stop accruing interest and penalties

Remember, if you filed on time but were unable to pay the entire amount, or any amount, showing as due on your return when you filed, and you have an outstanding balance with Uncle Sam, you are incurring interest and a "failure to pay" penalty imposed by the IRS. The failure to pay penalty is one-half of one percent (0.5%) owed for each month, or part of a month, that your tax remains unpaid after the due date. The late payment penalty can climb to a maximum of 25 percent on the amount actually shown as due on the return, even if you paid some of the tax debt off when you filed your return. This is the reason why it is imperative that you pay off your tax debt as quickly as possible, under a plan that avoids this steep penalty.

Here are some of the most common payment options available to taxpayers who still have an outstanding balance with the IRS:

Pay by credit card. Depending on your situation, paying the balance of your tax liability with a credit card (or by another form of personal loan) may be the best option in order to stop accruing interest and penalties for failing to pay the entire amount due. If this is an option, make sure you use a card with the lowest interest rate and the lowest account balance. The IRS has contracted with two private, third-party servicers that process credit card tax payments, and both (Official Payments Corporation and Link2Gov Corporation) accept most major credit cards such as American Express, Visa, and MasterCard. Additionally, you can use a credit card regardless of whether you filed your return electronically or by mail. Finally, be mindful that interest on a credit card or other personal loan to pay off your taxes is non-deductible.

Apply for an installment plan. The IRS offers taxpayers the ability to apply for an installment agreement plan. There are many requirements and rules regarding the installment plan method, which a tax professional can discuss with you. A request for an installment plan is made by filing Form 9465 with the IRS. Although there is a fee for apply for the agreement of approximately $105, this amount is deducted from your first payment upon approval of your request. However, even if your request is granted, you will continue to be charged interest on any tax not paid by the due date. But, the late payment penalty will generally be half the usual rate (i.e. 2 percent, instead of 4 percent per month).

Offer in compromise. In some situations, the IRS may allow you to strike a deal by accepting an offer-in-compromise (OIC). In general, an OIC allows you to make a one-time lump sum payment to the IRS that is less than the total amount of the taxes you owe. However, if your tax debt can be fully paid through an installment agreement or by other means, in most cases you may not be eligible for an OIC. Additionally, the amount of tax you propose to pay must reasonably reflect the liability you actually owe to have any success of being accepted by the IRS. You must include a $150 application fee with your OIC request, which is made on Form 656. If the IRS accepts your offer, this amount goes towards reducing your tax liability.

These are only some of the common options available to taxpayers who remain saddled with unpaid tax debt. Each available payment option should be discussed with a tax professional. Our office can help you understand your options and choose a payment method that is best for you, personally and financially. 

No. Even though trash pickup and neighborhood oversight provided by a governmental entity such as a town or county can be figured into the amount of deductible property taxes paid by a homeowner, a payment to a nongovernmental entity is not a deductible tax.

A tax is commonly defined as an enforced contribution, exacted on persons or property pursuant to legislative authority in the exercise of a governmental body's taxing power. A tax is imposed and collected for the purpose of raising revenue to be used for public or governmental purposes. Trash collection, for public health reasons, is among those permitted uses.

To be deductible as a tax, a payment must be made to a governmental body, or to certain public benefit corporations created under governmental authority for public purposes. Payments that are for the same purposes as a tax but that are made to a nongovernmental organization are not deductible.

Amounts paid to a cooperative or condominium association and allocable to governmental property taxes imposed on common areas or on a particular unit are deductible as property taxes. However, as with taxes paid into escrow under a mortgage account, amounts paid to associations for taxes are not deductible until the association or other entity remits payment of those taxes to the governmental entity.

Whether a particular contribution or charge is treated as a tax depends on its true nature. Merely designating a required payment in the levying statute as a tax is not determinative for federal tax purposes. For example, a New York State renter's tax paid by renters under the New York Real Property Tax Law is not a tax but is considered merely a part of rental payments.

Do you know where your 401(k) plan funds are? Errors can and do occur, sometimes with devastating results. By taking an active role in the management of your account, you can quickly uncover any errors, make good investment choices, and ascertain a secure, comfortable retirement. Here are some guidelines to help you get the most out of your 401(k) plan.

Do you know where your 401(k) plan funds are? Errors can and do occur, sometimes with devastating results. By taking an active role in the management of your account, you can quickly uncover any errors, make good investment choices, and ascertain a more secure retirement. Here are some guidelines to help you get the most out of your 401(k) plan, which - in light of current economic times - is more important now then ever.

Watch out for errors. Your company is required to provide an annual statement that shows the amounts that were contributed to your plan throughout the year. Compare amounts withheld from your paychecks to the employee contributions recorded on your 401(k) statement. If your employer has a matching program, verify that employer contributions are being correctly allocated to your account. Make sure the plan's vesting schedule is being correctly applied to you.

Do your homework. In addition to offering the company stock, most companies also offer a wide range of investment options. By gathering information for the different investment choices offered, you have a better opportunity to make an intelligent, informed decision. If your company does not provide a fund prospectus or performance history for the mutual fund or stock choices offered, you can contact the fund or company directly to obtain this pertinent information.

Make smart investment choices. Many employees make the mistake of investing too conservatively. Since a 401(k) plan is usually comprised of a variety of diversified securities, including stock, you can take advantage of the fact that over the long term, stocks generally outperform all other investments. Diversification has its place in any portfolio, so bonds and T-bills should also be considered.

Keep an eye on your plan's performance. While the annual statement provided by your employer will give you detail as to how your investments have performed over the past year, it's a good idea to monitor your fund's investments more frequently. While a good overall return for the year may make you think that your investment mix is right on target, very strong earnings in the first part of the year may hide the fact that some of your investments have taken a turn for the worse. To monitor the individual funds and stocks that comprise your 401(k) plan, check the business section of your newspaper on a regular basis, and just go online if you're invested with one of the major funds. Remember, too, that you pay no tax on your 401(k) investments until you retire and start to withdraw from it. As a result, funds geared to the situation in which short and long-term selling are treated the same for tax purposes ought to play into your investment strategy.

Maintaining good financial records is an important part of running a successful business. Not only will good records help you identify strengths and weaknesses in your business' operations, but they will also help out tremendously if the IRS comes knocking on your door.

Maintaining good financial records is an important part of running a successful business. Not only will good records help you identify strengths and weaknesses in your business' operations, but they will also help out tremendously if the IRS comes knocking on your door.

The IRS requires that business owners keep adequate books and records and that they be available when needed for the administration of any provision of the Internal Revenue Code (i.e., an audit). Here are some basic guidelines:

Copies of tax returns. You must keep records that support each item of income or deduction on a business return until the statute of limitations for that return expires. In general, the statute of limitations is three years after the date on which the return was filed. Because the IRS may go back as far as six years to audit a tax return when a substantial understatement of income is suspected, it may be prudent to keep records for at least six years. In cases of suspected tax fraud or if a return is never filed, the statute of limitations never expires.

Employment taxes. Chances are that if you have employees, you've accumulated a great deal of paperwork over the years. The IRS isn't looking to give you a break either: you are required to keep all employment tax records for at least 4 years after the date the tax becomes due or is paid, whichever is later. These records include payroll tax returns and employee time documentation.

Business assets. Records relating to business assets should be kept until the statute of limitations expires for the year in which you dispose of the asset in a taxable disposition. Original acquisition documentation, (e.g. receipts, escrow statements) should be kept to compute any depreciation, amortization, or depletion deduction, and to later determine your cost basis for computing gain or loss when you sell or otherwise dispose of the asset. If your business has leased property that qualifies as a capital lease, you should retain the underlying lease agreement in case the IRS ever questions the nature of the lease.

For property received in a nontaxable exchange, additional documentation must be kept. With this type of transaction, your cost basis in the new property is the same as the cost basis of the property you disposed of, increased by the money you paid. You must keep the records on the old property, as well as on the new property, until the statute of limitations expires for the year in which you dispose of the new property in a taxable disposition.

Inventories. If your business maintains inventory, your recordkeeping requirements are even more arduous. The use of special inventory valuation methods (e.g. LIFO and UNICAP) may prolong the record retention period. For example, if you use the last-in, first-out (LIFO) method of accounting for inventory, you will need to maintain the records necessary to substantiate all costs since the first year you used LIFO.

Specific Computerized Systems Requirements

If your company has modified, or is considering modifying its computer, recordkeeping and/or imaging systems, it is essential that you take the IRS's recently updated recordkeeping requirements into consideration.

If you use a computerized system, you must be able to produce sufficient legible records to support and verify amounts shown on your business tax return and determine your correct tax liability. To meet this qualification, the machine-sensible records must reconcile with your books and business tax return. These records must provide enough detail to identify the underlying source documents. You must also keep all machine-sensible records and a complete description of the computerized portion of your recordkeeping system.

Some additional advice: when your records are no longer needed for tax purposes, think twice before discarding them; they may still be needed for other nontax purposes. Besides the wealth of information good records provide for business planning purposes, insurance companies and/or creditors may have different record retention requirements than the IRS.

After your tax returns have been filed, several questions arise: What do you do with the stack of paperwork? What should you keep? What should you throw away? Will you ever need any of these documents again? Fortunately, recent tax provisions have made it easier for you to part with some of your tax-related clutter.

After your tax returns have been filed, several questions arise: What do you do with the stack of paperwork? What should you keep? What should you throw away? Will you ever need any of these documents again? Fortunately, recent tax provisions have made it easier for you to part with some of your tax-related clutter.

The IRS Restructuring and Reform Act of 1998 created quite a stir when it shifted the "burden of proof" from the taxpayer to the IRS. Although it would appear that this would translate into less of a headache for taxpayers (from a recordkeeping standpoint at least), it doesn't let us off of the hook entirely. Keeping good records is still the best defense against any future questions that the IRS may bring up. Here are some basic guidelines for you to follow as you sift through your tax and financial records:

Copies of returns. Your returns (and all supporting documentation) should be kept until the expiration of the statute of limitations for that tax year, which in most cases is three years after the date on which the return was filed. It's recommended that you keep your tax records for six years, since in some cases where a substantial understatement of income exists, the IRS may go back as far as six years to audit a tax return. In cases of suspected tax fraud or if you never file a return at all, the statute of limitations never expires.

Personal residence. With tax provisions allowing couples to generally take the first $500,000 of profits from the sale of their home tax-free, some people may think this is a good time to purge all of those escrow documents and improvement records. And for most people it is true that you only need to keep papers that document how much you paid for the house, the cost of any major improvements, and any depreciation taken over the years. But before you light a match to the rest of the heap, you need to consider the possibility of the following scenarios:

• • Your gain is more than $500,000 when you eventually sell your house. It could happen. If you couple past deferred gains from prior home sales with future appreciation and inflation, you could be looking at a substantial gain when you sell your house 15+ years from now. It's also possible that tax laws will change in that time, meaning you'll want every scrap of documentation that will support a larger cost basis in the home sold.
  • You did not use the home as a principal residence for a period. A relatively new income inclusion rule applies to home sales after December 31, 2008. Under the Housing and Economic Recovery Act of 2008, gain from the sale of a principal residence will no longer be excluded from gross income for periods that the home was not used as the principal residence. These periods of time are referred to as "non-qualifying use." The rule applies to sales occurring after December 31, 2008, but is based only on non-qualified use periods beginning on or after January 1, 2009. The amount of gain attributed to periods of non-qualified use is the amount of gain multiplied by a fraction, the numerator of which is the aggregate period of non-qualified use during which the property was owned by the taxpayer and the denominator of which is the period the taxpayer owned the property. Remember, however, that "non-qualified" use does not include any use prior to 2009.

• • You may divorce or become widowed. While realizing more than a $500,000 gain on the sale of a home seems unattainable for most people, the gain exclusion for single people is only $250,000, definitely a more realistic number. While a widow(er) will most likely get some relief due to a step-up in basis upon the death of a spouse, an individual may find themselves with a taxable gain if they receive the house in a property settlement pursuant to a divorce. Here again, sufficient documentation to prove a larger cost basis is desirable.

Individual Retirement Accounts. Roth IRA and education IRAs require varying degrees of recordkeeping:

• • Traditional IRAs. Distributions from traditional IRAs are taxable to the extent that the distributions exceed the holder's cost basis in the IRA. If you have made any nondeductible IRA contributions, then you may have basis in your IRAs. Records of IRA contributions and distributions must be kept until all funds have been withdrawn. Form 8606, Nondeductible IRAs, is used to keep track of the cost basis of your IRAs on an ongoing basis.

• • Roth IRAs. Earnings from Roth IRAs are not taxable except in certain cases where there is a premature distribution prior to reaching age 59 1/2. Therefore, recordkeeping for this type of IRA is the fairly simple. Statements from your IRA trustee may be worth keeping in order to document contributions that were made should you ever need to take a withdrawal before age 59 1/2.
  • Education IRAs. Because the proceeds from this type of an IRA must be used for a particular purpose (qualified tuition expenses), you should keep records of all expenditures made until the account is depleted (prior to the holder's 30th birthday). Any expenditures not deemed by the IRS to be qualified expenses will be taxable to the holder.

Investments. Brokerage firm statements, stock purchase and sales confirmations, and dividend reinvestment statements are examples of documents you should keep to verify the cost basis in your securities. If you have securities that you acquired from an inheritance or a gift, it is important to keep documentation of your cost basis. For gifts, this would include any records that support the cost basis of the securities when they were held by the person who gave you the gift. For inherited securities, you will want a copy of any estate or trust returns that were filed.

Keep in mind that there are also many nontax reasons to keep tax and financial records, such as for insurance, home/personal loan, or financial planning purposes. The decision to keep financial records should be made after all factors, including nontax factors, have been considered.

With home values across the country at the highest levels seen in years, you may find that you could actually have a gain from the sale of your home in excess of the new IRS exclusion amount of $500,000 ($250,000 for single and married filing separately taxpayers). In order to determine your potential gain or loss from the sale, you will first need to know the basis of your personal residence.

With home values across the country dropping significantly from just a year ago, but still generally much higher then they had been even five years ago, you may find that you could actually have a gain from the sale of your home in excess of the new IRS exclusion amount of $500,000 ($250,000 for single and married filing separately taxpayers). In order to determine your potential gain or loss from the sale, you will first need to know the basis of your personal residence.

Note. The Housing and Economic Recovery Act of 2008 modified the home sale exclusion applicable to home sales after December 31, 2008. Under the new rule, gain from the sale of a principal residence that is attributable to periods that the home was not used as a principal residence (i.e. "non-qualifying use") will be no longer be excluded from income. A transition rule provided in the new law applies the new income inclusion rule to nonqualified use periods that begin on or after January 1, 2009. This is a generous transition rule in light of the new requirement.

The basis of your personal residence is generally made up of three basic components: original cost, improvements, and certain other basis adjustments.

Original cost

How your home was acquired will need to be considered when determining its original cost basis.

Purchase or Construction. If you bought your home, your original cost basis will generally include the purchase price of the property and most settlement or closing costs you paid. If you or someone else constructed your home, your basis in the home would be your basis in the land plus the amount you paid to have the home built, including any settlement and closing costs incurred to acquire the land or secure a loan.

Examples of some of the settlement fees and closing costs that will increase the original cost basis of your home are:

• Attorney's fees,
• Abstract fees,
• Charges for installing utility service,
• Transfer and stamp taxes,
• Title search fees,
• Surveys,
• Owner's title insurance, and
• Unreimbursed amounts the seller owes but you pay, such as back taxes or interest; recording or mortgage fees; charges for improvements or repairs, or selling commissions.

Gift. If you acquired your home as a gift, your basis will be the same as it would be in the hands of the donor at the time it was given to you. However, the basis for loss is the lesser of the donor's adjusted basis or the fair market value on the date you received the gift.

Inheritance. If you inherited your home, your basis is the fair market value on the date of the deceased's death or on the "alternate valuation" date, as indicated on the federal estate tax return filed for the deceased.

Divorce. If your home was transferred to you from your ex-spouse incident to your divorce, your basis is the same as the ex-spouse's adjusted basis just before the transfer took place.

Improvements

If you've been in your home any length of time, you most likely have made some home improvements. These improvements will generally increase your home's basis and therefore decrease any potential gain on the sale of your residence. Before you increase your basis for any home improvements, though, you will need to determine which expenditures can actually be considered improvements versus repairs.

An improvement materially adds to the value of your home, considerably prolongs its useful life, or adapts it to new uses. The cost of any improvements can not be deducted and must be added to the basis of your home. Examples of improvements include putting room additions, putting up a fence, putting in new plumbing or wiring, installing a new roof, and resurfacing your patio.

Repairs, on the other hand, are expenses that are incurred to keep the property in a generally efficient operating condition and do not add value or extend the life of the property. For a personal residence, these costs cannot be do not add to the basis of the home. Examples of repairs are painting, mending drywall, and fixing a minor plumbing problem.

Other basis adjustments

Additional items that will increase your basis include expenditures for restoring damaged property and assessing local improvements. Some common decreases to your home's basis are:

Recordkeeping

In order to document your home's basis, it is wise to keep the records that substantiate the basis of your residence such as settlement statements, receipts, canceled checks, and other records for all improvements you made. Good records can make your life a lot easier if the IRS ever questions your gain calculation. You should keep these records for as long as you own the home. Once you sell the home, keep the records until the statute of limitations expires (generally three years after the date on which the return was filed reporting the sale)