Newsletters

To our business clients.

WITHHOLDING FROM EMPLOYEES' PAYCHECKS:

1a. Social Security - The employee portion of this tax remains at 6.2% with a wage limit of $176,100. The employer’s portion of Social Security for 2025 also remains at 6.2%, on wages up to $176,100.  

1b. Medicare - The employee and employer each pay 1.45% and there is no cap on the amount of payroll which will be subject to this total tax of 2.9%. Because of the unlimited ceiling on Medicare, there is no maximum tax deduction.

Generally, payroll deposits will include 15.3% of wages (6.2% times 2, plus 1.45% times 2) on wages up to $176,100, and 2.9% of all wages thereafter. However, there is an additional Medicare withholding of 0.9% on employees earning over $200,000. So the employee’s normal Medicare tax rate of 1.45%, will rise to 2.35% on their earnings over $200,000 but the employer still pays only the 1.45% rate.

2. The rate for self-employment persons will be 15.3% on wages up to $176,100. The Medicare tax of 2.9% continues on amounts over $176,100. Self-employed people earning over $200,000 will also face the additional .9% Medicare tax. Because the Medicare tax applies to all earnings, there is no maximum self-employment tax. (There is a deduction allowed for self-employed persons for both self-employment tax and income tax computations).

3. Federal and State Income Tax - The amount of withholding will change for both Federal and State effective January 1, 2025.  Please see the updated federal Employer’s Tax Guide Publication 15 (Circular E) on the Internal Revenue Service website at: https://www.irs.gov/pub/irs-pdf/p15.pdf and the California Employment Development Department’s Publication DE 44 (updated each January) in the Publication dropdown menu at: https://edd.ca.gov/en/payroll_taxes/forms_and_publications/ 

4. State Disability Insurance - The rate will change to 1.2%, and there is no cap on the amount of payroll which will be subject to this tax.

EMPLOYER TAXES PAID QUARTERLY:

1. Federal Unemployment Tax - The 2025 federal unemployment tax rate is .6% on the first $7,000.
2. State Unemployment Insurance and Employment Training Tax - The wage limit will remain at $7,000.  Rates are set individually for employers. You will receive a notice of your 2025 rate in the mail or it can be accessed in your EDD e-Services for Business account. Please send a copy of any notice you receive to your payroll report preparer. 

2025 FEDERAL PAYROLL DEPOSIT REQUIREMENTS:

Federal Payroll Tax Deposits must follow the monthly or semi-weekly deposit method assigned to each employer by the IRS. The IRS will send a notice if your status changed from 2024; however, the employer is ultimately responsible for determining which deposit schedule actually applies. If you didn’t receive an IRS notice, you can make your own determination as shown below:

1. An employer’s status as a monthly or semi-weekly depositor should be known before the beginning of each calendar year and is determined annually. This determination is based on the amount of employment taxes the employer reported on the four quarterly reports for the 12-month period from July 1, 2023 through June 30, 2024.  
2. Employers who accumulated less than $2,500 of employment taxes during a quarter are only required to make a deposit at the end of the quarter. They can pay their payroll taxes with the quarterly form.
3. Employers who report $50,000 or less of employment taxes (taxes withheld from the employee plus the employer portion) during the 12-month period from July 1, 2023 through June 30, 2024, and all new employers, will be monthly depositors. The deposits will be due the 15th of the following month. NOTE: These deposits will have to be made electronically (see below).
4. Employers who reported more than $50,000 of employment taxes during the 12-month period from July 1, 2023 through June 30, 2024, will be semi-weekly depositors. The deposits will be required on or before either Wednesday or Friday, depending on the timing of the payroll. Semi-weekly depositors will still have at least three banking days after a payday to make the deposit. NOTE: These deposits will have to be made electronically (see below).
   Under the semi-weekly rule, the payroll taxes withheld plus the employer’s portion of the FICA/Medicare on payrolls which were paid on Wednesday, Thursday or Friday must be deposited by the following Wednesday. Payroll taxes, accumulated for a payroll period, which were paid on Saturday through Tuesday must be deposited by the following Friday. Remember, your deposit will be due either on a Wednesday or Friday.
5. Employers who accumulate $100,000 of employment taxes during a monthly or semi-weekly period are required to deposit those taxes by the next banking day. Once you make a next-banking-day deposit, you automatically become a semi-weekly depositor for the remainder of that calendar year and the following calendar year.

FEDERAL ELECTRONIC DEPOSIT REQUIREMENTS FOR 2025:

Employers must use the IRS’ EFTPS for making tax payments. There is an exception for employers with a deposit liability of less than $2,500 for a return period. These employers can remit employment taxes with their quarterly or annual return.

If you are required to use EFTPS for your Federal tax deposits and fail to do so, you may be subject to a 10% penalty. For deposits made by EFTPS to be considered on time, you must initiate the transaction at least one business day before the date the deposit is due. If you are new to EFTPS you will need to allow seven (7) days to get your pin number and complete your account set-up.

You may voluntarily participate in the Electronic Federal Tax Payment System even if you are not required to do so. 

To get more information or to enroll in EFTPS, call 1-800-555-4477, or visit the EFTPS web site at www.eftps.gov. 

EMPLOYER’S QUARTERLY FEDERAL TAX RETURN, FORM 941

Each quarter’s wages subject to income tax, social security and/or Medicare taxes must be reported on Form 941. This form must be filed even if you have no taxes to report. Any employment taxes totaling less than $2,500 for the period and not previously deposited for the quarter can be paid with the report. 

Due dates for 2025 employment tax deposits are April 30, July 31, and October 31, 2025, and January 31, 2026, for the previous quarter. If all taxes have been deposited when due, and no tax is being paid with the return, an additional ten days is allowed to file the return. Late returns are subject to penalties on any unpaid tax due with the return.

2025 STATE PAYROLL TAX DEPOSIT REQUIREMENTS:

These deposits are required to be paid electronically. The depositing requirements are described below:

1. State deposit due dates are generally the same as federal deposit due dates.
2. Employers who are required to make federal monthly deposits and have accumulated $350 to $500 of undeposited state income tax withholding, are required to deposit all State Income Tax and State Disability Insurance withholding using the federal monthly deposit schedule.e.
3. Employers who deposit semi-weekly for federal purposes and have accumulated more than $500 of undeposited state income tax withholding are required to deposit all State Income Tax and State Disability Insurance withholding to the Employment Development Department using the federal semi-weekly deposit schedule.
4. Employers, who accumulate $100,000 of federal employment taxes, and more than $500 of state withholding taxes, must deposit all State Income Tax and State Disability Insurance withholding by the next banking day. Once you make a next banking day deposit, you automatically become a semi-weekly depositor for the remainder of that calendar year and the following calendar year.

5. If you accumulate more than $350 of state withholding taxes in a month or in the cumulative of two or more months, but are not required to make a federal monthly deposit, you are still required to deposit all State Income Tax and State Disability Insurance withheld by the 15th of the following month. Any withholding which is not required to be deposited based on the above will be due on April 30, July 31, and October 31, 2025 or January 31, 2026 for the preceding quarter. 

6. State Unemployment Insurance (SUI) and Employment Training Tax (ETT) must be deposited at least quarterly. 

A penalty of 15% plus interest will be charged on late payroll tax payments. 

CALIFORNIA ELECTRONIC DEPOSIT REQUIREMENTS:

e-Services for Business can be used to electronically submit all tax payments, wage reports and employment tax returns. Register at https://edd.ca.gov/eServices or contact the Taxpayer Assistance Center at 1-888-745-3886.

STATE WAGE AND WITHHOLDING REPORTS:

Employers file two quarterly reports, the DE 9 and DE 9C. These reports must be filed by April 30, July 31, and October 31, 2025, and January 31, 2026 for the previous quarter, even if you don’t have payroll during a quarter. A wage item penalty of $20.00 per employee will be charged for late or unreported employee wages. On these reports, be sure to include the full first name, not just the first initial.

The DE 9 and DE 9C forms must be filed on-line together using e-Services for Business. 

STATE REPORTING REQUIREMENTS FOR NEW OR RE-HIRED EMPLOYEES:

All employers are required to report the full name, social security number, home address and start-of-work date of each employee within twenty days of the start-of-work date.

Form DE 34, Report of New Employees, is used to report new employees.  The information may be filed online through e-Services for Business https://edd.ca.gov/eServices faxed to the EDD at 1-916-319-4400, or mailed to:

Employment Development Department
Document Management Group, MIC 96
P.O. Box 997016
West Sacramento, CA 95799-7016 

The reporting of new employees is required for all newly hired employees, employees rehired or returning to work from a furlough, separation, leave of absence without pay, or termination.  If a returning employee was not formally terminated or removed from payroll records and is returning after less than sixty consecutive days, you don’t need to report the employee as a rehire.

STATE REPORTING REQUIREMENTS FOR INDEPENDENT CONTRACTORS:

Businesses are required to report specific independent contractor information to the EDD if the following statements all apply:

• You will be required to file a 2025 Form 1099-NEC for the services performed by the independent contractor.
• You pay the independent contractor $600 or more OR enter into a contract for $600 or more.
• The independent contractor is an individual or sole proprietorship.

If all the above statements apply, you must report the independent contractor to the EDD within 20 days of paying/contracting for $600 or more in services. You are not required to report independent contractors that are corporations, general partnerships, limited liability partnerships, and limited liability companies. Form DE 542, Report of Independent Contractor(s), is used. The information may be filed online through e-Services for Business https://edd.ca.gov/eServices faxed to the EDD at 1-916-319-4410, or mailed to:

Employment Development Department
Document Management Group, MIC 96
P.O. Box 997350
Sacramento, CA  95899-7350 

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While we’ll try to inform you of any additional changes made during 2025, please be vigilant yourself and also seek out information on changes from your payroll processors.

If you need assistance in preparing your payroll checks or have other questions relating to these taxes, please call.  

December 27, 2024

A federal appeals court on Thursday reinstated a nationwide injunction halting enforcement of beneficial ownership information (BOI) reporting requirements, reversing an order the same court issued earlier this week.

In its latest order, the Fifth Circuit Court of Appeals said it was reinstating a lower court's injunction "in order to preserve the constitutional status quo while the merits panel considers the parties' weighty substantive arguments," referring to the panel of judges who will decide the appeal.

December 27, 2024

A federal appeals court on Thursday reinstated a nationwide injunction halting enforcement of beneficial ownership information (BOI) reporting requirements, reversing an order the same court issued earlier this week.

In its latest order, the Fifth Circuit Court of Appeals said it was reinstating a lower court's injunction "in order to preserve the constitutional status quo while the merits panel considers the parties' weighty substantive arguments," referring to the panel of judges who will decide the appeal.

The AICPA has been urging the government to postpone the original Jan. 1, 2025, BOI reporting deadline. The requirements are imposed by the Corporate Transparency Act (CTA) and enforced by the Financial Crimes Enforcement Network (FinCEN).

In a statement Friday, the AICPA said it "is seeking guidance from FinCEN and maintains its advice for those assisting clients with BOI filings to gather information required from clients and be prepared to file in case the injunction is lifted again."

Later on Friday, FinCEN issued an updated alert on its BOI information page, saying that companies can voluntarily submit BOI reports.

"In light of a recent federal court order, reporting companies are not currently required to file beneficial ownership information with FinCEN and are not subject to liability if they fail to do so while the order remains in force," the FinCEN alert said. "However, reporting companies may continue to voluntarily submit beneficial ownership information reports."

On Dec. 3, a federal district court in Texas issued the injunction in Texas Top Cop Shop, Inc. v. Garland, No. 4:24-CV-478 (E.D. Texas 12/3/24). Under the injunction, the CTA and the BOI reporting rule could not be enforced, and reporting companies would need not comply with the Jan. 1, 2025, BOI reporting deadline pending a further order of the court.

The Department of Justice (DOJ) appealed the injunction to the Fifth Circuit.

On Monday, a panel of the Fifth Circuit granted the DOJ motion to lift the injunction. A different panel of judges reversed that order Thursday.

Under the CTA, P.L. 116-283, which Congress passed in 2021 as an anti-money-laundering initiative, reporting companies must disclose the identity of and information about beneficial owners of the entities. For new entities incorporated after Jan. 1, 2024, reporting companies must also disclose the identity of "applicants" — defined as any individual who files an application to form a corporation, limited liability company, or other similar entity.

STANDARD MILEAGE RATES FOR 2025

For 2025, the standard mileage rate for business mileage will be 70 cents per mile. The previous rate was 67 cents per mile.

The standard mileage rate for the use of a car when providing services to a charitable organization will remain at 14 cents per mile.

The standard mileage rate for the use of your car for medical expenses or deductible moving expenses will remain at 21 cents per mile.

On Dec. 3, a federal court issued a preliminary nationwide injunction that temporarily halted Beneficial Ownership Information Report (BOIR) requirements.

On Dec. 3, a federal court issued a preliminary nationwide injunction that temporarily halted Beneficial Ownership Information Report (BOIR) requirements.

On Dec. 23, 2024, the Fifth Circuit Court of Appeals stayed that injunction, meaning it is no longer in effect and FinCEN may once again enforce its BOIR requirements – including reporting deadlines. However, for those with an initial deadline of Jan. 1, 2025, FinCEN has extended the deadline to Jan. 13, 2025. Additional details for the extended deadline include:

• For Companies Created or Registered Prior to Jan. 1, 2024:
  These companies now have until Jan. 13, 2025, to file their initial BOI reports with FinCEN (extended from the original Jan. 1, 2025, deadline).
• For Companies Created or Registered on or after Sept. 4, 2024:
  • If the original filing deadline fell between Dec. 3, 2024, and Dec. 23, 2024, these companies now have until Jan. 13, 2025, to file.
  • If created or registered between Dec. 3, 2024, and Dec. 23, 2024, these companies have an additional 21 days from their original filing deadline to submit their reports.
• For Companies Qualifying for Disaster Relief:
  These companies may have extended deadlines beyond Jan. 13, 2025, and should adhere to whichever deadline falls later.

For Companies Created or Registered on or After Jan. 1, 2025:
These companies must file their initial BOI reports with FinCEN within 30 days of receiving actual or public notice that their creation or registration is effective

Planning strategies and techniques available through end of year

After years of pandemic recovery, followed by years of high inflation, 2024 saw the return of a quiet economic year. This was also true from a tax standpoint. While the IRS has continued to churn out guidance relating to the Inflation Reduction Act of 2022 and the SECURE 2.0 Act, most other areas of taxation are likely to be stable through the end of the year.

That isn't to say that 2024 was quiet across the board. After a highly contentious election, Americans voted to return Donald Trump to the White House on November 5. Much of Trump's tax agenda focused on the Tax Cuts and Jobs Act of 2017 (TCJA), the majority of which is set to sunset at the end of 2025. How the impending sunset is handled will be a critical issue throughout the next year.

But the sunset of TCJA is a 2025 problem, for the end of the 2024, the best plan is a continued application of tried-and-true year-end tax strategies from years' past. While there are always new strategies to consider, and indeed there are some changes from recent legislation that are in effect for 2024, the simple tactics of deferring income and increasing current deductions are the best bet for the next few weeks.

Click on title for more detailed strategy.

Planning strategies and techniques available through end of year

After years of pandemic recovery, followed by years of high inflation, 2024 saw the return of a quiet economic year. This was also true from a tax standpoint. While the IRS has continued to churn out guidance relating to the Inflation Reduction Act of 2022 and the SECURE 2.0 Act, most other areas of taxation are likely to be stable through the end of the year.

That isn't to say that 2024 was quiet across the board. After a highly contentious election, Americans voted to return Donald Trump to the White House on November 5. Much of Trump's tax agenda focused on the Tax Cuts and Jobs Act of 2017 (TCJA), the majority of which is set to sunset at the end of 2025. How the impending sunset is handled will be a critical issue throughout the next year.

But the sunset of TCJA is a 2025 problem, for the end of the 2024, the best plan is a continued application of tried-and-true year-end tax strategies from years' past. While there are always new strategies to consider, and indeed there are some changes from recent legislation that are in effect for 2024, the simple tactics of deferring income and increasing current deductions are the best bet for the next few weeks.

LEGISLATION

Through the end of 2024, there is a very low likelihood of tax legislation. However, the expectation is that tax legislation will ramp up in early 2025. With the GOP in control of the Senate and the House, Trump's agenda will have a much easier path to legislative approval.

Action on the soon-to-expire TCJA is likely to be high on the to-do list for the new Congress. Many leaders in the GOP have expressed interest in taking quick action to extend the provisions beyond their pending expiration at the end of 2025. However, given the fact that TCJA has one more year to go, the issue of extension is not highly relevant to year-end tax planning for 2024.

For more on the tax policies of the incoming administration, see the recent CCH Tax Briefing 2024 Post-Election Tax Policy Update.

MINIMIZING INDIVIDUAL TAXES

Income taxes

The key to any year-end planning strategy is to minimize taxes. This is generally done by either reducing the amount of income received or increasing the amount of deductions. In recent years, the possibility of increased rates on higher incomes due to proposed legislation, or changes in qualification for various stimulus proposals made the decision of deferral or acceleration highly dependent upon individual circumstances. As the end of 2024 approaches, these factors are not really in play anymore. However, it is possible that an extension of TCJA could include some changes that reduce taxes in 2025, depending upon the applicable effective date of the legislation. But, given the proposals from the Trump campaign, the lower taxes would likely apply to things that cannot be easily deferred (tip, Social Security, and overtime income). So, as in prior years, individual considerations are the most significant factor in play.

The impact of inflation usually makes deferral of income a likely winner for almost all individuals. However, during the last year inflation has returned to a more familiar level from the historically high levels of inflation a couple years ago. In October, the IRS released the tax brackets for 2025.

Delaying and reducing capital gains

Taxes on capital gains apply at different rates depending upon the amount of taxable income. For 2024, the rates are as follows:

For taxpayers whose income tends to fluctuate from year to year, it would be wise to examine the impact of sales of investment items. For taxpayers who think they may have lower income in 2025, it would be smart to hold off on a sale of a capital item if their income is at or near a threshold for a higher capital gains bracket.

This type of consideration should not be limited to capital gain taxes, but also the net investment income (NII) tax. The 3.8% NII tax kicks in at $200,000 of modified adjusted gross income for single and head-of-household filers, $250,000 for joint filers, and $125,000 for married taxpayers filing separately.

COMMENT.

Since the NII thresholds fall right in the middle of the 15% capital gains bracket, a taxpayer to whom the NII applies because of a sale of a capital item would likely not be able to reduce the tax to 0%. But a taxpayer who is barely in the 20% bracket could defer a sale and get into the 15% bracket, meaning a sale of a capital item would only be taxed at 18.8% instead of 23.8%.

A potential tax strategy involves selling investments at a loss to offset or reduce capital gains generated in the same tax year. However, the benefits only apply to high-income taxpayers. In addition, taxpayers must be mindful of the wash-sale rules that might disallow the loss if they reinvest in a ‘substantially similar’ asset within 30 days.

Maximizing deductions

For 2024, the inflation-adjusted standard deduction amounts are $29,200 for joint filers, $21,900 for heads of households, and $14,600 for all other filers. With standard deduction amounts so high, coupled with the $10,000 limitation on the deduction of state and local taxes, it is difficult for many taxpayers to claim enough deductions to make itemizing deductions beneficial. Thus, maximizing deductions may not be beneficial for all taxpayers.

One of the best ways to maximize the amount of deductions is to develop a bunching strategy. This involves accumulating charitable contributions, or even medical expenses (see below), from two or more years into one year. For example, a taxpayer may have not made any of their normal charitable contributions in 2023, and then made double the normal amount in 2024 in order to help surpass the standard deduction amount.

The same bunching strategy can be employed for deductible medical expenses where the timing is somewhat flexible, such as for elective procedures (remember that purely cosmetic procedures are not deductible).

COMMENT.

Bunching can be a very effective strategy, but it has to be effectively used, and potentially planned out two or three years in advance to maximize the benefit, while also taking into account shifts in tax policies as a result of political change.

Green energy

2023 was the first year that the Energy Efficiency Home Improvement Credit was available. The credit is generally equal to 30% of the taxpayer's qualified expenses, which can include doors, windows, other qualifying energy property, and even a home energy audit. Also available is the Residential Clean Energy Credit, which is also equal to 30% of qualified expenses. This credit is applicable to the installation of certain energy property like solar cells, small wind turbines, or battery storage. Restrictions and limitations do apply to both credits.

The much more broadly applicable credit for the purchase of electric vehicles was eliminated upon the passage of the Inflation Reduction Act of 2022. In its place are two new credits, one $7,500 credit for the purchase of a new clean vehicle (with much more stringent requirements as compared to the old credit) and a $4,000 credit for the purchase of a used clean vehicle.

COMMENT.

At the end of 2023, there wasn't much urgency in claiming these credits, but that may not necessarily be the case at the end of 2024. While the Trump campaign did not single out any specific credits, there was a general antipathy of many green energy initiatives. It is entirely possible that some or all of these green energy incentives could be on the chopping block to help pay for tax cuts elsewhere. If any action on this legislation in 2025 is retroactively applicable to the whole year, 2024 could be the last chance to claim the credits.

Retirement savings

Starting in 2023, the age at which required minimum distributions (RMDs) must begin is increased to 73 for individuals who turn 72 after 2022 and age 73 before 2033.

Remember that taxpayers who are in their first RMD year have until April 15 of the following year to make that first RMD. So, while action isn't absolutely necessary before the end of the year, affected taxpayers should start to plan for those RMDs. Keep in mind that the RMD for 2025 is required by December 31, 2025. If a taxpayer were to take both RMDs in 2025, it could push them into a higher tax bracket because both distributions would be taxable in one tax year.

Qualified charitable distributions, or QCDs, offer eligible taxpayers aged 70 ½ or older a great way to easily give to charity before the end of the year. For those who are at least 72 years old, QCDs count toward the IRA owner's RMD for the year. QCDs are tax free if they are paid directly from the IRA to an eligible charitable organization. The annual limit for QCDs increases for the first time in 2024. The annual QCD limit is $105,000 (up from $100,000 in 2023).

SALT deduction

The Tax Cuts and Jobs Act (TCJA) capped the amount of the deduction for state and local taxes (SALT) at $10,000. Many legislators from higher-tax states have been clamoring for years to repeal or increase that limitation. While none of these efforts have proven successful so far, there is a strategy for taxpayers to claim this deduction that seems to have met with approval by the courts. Many states have enacted legislation that enables higher SALT deductions if paid by a passthrough entity. Requirements vary from state to state, so taxpayers looking to take advantage of this new strategy should speak with their tax professionals.

COMMENT.

Among the proposals Trump made during the campaign was a potential increase in the limitation on the state and local deduction. If this were to happen effective for the 2025 tax year, this workaround may become less prevalent.

Other year-end strategies for individuals

A number of other traditional year-end strategies may apply. These include:

• Maximizing Education Credits – Individuals can claim a credit for tuition paid in 2024 even if the academic period begins in 2025, as long as the period begins by the end of March.
• Increasing 401(k) Contributions – Adjusted gross income (AGI) can be reduced if individuals increase the amount of their 401(k) contributions.
• IRA Contributions – Individuals eligible for deductions for IRA contributions can claim deductions, and thus reduce AGI, for amounts contributed generally through April 15, 2025.
• Teacher deductions – Educators can claim a deduction for up to $300 of classroom expenses (like books, supplies, and computer equipment, as well as personal protective equipment, disinfectant, and other supplies used to prevent the spread of COVID-19), and should maximize those expenses by year-end.

YEAR-END BUSINESS STRATEGIES

Corporate Transparency Act

Companies should review and determine their reporting and filing obligations for the beneficial ownership information (BOI) report. BOI reports are due no later than January 1, 2025.

Retirement Plans

The SECURE 2.0 Act of 2022 expands provisions for retirement plans to benefit both employers and plan participants. Although some benefits were available in 2023, several of the provisions become effective in 2024 and beyond.

An employer that does not sponsor a retirement plan can offer a starter 401(k) plan (or safe harbor 403(b) plan). A starter 401(k) plan (or safe harbor 403(b) plan) would generally require that all employees be enrolled in the plan at 3% to 15% of compensation deferral rate by default. The limit on annual deferrals would be the same as the IRA contribution limit. This provision is effective for plan years beginning after December 31, 2023.

The SECURE Act 2.0 permits an employer to adopt a new retirement plan by the due date of the employer's tax return for the fiscal year in which the plan is effective. Current law, however, provides that plan amendments to an existing plan must generally be adopted by the last day of the plan year in which the amendment is effective. This precludes an employer from adding plan provisions that may be beneficial to participants. The SECURE Act 2.0 amends these provisions to allow discretionary amendments that increase participants' benefits to be adopted by the due date of the employer's tax return. This provision is effective for plan years beginning after December 31, 2023.

Depreciation and expensing

The TCJA provided very generous depreciation and expensing limitations. Businesses may want to take advantage of 100-percent first-year depreciation on machinery and equipment purchased during the year. Additionally, Code Sec. 179 expensing has an investment limitation of $3,050,000 for 2024, with a dollar limitation of $1,220,000.

Taxpayers may also claim an additional first-year depreciation allowance of 60% for property placed in service in 2024. It may be the best policy to take advantage of this benefit in the current year. The allowance generally decreases by 20% per year and expires Jan. 1, 2027.

COMMENT.

Despite the pending drop in the first-year depreciation percentage in 2025, this is one provision that is very likely to see legislative action in 2025, with a possible return of 100% first-year depreciation, so holding off on the acquisition of assets eligible for first-year depreciation may be the better strategy.

Clean commercial vehicles

The Inflation Reduction Act of 2022 provides a new $7,500 credit for the purchase of clean commercial vehicles after 2022. The requirements for this credit are very similar to that available to individuals, so the same considerations made by individuals should be made by businesses thinking about purchasing environmentally friendly vehicles.

COMMENT.

The same concerns about green energy credits for individuals being repealed by tax legislation in 2025 could also apply here.

Other year-end strategies for businesses

A number of other traditional year-end strategies may apply. These include:

• Timing the deduction of employee bonuses and executive compensation
• Prepay rent and suppliers under the cash system; commit to contracts under the accrual method
• Consider inventory write-offs
• Avoid the impact of corporate AMT

By Roger Russell August 07, 2024

The Senate's failure to approve a measure passed earlier this year by the House has delayed, for now, a solution to the quandary faced by many small and midsized companies that are severely hampered by the absence of the ability to currently deduct research & development expenses. 

"We're seeing more news about foreign giants like Huawei that are accelerating innovation despite U.S. sanctions. This latest blow on R&D amortization could make companies vastly reduce their research budgets right at a time when the U.S. needs increased innovation to remain competitive on the world stage," said former Congressman Rick Lazio, senior vice president at business consultancy Alliantgroup.

By   Roger Russell August 07, 2024

The Senate's failure to approve a measure passed earlier this year by the House has delayed, for now, a solution to the quandary faced by many small and midsized companies that are severely hampered by the absence of the ability to currently deduct research & development expenses. 

"We're seeing more news about foreign giants like Huawei that are accelerating innovation despite U.S. sanctions. This latest blow on R&D amortization could make companies vastly reduce their research budgets right at a time when the U.S. needs increased innovation to remain competitive on the world stage," said former Congressman Rick Lazio, senior vice president at business consultancy Alliantgroup.

Historically, Code Section 174 allowed businesses to expense current-year costs related to R&D. In the run up to the Tax Cuts and Jobs Act, tax writers were looking for an offset so they could make the corporate tax rate lower, Lazio explained: "They settled on this relatively obscure provision that no one envisioned surviving. They thought it would allow them to get the bill through and could be changed immediately afterward. It was just a short-term fix, but elections happen, politics happen, and the rest is history. When it was adopted in 2016, it was delayed for two years to give them a chance to repeal, but elections complicated the politics and over time, when the Democrats regained power their perception was that since it happened under the Republicans' watch — 'You broke it, you fix it.' 

Among the issues that hampered passage of the bill were differences between Republicans and Democrats over credits to benefit working families and people who were not working, with Republicans believing they would win back a majority in the November elections and be in a stronger position to negotiate a more favorable tax bill, including dealing with expiring provisions of the TCJA.

"This is what caused the bill to not be passed in the Senate up to this point," said Lazio. "The House went through a similar process, but some of the most conservative Republicans and most progressive Democrats passed it overwhelmingly earlier this year. When it went to the Senate, Republicans insisted on amending or eliminating some of the changes Democrats were proposing to the Child Tax Credit as a condition. Republicans didn't feel they could compromise, so when it came up for a vote it fell short of the 60 it needed to block a filibuster."

The tragedy is that the absence of the ability to currently expense R&D costs places extreme hardships on small and midsized businesses, according to Lazio. 

"Many saw their tax liability grow by a factor of four or five times, and in some cases more than that," he said. "It affects some of the most innovative businesses in the country, creating a disincentive on them continuing to innovate. The large tech companies have multibillion-dollar balance sheets and can finance the larger tax liability, but small businesses have none of those things and are the ones that in some cases are suspending R&D. In many cases they are holding up hiring and, in some cases, folding the business altogether."

"For example, we have clients that are engineering firms whose whole basic culture is constant innovation," he continued. "They will use last year's plans off the shelf, because they don't want to trigger the new provisions that will require amortization over six years as opposed to the current deduction. It's a huge hardship."

One client, SX Industries, had a 74% tax increase in 2022, and is considering stopping their military development projects since they can no longer afford the increase. Another client, Agile Six Applications, had a total tax liability that more than doubled; rather than a total tax bill of $2.2 million, they will be expected to pay $5.05 million. 

The company builds "digital experiences" for a number of government agencies such as the Veterans Administration. "We don't have the option to stop innovating," said Robert Rasmussen, founder and CEO. "Our only option now is to borrow money and try to survive. It's a unique situation aggravated by our growth rate. Profit-wise we're making money, but if we continue to grow at that rate, we'll just grow out of business."

"Half of our business model is in delivering more user-friendly services to citizens (e.g., veterans accessing benefits), the other half of it is how we deliver those services," said Rasmussen. "This is called 'objective-based contracting,' where we do not get paid unless objectives are met. So unlike most federal contracts, we share this risk (as to whether our technical solutions fix the problem), and therefore we have leveraged the R&D credits more than traditional contractors."

"The systemic problem is that we end up paying taxes on 30.6% ($15.3 million) net income (calculated based on innovation expenses), while only earning 13.6% ($6.8 million)," he explained. "This example from 2023–2024 will look worse. As we grow, our organic real net income has shrunken already in 2024, but our tax liability has increased. We may have negative real net income (cost of expansion) complicated by a real increase in taxable income (cost of innovation in our deliveries)."

He concluded: "All of this leaves us in an unsustainable situation, with a negative cash flow situation with no cash to support future growth, and a growing liability with future growth as the cash flow problem grows with our growth." 

"The irony is that American businesses are falling further behind international competitors in new areas such as AI and chip technology," said Lazio. "In fact, the policymakers have created a perverse disincentive by allowing this provision that was never intended to be permanent to affect small and medium businesses. The history of innovation is that big players acquire companies that have developed the technology they need. They innovate by buying smaller companies that have developed it. If smaller companies are disincentivized or discouraged, then American businesses won't have access to their technology and they become vulnerable to international competitors where the governments have encouraged R&D."

Is there at least the possibility of a fix before smaller companies are forced to leave the playing field? "We hope so, but we're looking at a timing problem," said Lazio. "It won't be until the summer or fall of 2025, before a bill the size of the TCJA comes up, and that's an eternity away for businesses. Many won't survive that long."

By Tobias Salinger August 07, 2024

The IRS has quashed any remaining hope that it would alter its new guidelines for inherited individual retirement accounts, ending the "stretch" strategy for most beneficiaries.

With its finding in rules issued last month that tax revenue-raising provisions of the 2019 Secure Act require so-called noneligible beneficiaries who have inherited IRAs in 2020 or later to transfer all the assets into their income within a decade, the IRS told financial advisors and their clients that there would be no more delays in implementation or a shift in the final statutes. That means beneficiaries must begin taking required minimum distributions next year — if they haven't already started. But experts agree that it's likely past time to initiate that process.

"Everyone thought there was a mistake. The longer we waited for the final regulations, the more the industry seemed to be thinking, 'OK, they're actually going to hold us to this,'" Heather Zack, the director of high net worth solutions with Waltham, Massachusetts-based wealth management firm Commonwealth Financial Network, said in an interview.

By Tobias Salinger August 07, 2024

The IRS has quashed any remaining hope that it would alter its new guidelines for inherited individual retirement accounts, ending the "stretch" strategy for most beneficiaries.

With its finding in rules issued last month that tax revenue-raising provisions of the 2019 Secure Act require so-called noneligible beneficiaries who have inherited IRAs in 2020 or later to transfer all the assets into their income within a decade, the IRS told financial advisors and their clients that there would be no more delays in implementation or a shift in the final statutes. That means beneficiaries must begin taking required minimum distributions next year — if they haven't already started. But experts agree that it's likely past time to initiate that process.

"Everyone thought there was a mistake. The longer we waited for the final regulations, the more the industry seemed to be thinking, 'OK, they're actually going to hold us to this,'" Heather Zack, the director of high net worth solutions with Waltham, Massachusetts-based wealth management firm Commonwealth Financial Network, said in an interview.

That said, the rules point to "a strategy that most advisors were taking already" in seeking to "equalize distributions over 10 years" rather than setting up a "tax bomb" by taking them all at once, she noted. "I don't think there were many advisors who were telling their clients, 'Let's wait and take out everything in year 10.'"

The rules' implications to retirement planning with "a tax component" merit a conversation with clients who inherited an IRA in any of the past four years, said Matthew Cleary, a financial planner with Wakefield, Massachusetts-based 401(k) and wealth firm Sentinel Group.

"We want to bring that up absolutely, because it may be a situation where you do want to have more of a schedule to minimize the tax burden of taking it out in one year," Cleary said in an interview. "There are a couple of exceptions to that rule, but for the most part the stretch IRA is dead."

Caveats to the new 10-year requirement apply to eligible designated beneficiaries — a group that includes the spouse of the deceased IRA owner, heirs who are chronically ill or disabled, and heirs younger than the late retirement saver by only a decade or less, Zack and Cleary noted. Another carve-out from the mandatory distributions applies to heirs who are 20 years old or younger, who can still use the stretch strategy until they are 21, according to a blog post by Sarah Brenner, director of retirement planning for IRA advice firm Ed Slott & Company. At that age, the new rules state that the beneficiary must launch their distributions and empty the accounts into their own income within the 10-year window.

In addition, the rules maintained the "controversial" provision that most beneficiaries are subject to the 10-year guideline — even if the account owner died on or after the beginning period for the holder's own required minimum distributions, Brenner wrote in another blog.

"This rule requires annual RMDs to continue once they have started," she wrote. "Many believed this rule went away with the Secure Act, but apparently the IRS thought differently. Due to all the confusion its interpretation caused, the IRS waived RMDs during the 10-year period for beneficiaries for the years 2021, 2022, 2023, and 2024. In the newly released final regulations, the IRS is doubling down on its position that these annual RMDs are required. They must be taken starting in 2025. However, the IRS will not impose penalties for annual RMDs that were not taken for years before 2025."

In its announcement, the IRS specifically discussed the concerns around that interpretation.

"Treasury and IRS reviewed comments suggesting that a beneficiary of an individual who has started required annual distributions should not be required to continue those annual distributions if the remaining account balance is fully distributed within 10 years of the individual's death as required by the Secure Act," the agency said in its July 18 press release. "However, Treasury and IRS determined that the final regulations should retain the provision in the proposed regulations requiring such a beneficiary to continue receiving annual payments."

As part of his characteristically detailed social thread examining the tax impact of a newly released rule, Buckingham Strategic Wealth Chief Planning Officer and Kitces.com blog Lead Financial Planning Nerd Jeffrey Levine reported that finding as the answer to "the No. 1 question advisors have asked for 2+ years now," adding, "Sorry, I don't make the rules, I just report them!!!" The industry had been eagerly anticipating the guidelines, he said.

"I honestly can't remember a time when advisors, tax pros and 'mom and pop' investors more eagerly awaited news from the IRS," Levine said. "But more than 4.5 years after Secure was passed, we now have some definitive answers to key Q's."

IRA owners seeking to avoid a tax hit on their beneficiaries could convert traditional accounts to Roth ones, which usually won't carry any more duties tied to the added income, Cleary noted.

"They would still be subject to the 10-year rule, but then they don't necessarily have the tax issue," he said. "It's an idea for the right person who's able to pay those taxes up front."

While there are "not a ton" of strategies that advisors can take to reduce the impact of the distributions on their income once they start taking them, separate charitable donations and maximizing other deductions could mitigate part of the burden, Zack said. 

Since inherited IRAs are "something that every advisor deals with," the rules have created "this whole maze of different beneficiary withdrawal requirements" based on the year of the account owner's death and the age, spousal and health status of the heir, she noted. And the final rule clarified that the 10-year distribution span started with IRA owners who died in 2020 — regardless of the fact that the IRS pushed back the required distribution four years in a row.

"It's just made the landscape a lot more complicated for advisors and clients now than it used to be," Zack said. "That is definitely of concern for some folks. That clock has been running this entire time."

The U.S. Department of the Treasury’s Financial Crimes Enforcement Network (FinCEN) published a Small Entity Compliance Guide to assist the small business community in complying with the beneficial ownership information (BOI) reporting rule.  Starting in 2024, many entities created in or registered to do business in the United States are required to report information about their beneficial owners—the individuals who ultimately own or control a company—to FinCEN.  The Guide is intended to help businesses determine if they are required to report their beneficial ownership information to FinCEN.  

The U.S. Department of the Treasury’s Financial Crimes Enforcement Network (FinCEN) published a Small Entity Compliance Guide to assist the small business community in complying with the beneficial ownership information (BOI) reporting rule. Starting in 2024, many entities created in or registered to do business in the United States are required to report information about their beneficial owners—the individuals who ultimately own or control a company—to FinCEN. The Guide is intended to help businesses determine if they are required to report their beneficial ownership information to FinCEN.

“This guide is the latest in our ongoing efforts to educate the public about these important new requirements,” said Andrea Gacki, Director of FinCEN. “We are committed to making this process as simple as possible, particularly for small businesses.”

“This is also a critical step towards implementing the Corporate Transparency Act, which will help the Treasury Department and FinCEN expose bad actors abusing the U.S. financial system by hiding their identity behind opaque corporate structures,” said Under Secretary of the Treasury for Terrorism and Financial Intelligence Brian Nelson.

The Guide is now available on FinCEN’s beneficial ownership information reporting webpage.

Among other things, the Guide:

• Describes each of the BOI reporting rule’s provisions in simple, easy-to-read language;
• Answers key questions; and
• Provides interactive checklists, infographics, and other tools to assist businesses in complying with the BOI reporting rule.

The requirements became effective on January 1, 2024, and companies are now able to report beneficial ownership information to FinCEN at this time. Small businesses can continue to monitor FinCEN’s website for more information.

STANDARD MILEAGE RATES FOR 2024

For 2024, the standard rate for business mileage will be 67 cents per mile. The previous rate was 65.5 cents per mile.

The standard rate for the use of a car when providing services to a charitable organization will remain at 14 cents per mile.

The 2024 standard mileage rate for the use of your car for medical expenses or deductible moving expenses will be 21 cents per mile. The previous rate was 22 cents per mile.

Every year, Americans donate billions of dollars to charity. Many donations are in cash. Others take the form of clothing and household items. With all this money involved, it's inevitable that some abuses occur. Current tax law cracks down on abuses by requiring that all donations of clothing and household items be in "good used condition or better."

Every year, Americans donate billions of dollars to charity. Many donations are in cash. Others take the form of clothing and household items. With all this money involved, it's inevitable that some abuses occur. Current tax law cracks down on abuses by requiring that all donations of clothing and household items be in "good used condition or better."

Good used or better condition
The law does not define good or better condition. For guidance, you can look to the standards that many charities already have in place. Many charities will not accept your donations of clothing or household items unless they are in good or better condition.

Clothing cannot be torn, soiled or stained. It must be clean and wearable. Many charities will reject a shirt with a torn collar or a jacket with a large tear in a sleeve. As one charity spokesperson summed it up, "Don't donate anything you wouldn't want to wear yourself."

Household items include furniture, furnishings, electronics, appliances, and linens, and similar items. Food, paintings, antiques, art, jewelry and collectibles are not household items. Household items must be in working condition. For example, a DVD player that does not work is not in good used or better condition. You can still donate it (if the charity will accept it) but you cannot claim a tax deduction. Household items, particularly furnishings and linens, must be clean and useable.

The law authorizes the IRS to deny a deduction for the contribution of a clothing or household item that has minimal monetary value. At the top of this list you can expect to find socks and undergarments.

Fair market value
You generally can deduct the fair market value of your donation. Unless your donation is new - for example, a blouse that has never been worn - its fair market value is not what you paid for it. Just like when you drive a new car off the dealer's lot, a new item loses value once you wear or use it. Therefore, its value is less than what you paid for it.

If you're not sure about an item's value, a reputable charity can help you determine its fair market value. Our office can also help you value your donations of used clothing and household items.

Get a receipt
Generally, you must obtain a receipt for your gift. If obtaining a receipt is impracticable, for example, you drop off clothing at a self-service donation center, you must maintain reliable written information about the contribution, such as the type and value of the property.

Charitable contributions of property of $250 or more must be substantiated by obtaining a contemporaneous written acknowledgement from the charity including an estimate of the value of the items. If your deduction for noncash contributions is greater than $500, you must attach Form 8283 to your tax return. Special rules apply if you are claiming a deduction of more than $5,000.

Exception
In some cases, the rules about good used or better condition do not apply. The restrictions do not apply if a deduction of more than $500 is claimed for the single clothing or household item and the taxpayer includes an appraisal with his or her return.

If you have any questions about the charitable contribution rules for donations of clothing and household items, give our office a call.

To our business clients:

Form 1099-NEC is to be used for reporting nonemployee compensation (NEC). This form must be filed by January 31, 2025 with the IRS and also provided to the recipient by this date. California participates in the combined Federal/State filing program for Form 1099-NEC which means that a copy of the form won’t need to be sent separately to the FTB.

The form 1099-MISC is still required for other types of payments and information. See below for the specific uses of this form. 

The 1099-NEC form is unusual in that it needs to be both to the IRS and the recipient by January 31st. Most other 1099s are due to the recipient by January 31st and to the IRS by February 28th.

The penalty for each instance of failing to file a correct 1099 form by the due date with the IRS is as follows:

• $60 per form if correctly filed within 30 days of the due date;
• $130 per form if correctly filed after 30 days of the due date but by August 1st;
• $330 per form if filed after August 1st, or not filed (assuming there was no intentional disregard);
• At least $660 per form with no maximum penalty if due to intentional disregard of the requirements.

A similar additional penalty framework applies if the payee isn’t provided their copy by these deadlines. 

California imposes its own penalties with the amount ranging between $15 and $130 per information return depending on the reason for the penalty. 

Federal business income tax returns contain two questions regarding the filing of 1099 forms. We'll be checking with you about your fulfilment of the 1099 form filing requirements in order to answer those questions correctly.

WHAT IS A 1099 FORM?

A 1099 form is an informational return on which businesses report various sorts of payments they've made to partnerships, sole proprietorships, individuals and certain types of corporations during the calendar year. Some of the most common types of 1099 forms are:

WHO SHOULD WE SEND A 1099 FORM TO?

They should be sent to partnerships, sole proprietorships, limited liability companies (LLC), limited liability partnerships (LLP), and individuals you made payments to in the course of your business. A 1099 should also be sent to any attorney, physician, or supplier of medical services even if they are a corporation. Any payment on which you take backup withholding for Federal income taxes must be reported on the appropriate Form 1099, regardless of the amount of the payment. This means:

1. Only send 1099s for payments you made related to the operation of your business.
2. You don't need to send 1099s for materials or products you purchased.
3. You don't need to send 1099s to corporations (unless it is for medical or legal services). However, the burden to find out if it's a corporation is on you. If the name has "Incorporated", "Inc.", "Corporation", or "Corp." in it, you can assume it's a corporation. Otherwise, you need to ask.
4. You don't need to send 1099s to exempt organizations, retirement trusts, or IRA accounts.

FILING RETURNS WITH THE IRS

Businesses who file 10 or more informational returns are required to file electronically through the IRS' FIRE System (Filing Information Returns Electronically). We can help you with this.

If you must file any Form 1098 or 1099 with the IRS and you are filing paper forms, you must send a separate Form 1096 with each different type of form, as the transmittal document.

For businesses located in California, the government copies need to be mailed to:

Department of the Treasury
IRS Submission Processing Center
1973 North Rulon White Blvd.
Ogden, UT 84201

CALIFORNIA REPORTING REQUIREMENTS

If you file IRS Forms 1099 series, Forms 5498, 1098 and W-2G with the IRS on paper, you are not required to file a paper copy of the same form with the Franchise Tax Board. The IRS will forward the information to them. 

When the Federal and State payment amounts differ, you may file information returns directly with the Franchise Tax Board.

WHAT INFORMATION DO YOU NEED FOR THE 1099 FORM?

1. Name and address of whom you paid.
2. The amount you paid them during 2024.
3. The type of payment made.
4. Their identification number. For an individual this would be their social security number. For a proprietorship, LLC, partnership, or corporation this would be their employer identification number which is a nine-digit number, usually beginning with "94-" or "77-".

IMPORTANT: It is extremely important that the name recorded on the 1099 agrees with the name listed on the Social Security Administration's records for the specified identification number. Therefore, in the case where an individual is self-employed, care must be taken to make sure that the name of the individual is listed on the 1099. Any "dba" name should be listed on the 1099 underneath the individual's legal name which agrees with the Social Security Administration's records.

WHAT IF SOMEONE WON'T GIVE US THEIR IDENTIFICATION NUMBER?

If someone won't give you their identification number, you're not sure they're giving you the correct number, or you're not sure they're incorporated as they say, then you should send them a W-9 form (available at the IRS website) by certified mail, return receipt requested. The receipt will document your request for their number and help you avoid the penalty for filing a 1099 form without an identification number. If the W-9 form is completed and returned to you, it will take you off the hook for both the accuracy of the identification number used and as to whether they're really a corporation.

WHAT CAN SEEBA & ASSOCIATES DO TO HELP?

Please give us a call if you would like us to help in the preparation of these 1099 forms. We can:

1. Answer your questions regarding the issues discussed above,
2. Prepare 1099 forms for you from information you've gathered, consisting of name, address, identification number, and amount paid in 2024, or
3. Figure the amount you've paid for 2024 from your books and records. Along with the address and identification number supplied by you, we'll prepare the 1099 forms.
4. e-File your 1099 forms via the IRS system.

*         *         *         *         *

IMPORTANT

Please let us know as soon as possible if we can assist you since the 1099s are due by January 31st.

You should be getting an identification number or completed W-9 form from anyone you pay for services, even if less than $600, before you pay them. Otherwise, you are obligated to withhold 24% of their payment and remit it to the IRS. Please call us if you run into problems where the 24% "backup withholding" may come into effect.

You should also keep in mind that you will need to maintain records of amounts paid to independent contractors as payments are made or contracts are signed in order to comply with the 2025 Employment Development Department reporting requirement for independent contractors.

If you have any questions regarding 1099 filings, feel free to contact us.

BONUSES - Just a reminder - holiday bonuses are subject to all payroll taxes

BONUSES- Just a reminder - holiday bonuses are subject to all payroll taxes.

This is true whether the bonus is paid in cash, by check or by a gift card. For income tax withholding, the rates are 22% federal and 10.23% state. If you have a net figure in mind, the gross amount can be calculated as follows:

1. If the employee has not passed the wage limits for FICA ($168,600), divide the desired net by .5902 to arrive at the gross.

2. If the employee has exceeded the FICA limits, divide the desired net by.6667 to arrive at the gross.

Example: You wish to pay an Employee a net bonus of $100.00 -

If the employee has earned $4,000.00 for 2024, they are subject to all taxes. Dividing $100.00 by .5902 (See #1 above) yields a gross of $169.43. Deductions would be:  Federal income tax $37.27 (22%); Social Security $10.51 (6.2%); Medicare $2.46 (1.45%); State income tax $17.33 (10.23%); SDI $1.86 (1.1%).

The percentages and example shown above pertain to checks dated prior to January 1, 2025. For checks dated after December 31, 2024, you must use the 2025 withholding rates and limits.

AWARDS - As part of a meaningful presentation, employers can give employees awards for length of service or safety achievements of up to $400 per year. In order to be deductible to the employer and non-taxable to the employee, the awards must be made with noncash items. Awards of cash or items readily convertible into cash, such as gift certificates, are subject to payroll taxes, no matter the amount.  Length of Service Awards are deductible to the employer if employees have more than five years of service and have not received such an award in the last four years. Safety Achievement Awards aren't deductible if given to a manager, administrator, clerical employee, or professional, nor if given to more than 10% of the other employees. We recommend that any prizes awarded be documented by corporations in their corporate minutes, although the law doesn't require this.

GIFTS - Business gifts are still limited to $25 to any individual per year. They can be made on a discriminatory basis and can be in cash. These gifts are deductible to the business and non-taxable to the recipient.

Items clearly of an advertising nature that cost $4 or less, such as promotional items, aren’t considered gifts and therefore, aren’t included in calculating the $25 limit for an individual.

In addition, gifts that are considered “de minimis” fringe benefits aren’t restricted by the $25 per recipient limit and are considered to be made tax-free to the employee. For a gift to be considered as a de minimis fringe benefit the value must be nominal, the accounting for such a gift would be administrative nitpicking, it’s only an occasional gift, and it’s given for the purpose of promoting the health, goodwill, contentment or efficiency of the employees. Some examples of such gifts are holiday turkeys, a Christmas luncheon or party.

There is no limit on gifts made to corporations or partnerships.

So that the reporting for this fringe benefit is not so burdensome, the IRS allows employers to include the personal use of business-owned cars during November and December in the following year's W-2s. This means that W-2s for 2024 need to include the value of the personal use of the vehicles from November 1, 2023 to October 31, 2024 and that this value can be calculated now. Those clients using computerized payroll systems which prepare W-2s will have to inform the system of this fringe benefit value which needs to be included in payroll before the end of December.

The following information should serve to remind you of how to calculate the value of the personal use of business-owned cars for W-2 purposes and how to withhold taxes on it:

So that the reporting for this fringe benefit is not so burdensome, the IRS allows employers to include the personal use of business-owned cars during November and December in the following year's W-2s. This means that W-2s for 2024 need to include the value of the personal use of the vehicles from November 1, 2023 to October 31, 2024 and that this value can be calculated now. Those clients using computerized payroll systems which prepare W-2s will have to inform the system of this fringe benefit value which needs to be included in payroll before the end of December.

The following information should serve to remind you of how to calculate the value of the personal use of business-owned cars for W-2 purposes and how to withhold taxes on it:

1. For non-officer/shareholders:  If commuting is the only personal use of a business-owned car allowed by an employer, then the employer would need to include $3 a day in the employee's wages to recognize the value of the commute, plus 5.5 cents/mile for the fuel provided by the employer.

2. For officers and shareholders:  The personal use of a business-owned vehicle must be included in their W-2. The formula for computing the value of their personal use is as follows:
    

   1. Annual lease value based on the IRS table (see attached table) prorated for the number of months the vehicle was used from November 2023-October 2024.
   2. Times this value by the personal use percentage determined from mileage records maintained throughout the year which list business and personal miles driven.
   3. Then add the lesser of the actual cost, or 5.5 cents/mile, for gasoline provided by employer that was used for personal travel
   4. Next subtract any reimbursement that the employer receives from employee.
   5. The result is the value of the personal use of the business-owned vehicle to be included in employee's W-2 compensation.

                                                                            or                                      
                                                                 (A x B) + (C - D) = E

3. It is possible to avoid income tax withholding on the value of the personal use of an employer-provided vehicle. However, early action was required in order to avoid withholding income tax for 2024. The employer must have notified the employee in writing by January 31, 2024 or within 30 days after receiving the vehicle during the year, in order to avoid income tax withholding on this fringe benefit. If the employee is not notified of the withholding election by the specified dates, the employer must withhold income taxes on the value included in the W-2. For 2025, the employee must be notified in writing by January 31, 2025 or within 30 days of receiving the vehicle, in order to avoid 2025 withholding on this fringe benefit.

4. Even though an employer can avoid withholding income tax on the value of the personal use of a vehicle (as described in item 3 above), the Social Security tax (FICA), the Medicare tax, and State Disability Insurance (SDI) must be withheld on the value included in the W-2. However, there are some choices available on the timing of these withholdings. The employer is given the option of calculating and withholding these taxes on a pay period, quarterly, semi-annual, or annual basis. As stated previously, the annual period would run from November through October, which means that the employer could wait until the end of October to figure the taxes to be withheld. If the employee will reach the maximum Social Security wages for the year by that time, without considering the fringe benefit, only Medicare tax withholding would be necessary.

Please feel free to contact us if you need help in calculating the value of the personal usage of business owned cars, but remember it must be calculated in time to be included on the 2024 W-2 forms.

 Click here to view the Business Car Usage

All businesses are required to report independent contractors, to whom they will be issuing a 1099-MISC form, to the California Employment Development Department. The information provided will be forwarded to state and local child support agencies to help in their efforts to locate parents who are delinquent in their child support obligations.

The information must be reported to the EDD, using form DE 542 ("Report of Independent Contractors"), within twenty days of either entering a contract for $600 or more, or the date during the calendar year when total payments to the independent contractor reach $600. Form DE 542 requests the independent contractors' full name, social security number, address and the contract dates and amounts. You may obtain forms by calling the Employment Development Department at (916) 657-0529, accessing the EDD web site at www.edd.ca.gov, or contacting our office.

Only individuals working as independent contractors are to be reported. Thus, you don't need to report corporations or partnerships which you pay for services provided to your business. However, you must report all independent contractors you hire for $600 or more, regardless of whether the independent contractor lives or works in California or another state. You only need to report an independent contractor one time per each calendar year that you contract or pay the contractor $600 or more.

The completed DE 542 forms can be either mailed or faxed to the Employment Development Department. The mailing address is:Employment Development Department PO Box 997350 MIC 96 Sacramento, CA 95899-7350 And the fax number is: (916) 319-4410

The EDD may assess a $24 penalty for each failure to comply with the reporting requirements within the required time frame. Also, a penalty of $490 may be assessed for the failure to report the required information due to an agreement between you and the independent contractor to disregard the filing requirements.

California's state-run college saving program, Golden State Scholarshare Trust allows parents and others to put aside tax-deferred money for college.

Plan Features

Money that participants (parents, grandparents, businesses, etc.) contribute to the Scholarshare Trust will grow while in the participant's account and be tax free for federal and California purposes upon disbursement to the beneficiary's school of choice. The funds disbursed can cover room and board, as well as tuition fees, books, supplies and equipment required for enrollment or attendance at a "qualified institution" (defined below). The participant retains ownership of his/her deposits in the trust until disbursement, at which time ownership is transferred to the beneficiary (student). Interest earnings disbursed from the trust are not included in the beneficiary's gross income (while attending college).

Qualified Institutions

Neither the beneficiary nor the participant will have to choose a college when opening a Scholarshare account. However, the type of college the beneficiary plans to attend will affect the maximum contribution allowed, i.e., community college, state university, private institution, etc. The student may use the funds to attend any qualified institution. A qualified institution is one that offers credit toward:

A bachelor's degree; An associate's degree; A graduate level or professional degree; and Another recognized post-secondary credential. Certain proprietary and post-secondary vocational schools are also eligible institutions.

At the time the beneficiary enrolls in college, the Scholarshare Program will transfer payments from the participant's Scholarshare account directly to the college to pay the beneficiary's qualified expenses.

Transferability

If the beneficiary dies or does not attend college, the contributor has the option of canceling the account or changing the beneficiary. Cancellation results in a refund equal to the then-current market value less a penalty of no less than 10 percent of the earnings. The penalty is waived in the event of the beneficiary's death.

Without cause and before the beneficiary's admission to college, the contributor may change the beneficiary designation to relatives of the original beneficiary or relatives of the beneficiary's spouse, including the contributor if the contributor is a relative of the original beneficiary or a relative of the original beneficiary's spouse.

Income Tax Issues

There are no income tax deductions to the contributor for placing funds into a Scholarshare program. Taxation is avoided on the earnings. Amounts paid for tuition will also be eligible for both the HOPE credit and Lifetime Learning credit, subject to the rules that regularly apply to each of those credits.

Gift Tax Issues

For gift tax purposes, deposits are completed gifts of present interests to the designated beneficiary and therefore qualify for the annual gift tax and generation-skipping transfer tax exclusion of $15,000 per year per donee as indexed. They do not qualify as excludable education expenses under the gift tax rules which allow education expenses to be paid in addition to the $15,000 annual exclusion. If the deposit exceeds the annual exclusion amount, the contributor may elect to take the balance into account ratably over a five-year period on their gift tax return.

The IRS has provided transition relief for third party settlement organizations (TPSOs) for reportable transactions under Code Sec. 6050W during calendar years 2024 and 2025. These calendar years will be the final transition period for IRS enforcement and administration of amendments made to the minimum threshold amount for TPSO reporting under Code Sec. 6050W(e).

The IRS has provided transition relief for third party settlement organizations (TPSOs) for reportable transactions under Code Sec. 6050W during calendar years 2024 and 2025. These calendar years will be the final transition period for IRS enforcement and administration of amendments made to the minimum threshold amount for TPSO reporting under Code Sec. 6050W(e).

Background

Code Sec. 6050W requires payment settlement entities to file Form 1099-K, Payment Card and Third Party Network Transactions, for each calendar year for payments made in settlement of certain reportable payment transactions. Among other information, the return must report the gross amount of the reportable payment transactions regarding a participating payee to whom payments were made in the calendar year. As originally enacted, Code Sec. 6050W(e) provided that TPSOs are not required to report third party network transactions with respect to a participating payee unless the gross amount that would otherwise be reported is more than $20,000 and the number of such transactions with that payee is more than 200.

The American Rescue Plan Act of 2021 (P.L. 117-2) amended Code Sec. 6050W(e) so that, for calendar years beginning after 2021, a TPSO must report third party network transaction settlement payments that exceed a minimum threshold of $600 in aggregate payments, regardless of the number of transactions. The IRS has delayed implementing the amended TPSO reporting threshold for calendar years beginning before January 1, 2023, and for calendar year 2023 (Notice 2023-10; Notice 2023-74).

For backup withholding purposes, a reportable payment includes payments made by a TPSO that must be reported on Form 1099-K, without regard to the thresholds in Code Sec. 6050W. The IRS has provided interim guidance on backup withholding for reportable payments made in settlement of third party network transactions (Notice 2011-42).

Reporting Relief

Under the new transition relief, a TPSO will not be required to report payments in settlement of third party network transactions with respect to a participating payee unless the amount of total payments for those transactions is more than:

• $5,000 for calendar year 2024;
• $2,500 for calendar year 2025.

This relief does not apply to payment card transactions.

For those transition years, the IRS will not assert information reporting penalties under Code Sec. 6721 or Code Sec. 6722 against a TPSO for failing to file or furnish Forms 1099-K unless the gross amount of aggregate payments to be reported exceeds the specific threshold amount for the year, regardless of the number of transactions.

In calendar year 2026 and after, TPSOs will be required to report transactions on Form 1099-K when the amount of total payments for those transactions is more than $600, regardless of the number of transactions.

Backup Withholding Relief

For calendar year 2024 only, the IRS will not assert civil penalties under Code Sec. 6651 or Code Sec. 6656 for a TPSO’s failure to withhold and pay backup withholding tax during the calendar year. However, TPSOs that have performed backup withholding for a payee during 2024 must file Form 945, Annual Return of Withheld Federal Income Tax, and Form 1099-K with the IRS, and must furnish a copy of Form 1099-K to the payee.

For calendar year 2025 and after, the IRS will assert those penalties for a TPSO’s failure to withhold and pay backup withholding tax.

Effect on Other Documents

Notice 2011-42 is obsoleted.

Notice 2024-85

IR-2024-299

The Treasury Department and IRS have issued final regulations amending regulations under Code Sec. 752 regarding a partner’s share of recourse partnership liabilities and the rules for related persons.

The Treasury Department and IRS have issued final regulations amending regulations under Code Sec. 752 regarding a partner’s share of recourse partnership liabilities and the rules for related persons.

Background

Code Sec. 752(a) treats an increase in a partner’s share of partnership liabilities, as well as an increase in the partner’s individual liabilities when the partner assumes partnership liabilities, as a contribution of money by the partner to the partnership. Code Sec. 752(b) treats a decrease in a partner’s share of partnership liabilities, or a decrease in the partner’s own liabilities on the partnership’s assumption of those liabilities, as a distribution of money by the partnership to the partner.

The regulations under Code Sec. 752(a), i.e., Reg. §§1.752-1 through 1.752-6, treat a partnership liability as recourse to the extent the partner or related person bears the economic risk of loss and nonrecourse to the extent that no partner or related person bears the economic risk of loss.

According to the existing regulations, a partner bears the economic risk of loss for a partnership liability if the partner or a related person has a payment obligation under Reg. §1.752-2(b), is a lender to the partnership under Reg. §1.752-2(c), guarantees payment of interest on a partnership nonrecourse liability as provided in Reg. §1.752-2(e), or pledges property as security for a partnership liability as described in Reg. §1.752-2(h).

Proposed regulations were published in December 2013 (REG-136984-12). These final regulations adopt the proposed regulations with modifications.

The Final Regulations

The amendments to the regulations under Reg. §1.752-2(a) provide a proportionality rule for determining how partners share a partnership liability when multiple partners bear the economic risk of loss for the same liability. Specifically, the economic risk of loss that a partner bears is the amount of the partnership liability or portion thereof multiplied by a fraction that is obtained by dividing the economic risk of loss borne by that partner by the sum of the economic risk of loss borne by all the partners with respect to that liability.

The final regulations also provide guidance on how a lower-tier partnership allocates a liability when a partner in an upper-tier partnership is also a partner in the lower-tier partnership and bears the economic risk of loss for the lower-tier partnership’s liability. The lower-tier partnership in this situation must allocate the liability directly to the partner that bears the economic risk of loss with respect to the lower-tier partnership’s liability. The final regulations clarify how this rule applies when there are overlapping economic risks of loss among unrelated partners, and the amendments add an example illustrating application of the proportionality rule to tiered partnerships. They also add a sentence to Reg. §1.704-2(k)(5) clarifying that an upper-tier partnership bears the economic risk of loss for a lower-tier partnership’s liability that is treated as the upper-tier partnership’s liability under Reg. §1.752-4(a), with the result that partner nonrecourse deduction attributable to the lower-tier partnership’s liability are allocated to the upper-tier partnership under Reg. §1.704-2(i).

In addition, the final regulations list in one section all the situations under Reg. §1.752-2 in which a person directly bears the economic risk of loss, including situations in which the de minimis exceptions in Reg. §1.752-2(d) are taken into account. The amendments state that a person directly bears the economic risk of loss if that person—and not a related person—meets all the requirements of the listed situations.

For purposes of rules on related parties under Reg. §1.752-4(b)(1), the final regulations disregard: (1) Code Sec. 267(c)(1) in determining if an upper-tier partnership’s interest in a lower-tier partnership is owned proportionately by or for the upper-tier partnership’s partners when a lower-tier partnership bears the economic risk of loss for a liability of the upper-tier partnership; and (2) Code Sec. 1563(e)(2) in determining if a corporate partner in a partnership and a corporation owned by the partnership are members of the same controlled group when the corporation directly bears the economic risk of loss for a liability of the owner partnership. The regulations state that in both these situations a partner should not be treated as bearing the economic risk of loss when the partner’s risk is limited to the partner’s equity investment in the partnership.

Under the final regulations, if a person owning an interest in a partnership is a lender or has a payment obligation with respect to a partnership liability, then other persons owning interests in that partnership are not treated as related to that person for purposes of determining the economic risk of loss that they bear for the partnership liability.

The final regulations also provide that if a person is a lender or has a payment obligation with respect to a partnership liability and is related to more than one partner, then the partners related to that person share the liability equally. The related partners are treated as bearing the economic risk of loss for a partnership liability in proportion to each related partner’s interest in partnership profits.

The final regulations contain an ordering rule in which the first step in Reg. §1.762-4(e) is to determine whether any partner directly bears the economic risk of loss for the partnership liability and apply the related-partner exception in Reg. §1.752-4(b)(2). The next step is to determine the amount of economic risk of loss each partner is considered to bear under Reg. §1.752-4(b)(3) when multiple partners are related to a person directly bearing the economic risk of loss for a partnership liability. The final step is to apply the proportionality rule to determine the economic risk of loss that each partner bears when the amount of the economic risk of loss that multiple partners bear exceeds the amount of partnership liability.

The IRS and Treasury indicate that they are continuing to study whether additional guidance is needed on the situation in which an upper-tier partnership bears the economic risk of loss for a lower-tier partnership’s liability and distributes, in a liquidating distribution, its interest in the lower-tier partnership to one of its partners when the transferee partner does not bear the economic risk of loss.

Applicability Dates

The final regulations under T.D. 10014 apply to any liability incurred or assumed by a partnership on or after December 2, 2024. Taxpayers may apply the final regulations to all liabilities incurred or assumed by a partnership, including those incurred or assumed before December 2, 2024, with respect to all returns (including amended returns) filed after that date; but in that case a partnership must apply the final regulations consistently to all its partnership liabilities.

T.D. 10014

Final regulations defining “energy property” for purposes of the energy investment credit generally apply with respect to property placed in service during a tax year beginning after they are published in the Federal Register, which is scheduled for December 12.

Final regulations defining “energy property” for purposes of the energy investment credit generally apply with respect to property placed in service during a tax year beginning after they are published in the Federal Register, which is scheduled for December 12.

The final regs generally adopt proposed regs issued on November 22, 2023 (NPRM REG-132569-17) with some minor modifications.

Hydrogen Energy Storage P property

he Proposed Regulations required that hydrogen energy storage property store hydrogen solely used for the production of energy and not for other purposes such as for the production of end products like fertilizer. However, the IRS recognize that the statute does not include that requirement. Accordingly, the final regulations do not adopt the requirement that hydrogen energy storage property store hydrogen that is solely used for the production of energy and not for other purposes.

The final regulations also provide that property that is an integral part of hydrogen energy storage property includes, but is not limited to, hydrogen liquefaction equipment and gathering and distribution lines within a hydrogen energy storage property. However, the IRS declined to adopt comments requesting that the final regulations provide that chemical storage, that is, equipment used to store hydrogen carriers (such as ammonia and methanol), is hydrogen energy storage property.

Thermal Energy Storage Property

To clarify the proposed definition of “thermal energy storage property,” the final regs provide that such property does not include property that transforms other forms of energy into heat in the first instance. The final regulations also clarify the requirements for property that removes heat from, or adds heat to, a storage medium for subsequent use. Under a safe harbor, thermal energy storage property satisfies this requirement if it can store energy that is sufficient to provide heating or cooling of the interior of a residential or commercial building for at least one hour. The final regs also include additional storage methods and clarify rules for property that includes a heat pump system.

Biogas P property

The final regulations modify several elements of the rules governing biogas property. Gas upgrading equipment is included in cleaning and conditioning property. The final regs clarify that property that is an integral part of qualified biogas property includes but is not limited to a waste feedstock collection system, landfill gas collection system, and mixing and pumping equipment. While a qualified biogas property generally may not capture biogas for disposal via combustion, combustion in the form of flaring will not disqualify a biogas property if the primary purpose of the property is sale or productive use of biogas and any flaring complies with all relevant laws and regulations. The methane content requirement is measured at the point at which the biogas exits the qualified biogas property.

Unit of Energy P property

To clarify how the definition of a unit of energy property is applied to solar energy property, the final regs update an example illustrate that the unit of energy property is all the solar panels that are connected to a common inverter, which would be considered an integral part of the energy property, or connected to a common electrical load, if a common inverter does not exist. Accordingly, a large, ground-mounted solar energy property may comprise one or more units of energy property depending upon the number of inverters. For rooftop solar energy property, all components of property that are installed on a single rooftop are considered a single unit of energy property.

Energy Projects

The final regs modify the definition of an energy project to provide more flexibility. However, the IRS declined to adopt a simple facts-and-circumstances analysis so an energy project must still satisfy particular and specific factors.

T.D. 10015

The IRS has provided relief from the failure to furnish a payee statement penalty under Code Sec. 6722 to certain partnerships with unrealized receivables or inventory items described in Code Sec. 751(a) (Section 751 property) that fail to furnish, by the due date specified in Reg. §1.6050K-1(c)(1), Part IV of Form 8308, Report of a Sale or Exchange of Certain Partnership Interests, to the transferor and transferee in a Section 751(a) exchange that occurred in calendar year 2024.

The IRS has provided relief from the failure to furnish a payee statement penalty under Code Sec. 6722 to certain partnerships with unrealized receivables or inventory items described in Code Sec. 751(a) (Section 751 property) that fail to furnish, by the due date specified in Reg. §1.6050K-1(c)(1), Part IV of Form 8308, Report of a Sale or Exchange of Certain Partnership Interests, to the transferor and transferee in a Section 751(a) exchange that occurred in calendar year 2024.

Background

A partnership with Section 751 property must provide information to each transferor and transferee that are parties to a sale or exchange of an interest in the partnership in which any money or other property received by a transferor in exchange for all or part of the transferor’s interest in the partnership is attributable to Section 751 property. The partnership must file Form 8308 as an attachment to its Form 1065 for the partnership's tax year that includes the last day of the calendar year in which the Section 751(a) exchange took place. The partnership must also furnish a statement to the transferor and transferee by the later of January 31 of the year following the calendar year in which the Section 751(a) exchange occurred, or 30 days after the partnership has received notice of the exchange as specified under Code Sec. 6050K and Reg. §1.6050K-1. The partnership must use a copy of the completed Form 8308 as the required statement, or provide or a statement that includes the same information.

In 2020, Reg. §1.6050K-1(c)(2) was amended to require a partnership to furnish to a transferor partner the information necessary for the transferor to make the transferor partner’s required statement in Reg. §1.751-1(a)(3). Among other items, a transferor partner in a Section 751(a) exchange is required to submit with the partner’s income tax return a statement providing the amount of gain or loss attributable to Section 751 property. In October 2023, the IRS added new Part IV to Form 8308, which requires a partnership to report, among other items, the partnership’s and the transferor partner’s share of Section 751 gain and loss, collectibles gain under Code Sec. 1(h)(5), and unrecaptured Section 1250 gain under Code Sec. 1(h)(6).

In January 2024, the IRS provided relief due to concerns that many partnerships would not be able to furnish the information required in Part IV of the 2023 Form 8308 to transferors and transferees by the January 31, 2024 due date, because, in many cases, partnerships would not have all of the required information by that date (Notice 2024-19, I.R.B. 2024-5, 627).

The relief below has been provided due to similar concerns for furnishing information for Section 751(a) exchanges occurring in calendar year 2024.

Penalty Relief

For Section 751(a) exchanges during calendar year 2024, the IRS will not impose the failure to furnish a correct payee statement penalty on a partnership solely for failure to furnish Form 8308 with a completed Part IV by the due date specified in Reg. §1.6050K-1(c)(1), only if the partnership:

• timely and correctly furnishes to the transferor and transferee a copy of Parts I, II, and III of Form 8308, or a statement that includes the same information, by the later of January 31, 2025, or 30 days after the partnership is notified of the Section 751(a) exchange, and
• furnishes to the transferor and transferee a copy of the complete Form 8308, including Part IV, or a statement that includes the same information and any additional information required under Reg. §1.6050K-1(c), by the later of the due date of the partnership’s Form 1065 (including extensions), or 30 days after the partnership is notified of the Section 751(a) exchange.

This notice does not provide relief with respect to a transferor partner’s failure to furnish the notification to the partnership required by Reg. §1.6050K-1(d). This notice also does not provide relief with respect to filing Form 8308 as an attachment to a partnership’s Form 1065, and so does not provide relief from failure to file correct information return penalties under Code Sec. 6721.

Notice 2025-2

The American Institute of CPAs is encouraging business owners to continue to collect required beneficial ownership information as required by the Corporate Transparency Act even though the regulations have been halted for the moment.

The American Institute of CPAs is encouraging business owners to continue to collect required beneficial ownership information as required by the Corporate Transparency Act even though the regulations have been halted for the moment.

AICPA noted that the while there a preliminary injunction has been put in place nationwide by a U.S. district court, the Financial Crimes Enforcement Network has already filed its appeal and the rules could be still be reinstated.

"While we do not know how the Fifth Circuit court will respond, the AIPCA continues to advise members that, at a minimum, those assisting clients with BOI report filings continue to gather the required information from their clients and [be] prepared to file the BOI report if the inunction is lifted," AICPA Vice President of Tax Policy & Advocacy Melanie Lauridsen said in a statement.

She continued: "The AICPA realizes that there is a lot of confusion and anxiety that business owners have struggled with regarding BOI reporting requirements and we, together with our partners at the State CPA societies, have continued to advocate for a delay in the implementation of this requirement."

The United States District Court for the Eastern District of Texas granted on December 3, 2024, a motion for preliminary injunction requested in a lawsuit filed by Texas Top Cop Shop Inc., et al, against the federal government to halt the implementation of BOI regulations.

In his order granting the motion for preliminary injunction, United States District Judge Amos Mazzant wrote that its "most rudimentary level, the CTA regulates companies that are registered to do business under a State’s laws and requires those companies to report their ownership, including detailed, personal information about their owners, to the Federal Government on pain of severe penalties."

He noted that this request represents a "drastic" departure from history:

First, it represents a Federal attempt to monitor companies created under state law – a matter our federalist system has left almost exclusively to the several States; and

Second, the CTA ends a feature of corporate formations as designed by various States – anonymity.

"For good reason, Plaintiffs fear this flanking, quasi-Orwellian statute and its implications on our dual system of government," he continued. "As a result, the Plantiffs contend that the CTA violates the promises our Constitution makes to the People and the States. Despite attempting to reconcile the CTA with the Constitution at every turn, the Government is unable to provide the Court with any tenable theory that the CTA falls within Congress’s power."

By Gregory Twachtman, Washington News Editor

The IRS has launched a new enforcement campaign targeting taxpayers engaged in deferred legal fee arrangements and improper use of Form 8275, Disclosure Statement. The IRS addressed tax deferral schemes used by attorneys or law firms to delay recognizing contingency fees as taxable income.

The IRS has launched a new enforcement campaign targeting taxpayers engaged in deferred legal fee arrangements and improper use of Form 8275, Disclosure Statement. The IRS addressed tax deferral schemes used by attorneys or law firms to delay recognizing contingency fees as taxable income.

The IRS highlighted that plaintiff’s attorneys or law firms representing clients in lawsuits on a contingency fee basis may receive as much as 40 percent of the settlement amount that they then defer by entering an arrangement with a third party unrelated to the litigation, who then may distribute to the taxpayer in the future. Generally, this happens 20 years or more from the date of the settlement. Subsequently, the taxpayer fails to report the deferred contingency fees as income at the time the case is settled or when the funds are transferred to the third party. Instead, the taxpayer defers recognition of the income until the third party distributes the fees under the arrangement. The goal of this newly launched campaign is to ensure taxpayer compliance and consistent treatment of similarly situated taxpayers which requires the contingency fees be included in taxable income in the year the funds are transferred to the third party.

Additionally, the IRS stated that the Service's efforts continue to uncover unreported financial accounts and structures through data analytics and whistleblower tips. In fiscal year 2024, whistleblowers contributed to the collection of $475 million, with $123 million awarded to informants. The IRS has now recovered $4.7 billion from new initiatives underway. This includes more than $1.3 billion from high-income, high-wealth individuals who have not paid overdue tax debt or filed tax returns, $2.9 billion related to IRS Criminal Investigation work into tax and financial crimes, including drug trafficking, cybercrime and terrorist financing, and $475 million in proceeds from criminal and civil cases attributable to whistleblower information.

Proper Use of Form 8275

The IRS stressed upon the proper use of Form 8275 by taxpayers in order to avoid portions of the accuracy-related penalty due to disregard of rules, or penalty for substantial understatement of income tax for non-tax shelter items. Taxpayers should be aware that Form 8275 disclosures that lack a reasonable basis do not provide penalty protection. Taxpayers in this posture should consult a tax professional or advisor to determine how to come into compliance. In its review of Form 8275 filings, the IRS identified multiple filings that do not qualify as adequate disclosures that would justify avoidance of penalties. Finally, the IRS reminded taxpayers that Form 8275 is not intended as a free pass on penalties for positions that are false.

FS-2024-32

IR-2024-310

Probably one of the more difficult decisions you will have to make as a consumer is whether to buy or lease your auto. Knowing the advantages and disadvantages of buying vs. leasing a new car or truck before you get to the car dealership can ease the decision-making process and may alleviate unpleasant surprises later.

Probably one of the more difficult decisions you will have to make as a consumer is whether to buy or lease your auto. Knowing the advantages and disadvantages of buying vs. leasing a new car or truck before you get to the car dealership can ease the decision-making process and may alleviate unpleasant surprises later.

Nearly one-third of all new vehicles (and up to 75% of all new luxury cars) are leased rather than purchased. But the decision to lease or buy must ultimately be made on an individual level, taking into consideration each person's facts and circumstances.

Buying

Advantages.

• You own the car at the end of the loan term.
• Lower insurance premiums.
• No mileage limitations.

Disadvantages.

• Higher upfront costs.
• Higher monthly payments.
• Buyer bears risk of future value decrease.

Leasing

Advantages.

• Lower upfront costs.
• Lower monthly payments.
• Lessor assumes risk of future value decrease.
• Greater purchasing power.
• Potential additional income tax benefits.
• Ease of disposition.

Disadvantages.

• You do not own the car at the end of the lease term, although you may have the option to purchase at that time.
• Higher insurance premiums.
• Potential early lease termination charges.
• Possible additional costs for abnormal wear & tear (determined by lessor).
• Extra charges for mileage in excess of mileage specified in your lease contract.

Before you make the decision whether to lease or buy your next vehicle, it makes sense to ask yourself the following questions:

How long do I plan to keep the vehicle? If you want to keep the car or truck longer than the term of the lease, you may be better off purchasing the vehicle as purchase contracts usually result in a lower overall cost of ownership.

How much am I going to drive the vehicle? If you are an outside salesperson and you drive 30,000 miles per year, any benefits you may have gained upfront by leasing will surely be lost in the end to excess mileage charges. Most lease contracts include mileage of between 12,000-15,000 per year - any miles driven in excess of the limit are subject to some pretty hefty charges.

How expensive of a vehicle do I want? If you can really only afford monthly payments on a Honda Civic but you've got your eye on a Lexus, you may want to consider leasing. Leasing usually results in lower upfront fees in the form of lower down payments and deferred sales tax, in addition to lower monthly payments. This combination can make it easier for you to get into the car of your dreams.

If you have any questions about the tax ramifications regarding buying vs. leasing an automobile or would like some additional information when making your decision, please contact the office.