The bipartisan infrastructure bill passed the House of Representatives in a late night vote on November 5 by a 228-206 vote with 13 Republicans crossing the aisle to get the bill across the finish line after 6 Democrats voted the bill down.

The bipartisan infrastructure bill passed the House of Representatives in a late night vote on November 5 by a 228-206 vote with 13 Republicans crossing the aisle to get the bill across the finish line after 6 Democrats voted the bill down. President Biden signed the infrastructure bill into law on November 15 after Congress came back from a week-long recess.

The $1.2 trillion Infrastructure Investment and Jobs Act ( P.L. No. 117-58), includes a few tax provisions mixed in with the spending on to repair and rebuild the nation’s bridges, climate issues and other items. It passed the Senate with a 69-30 vote in August.

Cryptocurrency Reporting And Other Tax Provisions
Among the tax provisions in the bill is an expansion of the reporting requirements available to cryptocurrency, which is one of the revenue generators to help offset the new spending in the bill. It is believed that a significant amount of cryptocurrency gains escape taxation due to underreporting.

The bill also includes a few other tax changes meant to spur private infrastructure investment, raise revenue, and expand the scope and applicability of disaster declarations, in addition to typical extension of highway funding provisions. These other changes include

• An extension of highway taxes to 2028 and highway trust fund expenditure authority to 2026;
• Inclusion of qualified broadband projects and carbon dioxide capture facilities among the other types of projects for which private activity bonds can be issued;
• A return of the exception for water and sewage disposal utilities from the rule requiring a corporation to recognize contributions in aid of construction (removed by the Tax Cuts and Jobs Act of 2017);
• A return of Superfund excise taxes on certain chemicals, last effective in the mid-1990s;
• Termination of the employee retention credit for employers closed due to COVID-19 after September 30, 2021; and
• Changes to the extension of tax deadlines due to declared disasters and service in a combat area, as well as expansion of extension authority to taxpayers impacted by wildfires.

The IRS has released the annual inflation adjustments for 2022 for the income tax rate tables, plus more than 56 other tax provisions.

The IRS has released the annual inflation adjustments for 2022 for the income tax rate tables, plus more than 56 other tax provisions. The IRS makes these cost-of-living adjustments (COLAs) each year to reflect inflation.

2022 Income Tax Brackets
For 2022, the highest income tax bracket of 37 percent applies when taxable income hits:

• $647,850 for married individuals filing jointly and surviving spouses,
• $539,900 for single individuals and heads of households,
• $323,925 for married individuals filing separately, and
• $13,450 for estates and trusts.

2022 Standard Deduction
The standard deduction for 2022 is:

• $25,900 for married individuals filing jointly and surviving spouses,
• $19,400 for heads of households, and
• $12,950 for single individuals and married individuals filing separately.

The standard deduction for a dependent is limited to the greater of:

• $1,150 or
• the sum of $400, plus the dependent’s earned income.

Individuals who are blind or at least 65 years old get an additional standard deduction of:

• $1,400 for married taxpayers and surviving spouses, or
• $1,750 for other taxpayers.

Alternative Minimum Tax (AMT) Exemption for 2022
The AMT exemption for 2022 is:

• $118,100 for married individuals filing jointly and surviving spouses,
• $75,900 for single individuals and heads of households,
• $59,050 for married individuals filing separately, and
• $26,500 for estates and trusts.

The exemption amounts phase out in 2022 when AMTI exceeds:

• $1,079,800 for married individuals filing jointly and surviving spouses,
• $539,900 for single individuals, heads of households, and married individuals filing separately, and
• $88,300 for estates and trusts.

Expensing Code Sec. 179 Property in 2022
For tax years beginning in 2022, taxpayers can expense up to $1,080,000 in section 179 property. However, this dollar limit is reduced when the cost of section 179 property placed in service during the year exceeds $2,700,000.

Estate and Gift Tax Adjustments for 2022
The following inflation adjustments apply to federal estate and gift taxes in 2022:

• the gift tax exclusion is $16,000 per donee, or $164,000 for gifts to spouses who are not U.S. citizens;
• the federal estate tax exclusion is $12,060,000; and
• the maximum reduction for real property under the special valuation method is $1,230,000.

2022 Inflation Adjustments for Other Tax Items
The maximum foreign earned income exclusion amount in 2022 is $112,000.

The IRS also provided inflation-adjusted amounts for the:

• adoption credit,
• lifetime learning credit,
• earned income credit,
• excludable interest on U.S. savings bonds used for education,
• various penalties, and
• many other provisions.

Effective Date of 2022 Adjustments
These inflation adjustments generally apply to tax years beginning in 2022, so they affect most returns that will be filed in 2023. However, some specified figures apply to transactions or events in calendar year 2022.

The 2022 cost-of-living adjustments (COLAs) that affect pension plan dollar limitations and other retirement-related provisions have been released by the IRS.

The 2022 cost-of-living adjustments (COLAs) that affect pension plan dollar limitations and other retirement-related provisions have been released by the IRS. In general, many of the pension plan limitations will change for 2022 because the increase in the cost-of-living index due to inflation met the statutory thresholds that trigger their adjustment. However, other limitations will remain unchanged.

The 2022 cost-of-living adjustments (COLAs) were released for:

• pension plan dollar limitations, and
• other retirement-related provisions.

Highlights of Changes for 2022
The contribution limit has increased from $19,500 to $20,500 for employees who take part in:

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

The catch-up contribution limit for employees aged 50 and over in the plans above remains $6,500.

The annual limit on contributions to an IRA remains unchanged at $6,000. The $1,000 IRA catch-up contribution amount is not subject to inflation adjustments.

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

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

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

• Single taxpayers covered by a workplace retirement plan, the phase-out range is $68,000 and $78,000, increased from between $66,000 and $76,000.
• Joint filers, when the spouse making the contribution takes part in a workplace retirement plan, the phase-out range is $109,000 and $129,000, increased from between $105,000 and $125,000.
• An IRA contributor, who is not covered by a workplace retirement plan but their spouse is, the phase out is between $204,000 and $214,000, increased from between $198,000 and $208,000.
• For a married individual filing a separate return who is covered by a workplace plan, the phase-out range remains $0 to $10,000.
• The phase-out ranges for Roth IRA contributions are:
• $129,000 to $144,000, for singles and heads of household,
• $204,000 to $214,000, for joint filers, and
• $0 to $10,000 for married separate filers.

Finally, the income limit for the Saver' Credit is:

• $68,000 for joint filers,
• $51,000 for heads of household, and
• $34,000 for singles and married filing separately.

The IRS has released additional Paycheck Protection Program (PPP) loan forgiveness guidance.

The IRS has released additional Paycheck Protection Program (PPP) loan forgiveness guidance. The guidance addresses (1) timing issues; (2) partner and consolidated group member basis adjustments; and (3) filing of amended partnership returns and information statements.

Timing of Tax-exempt Income
A taxpayer that received a PPP loan may treat tax-exempt income resulting from the partial or complete forgiveness of the PPP loan as received or accrued as follows:

• As the taxpayer pays or incurs eligible expenses. Under the safe harbor that allows certain taxpayers who relied on prior guidance and did not deduct certain PPP-related expenses on a tax return filed before the COVID Tax Relief Act was enacted, to deduct the expenses in the next tax year. A taxpayer that has elected to use the safe harbor will be treated as paying or incurring the eligible expenses during the taxpayer’s immediately subsequent tax year following the taxpayer’s 2020 tax year in which the expenses were actually paid or incurred, as described in Rev. Proc. 2021-20;
• When the taxpayer files an application for forgiveness of the PPP loan; or;
• When the PPP loan forgiveness is granted.

The timing treatment also applies to the extent tax-exempt income resulting from the partial or complete forgiveness of a PPP loan is treated as gross receipts under a federal tax provision.

If a taxpayer received PPP loan forgiveness of less than the amount that the taxpayer previously treated as tax-exempt income, the taxpayer must file an amended return, information return, or administrative adjustment request as applicable.

Partnership Allocations and Basis Adjustments
If covered partnerships meet certain requirements, the IRS will treat the covered taxpayer’s allocation of amounts treated as tax exempt income and allocation of deductions as determined in accordance with Code Sec. 704(b). A partner's basis in its interest is increased by the partner’s distributive share of tax exempt income and is decreased by the partner’s distributive share of deductions. If certain conditions are met, the treatment generally applies in connection with:

• deductions and amounts treated as tax exempt income arising in connection with the forgiveness of a PPP loan;
• deductions and amounts treated as tax exempt income arising in connection with payments made by the SBA on behalf of the taxpayer with respect to a covered loan under § 1112(c) of the CARES Act; and
• the allocation of deductions and amounts treated as tax exempt income arising in connection with the taxpayer receiving a Supplemental Targeted EIDL Advance or a Restaurant Revitalization Grant.

Consolidated Group Members
For consolidated group members, the IRS will treat any amount excluded from gross income under § 7A(i) of the Small Business Act, § 276(b) of the COVID Tax Relief Act, or § 278(a)(1) of the COVID Tax Relief Act, as applicable, as tax exempt income for purposes of Reg. §1.1502-32(b)(2)(ii) investment adjustments. For the treatment to apply, the consolidated group must attach a signed statement to its consolidated tax return.

Amended Returns
Eligible partnerships subject to the centralized partnership audit regime (BBA partnerships) that filed a Form 1065 and furnished all required Schedules K-1 for tax years ending after March 27, 2020 and before Rev. Proc. 2021-50 was issued may file amended partnership returns and furnish amended Schedules K-1 on or before December 31, 2021. The amended returns must take into account tax changes under Rev. Proc. 2021-48 or Rev. Proc. 2021-49, but eligible BBA partnerships may make any additional changes on their amended returns.

The amended return applies to any partnership tax year ending after March 27, 2020 and before the issuance of Rev. Proc. 2021-48 and Rev. Proc. 2021-49. The BBA partnership must clearly indicate the application of this revenue procedure on the amended return and write "FILED PURSUANT TO REV PROC 2021-50" at the top of the amended return and attach a statement with each amended Schedule K-1 furnished to its partners with the same notation.

Special rules apply to pass-through partners. A partnership under examination that wishes to use this amended return procedure must notify the revenue agent coordinating the partnership’s examination.

The IRS issued guidance related to the application of the per diem rules under Rev. Proc. 2019-48 to the temporary 100-percent deduction for business meals provided by a restaurant.

The IRS issued guidance related to the application of the per diem rules under Rev. Proc. 2019-48 to the temporary 100-percent deduction for business meals provided by a restaurant. The Taxpayer Certainty and Disaster Tax Relief Act of 2020 ( P.L. 116-260) temporarily increased the deduction from 50 percent to 100 percent for a business’s restaurant food and beverage expenses for 2021 and 2022.

Application of Per Diem Rules
Under Rev. Proc. 2019-48, taxpayers using the per diem rules to substantiate deductible food and beverage expenses must still apply the 50-percent limitation. According to the IRS guidance, taxpayers that follow Rev. Proc. 2019-48 may treat the entire meal portion of a the per diem or allowance as being attributable to food or beverages provided by a restaurant.

Effective Date
This IRS guidance is effective for the meal portion of per diem allowances for lodging and M&IE, or for M&IE only that are paid or incurred by an employer after December 31, 2020, and before January 1, 2023.

The IRS has released guidance which addresses the federal income tax treatment and information reporting requirements for payments made to or on behalf of financially distressed individual homeowners by a state with funds allocated from the Homeowner Assistance Fund (HAF).

The IRS has released guidance which addresses the federal income tax treatment and information reporting requirements for payments made to or on behalf of financially distressed individual homeowners by a state with funds allocated from the Homeowner Assistance Fund (HAF). The fund was established under section 3206 of the American Rescue Plan Act of 2021, P.L. No. 117-2, in response to the coronavirus disease (COVID-19) pandemic. This guidance is effective on November 8, 2021, and would apply to qualified expenses paid after January 21, 2020.

Disaster Relief Payments
The IRS guidance provides that any HAF payment made to or on behalf of a homeowner is qualified disaster relief payment within the meaning of Code Sec. 139(b)(4) since COVID-19 is a qualified disaster. As a result, such payments are not included in the homeowner’s gross income. However, a homeowner that receives a HAF payment, or on whose behalf a HAF payment is made, for qualified expenses cannot take a deduction or credit with respect to such expenses. Qualified expenses under the HAF program include assistance payments for mortgage payments, utilities, and insurance.

Safe Harbor for Tax Deductions
For tax years beginning in 2021 through 2025, a homeowner may deduct as qualified mortgage interest expenses or qualified real property tax expenses on the homeowner’s federal income tax return for the lesser of:

• the sum of all payments the homeowner actually makes from the homeowner’s own sources during the taxable year to the mortgage servicer; or
• the sum of amounts shown on Form 1098, for qualified housing payment expenses.

A homeowner may first allocate the HAF payments to qualified expenses that are not qualified housing payment expenses before allocating the remaining portion of the HAF payments to qualified housing payment expenses. A qualified housing payment a payment for a mortgage or taxes that would be eligible to be deducted on the taxpayer’s return.

Eligible Homeowners
A homeowner is eligible to claim relief under the IRS guidance if:

• the homeowner receives a payment from, or a payment is made on the homeowner’s behalf by, a State;
• the payment is made with funds from the HAF;
• the payment is used to pay qualified expenses of the homeowner, and at least one of the expenses is a qualified housing payment expense;
• the homeowner has also paid a portion of the qualified housing payment expense from their own sources;
• the homeowner itemizes deductions on their federal income tax return;
• the homeowner would meet the requirements of Code Sec. 163(h)(3) to deduct qualified mortgage interest expenses, if they paid the qualified mortgage interest expenses from the homeowner’s own sources; and
• the homeowner would meet the requirements of Code Sec. 164(a)(1) to deduct qualified real property tax expenses if the homeowner paid the qualified real property tax expenses from the Homeowner’s own sources.

Reporting Requirements
Since HAF payments made to or on behalf of homeowners are excluded from the gross income of the homeowners, they are not fixed or determinable income under Code Sec. 6041 and information reporting for such payments is not required. HAF payments that are made directly to third parties on behalf of homeowners, such as payments made to insurance companies and homeowners associations, are generally reportable to those third parties if they constitute fixed or determinable income to the third party and the aggregate payments meet the $600 reporting threshold. Moreover, the interest received from a governmental unit or an agency or instrumentality of a governmental unit is not interest received on a mortgage. Lenders who receive a homeowner’s mortgage payments directly from a State should not report the interest received from the State on Form 1098 as interest received on the homeowner’s mortgage.

If a lender files and furnishes a Form 1098 that includes mortgage interest received directly from the State, thereby reporting an incorrect amount of interest on the information return, the lender will not be subject to penalties under Code Secs. 6721 and 6722 so long as the lender notifies the homeowner that the amounts reported on the Form 1098 are overstated because they include payments from a governmental unit or an agency or instrumentality of a governmental unit, and sets forth the amount of the overstatement. Such notification to the homeowner should be made at the time the Form 1098 is furnished or within 30 days thereafter, and can be provided in a separate statement (written or electronic), or included on Form 1098 in Box 10 labeled "Other".

The IRS has urged taxpayers, including ones who received stimulus payments or advance Child Tax Credit payments, to follow some easy steps for accurate federal tax returns filing in 2022.

The IRS has urged taxpayers, including ones who received stimulus payments or advance Child Tax Credit payments, to follow some easy steps for accurate federal tax returns filing in 2022.

Organized tax records
Taxpayers can easily prepare complete and accurate tax returns with the help of organized tax records. Organized tax records also help avoid errors that lead to processing and refund delays. Taxpayers must have all tax information available before filing their tax returns. Taxpayers must inform the IRS of any address changes and the Social Security Administration of a legal name change.

Recordkeeping for individuals includes the following:

• Forms W-2 from employer(s),
• Forms 1099 from banks, issuing agencies and other payers, including unemployment compensation, dividends, distributions from a pension, annuity or retirement plan,
• Form 1099-K, 1099-MISC, W-2 or other income statement for workers in the gig economy,
• Form 1099-INT for interest received, and
• other income documents and records of virtual currency transactions.

Individuals can determine if they are eligible for deductions or credits with the help of income documents. Further, taxpayers will need their related 2021 information to reconcile their advance payments of the Child Tax Credit and Premium Tax Credit. People will also need their stimulus payment and plus-up amounts to figure and claim the 2021 Recovery Rebate Credit if they received third Economic Impact Payments and think they qualify for an additional amount.

Further, taxpayers must secure the end of year documents, including the following:

• Letter 6419, 2021 Total Advance Child Tax Credit Payments, to reconcile advance Child Tax Credit payments,
• Letter 6475, Your 2021 Economic Impact Payment, to determine eligibility to claim the Recovery Rebate Credit, and
• Form 1095-A, Health Insurance Marketplace Statement, to reconcile advance Premium Tax Credits for Marketplace coverage.

Online Account
Taxpayers can securely gain entry to the Child Tax Credit Update Portal to see their payment dates and amounts through their Online Account. This information will be required to reconcile taxpayers’ advance Child Tax Credit payments with the Child Tax Credit they can claim when filing their 2021 tax returns.

Eligible individuals claiming a 2021 Recovery Rebate Credit can view their Economic Impact Payment amounts in their online account to accurately claim the credit when they file.

Those who have an Online Account may:

• see the amounts of their Economic Impact Payments,
• access Child Tax Credit Update Portal for information regarding their advance Child Tax Credit payments,
• approve or reject authorization requests from their tax professional, and
• update their email address and opt-out/in for selected paper notice preferences.

Tax Withholding
The IRS has informed that individuals may want to consider adjusting their withholding if they owed taxes or received a large refund the previous year. Individuals can help avoid a tax bill or let individuals keep more money every payday by changing withholding. Some reasons for adjusting withholding might be marriage or divorce, childbirth or taking on a second job. Taxpayers may complete a new Form W-4, Employee’s Withholding Certificate, every year and when personal or financial situations change.

Further, individuals should make quarterly estimated tax payments if they receive a substantial amount of non-wage income like self-employment income, investment income, taxable Social Security benefits and in some instances, pension and annuity income. The due date for 2021 is January 18, 2022.

ITINs
An Individual Taxpayer Identification Number (ITIN) will expire on December 31, 2021 if it was not included on a U.S. federal tax return at least once for tax years 2018, 2019 and 2020. The IRS has reminded taxpayers that ITINs with middle digits 70 through 88 have expired. Further, ITINs with middle digits 90 through 99, IF assigned before 2013, have expired. Individuals are not required to renew again if they previously submitted a renewal application that was approved.

Direct Deposit
Individuals can access their refund faster than a paper check with the help of direct deposit. Taxpayers without a bank account can learn how to open an account at an FDIC-Insured bank or through the National Credit Union Locator Tool. Veterans can visit the Veterans Benefits Banking Program to access financial services at participating banks.

IRS Certified Volunteers
The IRS has encouraged people to join the Volunteer Income Tax Assistance and Tax Counseling for the Elderly programs to prepare a free tax return for eligible taxpayers.

All members of the G20 on October 30 endorsed a global corporate minimum tax rate of 15 percent in an effort to eliminate countries slashing corporate tax rates and creating tax shelters to attract large multinational corporations.

All members of the G20 on October 30 endorsed a global corporate minimum tax rate of 15 percent in an effort to eliminate countries slashing corporate tax rates and creating tax shelters to attract large multinational corporations.

The agreement comes on the heels of an international agreement in October among 136 of the 140 Organization for Economic Cooperation and Development (OECD) members, that featured two pillars. Under Pillar One, taxing rights will be reallocated to market jurisdictions to ensure that market economies receive tax revenue even in locations where large multinational enterprises (MNEs) lack a physical presence. MNEs with global sales above 20 billion euro and profitability above 10 percent will be covered by the new rules, with 25 percent of profit above the 10 percent threshold to be reallocated to market jurisdictions.

Pillar Two introduces the global minimum corporate tax rate set at 15 percent, which applies to companies with revenue above 750 million euro.

Each country will need to ratify the tax within its own governing structure.
"The final political agreement as set out in the Statement on a Two-Pillar Solution to Address the Tax Challenges Arising from the Digitalisation of the Economy and in the Detailed Implementation Plan, released by the OECD/G20 Inclusive Framework on Base Erosion and Profit Shifting (BEPS) on October 8, is a historic achievement through which we will establish a more stable and fairer international tax system," the final Rome Declaration states. "We call on the OECD/G20 Inclusive Framework on BEPS to swiftly develop the model rules and multilateral instruments as agreed in the Detailed Implementation Plan, with a view to ensure that the new rules will come into effect at global level in 2023."

Tax To Generate $60 Billion Annually for U.S.
A White House spokesperson said October 29 ahead of the formal G20 endorsement that the 15 percent global corporate minimum tax would generate at least $60 billion annually. The tax has been proposed as part of the current version of the Build Back Better Act ( H.R. 5376) as a key revenue generator that will help offset the $1.75 trillion in new spending that is included in the legislation. The House Rules Committee is in the process of reviewing that legislation as the last stop before the bill advances to the lower chamber of Congress for consideration, something that could happen as early as the week of November 1.

Treasury Secretary Janet Yellen said at a November 1 press conference that while the agreed upon global corporate minimum tax rate was set at 15 percent, it could conceivably go higher, although she does not expect it to.

Individual countries "may choose themselves to establish a higher tax, but I expect many countries to adopt a 15 percent tax," Yellen said, adding that there is nothing that makes 15 percent represents a fixed percentage, a minimum or even a ceiling. " I don't think that there's broad agreement on that. It works for many countries, and I don't think that that's something that is going to be reconsidered as a as a global minimum."

In a case of first impression, the Tax Court retained jurisdiction over a petition for redetermination with respect to a whistleblower's claim for an award after the petitioner’s death.

In a case of first impression, the Tax Court retained jurisdiction over a petition for redetermination with respect to a whistleblower's claim for an award after the petitioner’s death. The informant filed a claim for an award with the IRS Whistleblower Office (WBO) for naming multiple target taxpayers. The WBO denied the claim and the informant appealed the determination to the Tax Court under Code Sec. 7623(b)(4). The informant died after filing the petition, but before the trial. Moreover, the informant's claim with respect to two of the target taxpayers was pending before the Tax Court prior to the petitioner’s death.

Litigation Post-Death of Informant
The counsel for the informant filed a motion to substitute the informant's estate in order to continue to prosecute the informant's claim after his death. At trial, the Tax Court stated that its jurisdiction over a petition filed under Code Sec. 7623(b)(4) was not extinguished by the death of the informant because the WBO reached a final determination and a petition was filed. Further, the informant's claim survived his death and his estate had standing to be substituted as the petitioner.

An S corporation’s disposition of a major league baseball team was a disguised sale to a newly formed partnership.

An S corporation’s disposition of a major league baseball team was a disguised sale to a newly formed partnership. The taxpayer had formed the partnership, with a renowned family, where the taxpayer contributed the major league baseball team and related assets and the family contributed cash. Subsequently, the partnership then distributed cash to the taxpayer (the transaction) which represented a "disguised sale" which was taxable under Code Sec. 707. Further, the IRS had issued a notice of deficiency to the taxpayer and a notice of final partnership administrative adjustment (FPAA) as to the partnership for the tax year at issue. The IRS claimed that since the debt funded by the family was not bona fide debt, it was supposed to be disregarded for purposes of the debt-financed distribution rule. The taxpayer argued that the transaction was a disguised sale but that the distribution to the taxpayer was not taxable because it was a debt-financed distribution. Moreover, the taxpayer contended that it should be allocated to the debt because it bore the economic risk of loss on account of its guaranties. However, the IRS contended that the possibility of the taxpayer being called on to fulfill the guaranties was so remote it they should be disregarded.

Whether the Sub Debt was Bona Fide Debt or Equity
The parties disputed whether the amount of sub debt which the partnership borrowed from a finance company was bona fide debt and therefore a partnership liability. The factors which determined the same (the Dixie Dairies factors), such as: 1) presence or absence of a fixed maturity date; (2) names given to the certificates evidencing the indebtedness; (3) source of payments; (4) right to enforce payments; (5) participation rights; (6) status of the advances in relation to regular corporate creditors; (7) intent of the parties weighs strongly toward equity; (8) identity of interest between creditor and stockholder; (9) ‘thinness’ of capital structure in relation to debt; (10) ability of the corporation to obtain credit from outside sources; (11) use to which the advances were put; (12) failure of the debtor to repay; and (13) risk, all strongly favored that the sub-debt was equity. Because the sub debt was equity, it was not allowed to be allocated to the taxpayer as recourse debt.

Allocation of Partnership Liabilities
The economic substance of the transaction was a disguised sale with a debt-financed distribution, a structure contemplated by both the statute and the regulations. Moreover, under the constructive liquidation test, the taxpayer bore the risk of economic loss for the senior debt. According to the terms of the taxpayer’s guaranty of the senior debt, the taxpayer was obligated to pay when the partnership failed to make a payment and the debt was accelerated, the creditors had exhausted their remedies, and the creditors had failed to collect the full amount of the debt. Therefore, the senior debt guaranty was a nontaxable debt-financed distribution. Finally, the amount of expenses, in the form of legal expenses, paid by the taxpayer to a group of potential buyers, was required to be capitalized.

Taxpayers that place new business assets other than real property in service through 2012 may claim a "bonus" depreciation deduction. Although the bonus depreciation deduction is generally equal to 50 percent of the cost of qualified property, the rate has been increased by recent legislation to 100 percent for new business assets acquired after September 8, 2010 and placed in service before January 1, 2012. Thus, the entire cost of such 100 percent rate property is deducted in a single tax year rather than over the three- to 20-year depreciation period that is normally assigned to the property based on its type or the business activity in which it is used.

Every business should consider taking advantage of 100 percent bonus depreciation while it is available this year. Ironically, the benefits of 100 percent bonus depreciation are so favorable that some of the regular tax rules standing guard under normal circumstances to prevent abuses are being unintentionally triggered. The IRS has now come to the rescue with a few clarifications, elections and workarounds, in the form of Rev. Proc. 2011-26.

The most important clarifications/elections provide:

--A taxpayer is deemed to acquire qualified property when it pays or incurs the cost of the property.

--Bonus depreciation may be claimed at the 100 percent rate even though a pre-September 9, 2010 binding acquisition contract was in effect provided the contract was not in effect before January 1, 2008.

--Qualified property that a taxpayer manufactures, constructs, or produces is considered acquired by the taxpayer when the taxpayer begins constructing, manufacturing, or producing that property.

--A taxpayer may elect to claim 100 percent bonus depreciation on a component of a larger property if the component is acquired after September 8, 2010 even though manufacture, construction, or production of the larger property began before September 9, 2010.

--A taxpayer may elect the 50 percent rate in place of the 100 percent rate but only in a tax year that includes September 9, 2010.

Election Procedures for 2009/2010 FY Taxpayers

Special procedures that mainly affect fiscal-year (FY) 2009-2010 taxpayers who filed returns prior to the reinstatement of bonus depreciation for the 2010 calendar year explain how to claim or not claim the bonus deduction on property placed in service in 2010.

"Safe Harbor" Enhances Bonus Depreciation for Cars

The guidance also provides an important benefit to taxpayers who purchase a new automobile in 2010 or 2011 that is eligible for the 100 percent bonus rate but which is subject to annual depreciation caps because the vehicle has a gross vehicle weight rating of 6000 pounds or less. The benefit comes in the form of a "safe harbor method of accounting," which allows a taxpayer to claim depreciation deductions in each year of the vehicle's depreciation period.

If this safe harbor method of accounting is not adopted, a taxpayer may only claim a depreciation deduction in the tax year that the vehicle is purchased and that deduction is limited to the amount of the first-year depreciation cap ($11,060 for cars and $11,160 for trucks and vans placed in service in 2010).

If the safe harbor method is adopted, a taxpayer may claim the amount of the first-year depreciation cap in the year the vehicle is purchased plus additional amounts in each of the next five tax years of the vehicle's regular depreciation period.

In most cases, the amount of depreciation allowed in each year of a vehicle's recovery period under the safe harbor method is the same amount that could have been claimed if the 50 percent bonus rate applied.

As the 2015 tax filing season comes to an end, now is a good time to begin thinking about next year's returns. While it may seem early to be preparing for 2016, taking some time now to review your recordkeeping will pay off when it comes time to file next year.

As the 2015 tax filing season comes to an end, now is a good time to begin thinking about next year's returns. While it may seem early to be preparing for 2016, taking some time now to review your recordkeeping will pay off when it comes time to file next year.

Taxpayers are required to keep accurate, permanent books and records so as to be able to determine the various types of income, gains, losses, costs, expenses and other amounts that affect their income tax liability for the year. The IRS generally does not require taxpayers to keep records in a particular way, and recordkeeping does not have to be complicated. However, there are some specific recordkeeping requirements that taxpayers should keep in mind throughout the year.

Business Expense Deductions

A business can choose any recordkeeping system suited to their business that clearly shows income and expenses. The type of business generally affects the type of records a business needs to keep for federal tax purposes. Purchases, sales, payroll, and other transactions that incur in a business generate supporting documents. Supporting documents include sales slips, paid bills, invoices, receipts, deposit slips, and canceled checks. Supporting documents for business expenses should show the amount paid and that the amount was for a business expense. Documents for expenses include canceled checks; cash register tapes; account statements; credit card sales slips; invoices; and petty cash slips for small cash payments.

The Cohan rule. A taxpayer generally has the burden of proving that he is entitled to deduct an amount as a business expense or for any other reason. However, a taxpayer whose records or other proof is not adequate to substantiate a claimed deduction may be allowed to deduct an estimated amount under the so-called Cohan rule. Under this rule, if a taxpayer has no records to provide the amount of a business expense deduction, but a court is satisfied that the taxpayer actually incurred some expenses, the court may make an allowance based on an estimate, if there is some rational basis for doing so.

However, there are special recordkeeping requirements for travel, transportation, entertainment, gifts and listed property, which includes passenger automobiles, entertainment, recreational and amusement property, computers and peripheral equipment, and any other property specified by regulation. The Cohan rule does not apply to those expenses. For those items, taxpayers must substantiate each element of an expenditure or use of property by adequate records or by sufficient evidence corroborating the taxpayer's own statement.

Individuals

• Record keeping is not just for businesses. The IRS recommends that individuals keep the following records:
• Copies of Tax Returns. Old tax returns are useful in preparing current returns and are necessary when filing an amended return.
• Adoption Credit and Adoption Exclusion. Taxpayers should maintain records to support any adoption credit or adoption assistance program exclusion.
• Employee Expenses. Travel, entertainment and gift expenses must be substantiated through appropriate proof. Receipts should be retained and a log may be kept for items for which there is no receipt. Similarly, written records should be maintained for business mileage driven, business purpose of the trip and car expenses for business use of a car.
• Business Use of Home. Records must show the part of the taxpayer's home used for business and that such use is exclusive. Records are also needed to show the depreciation and expenses for the business part of the home.
• Capital Gains and Losses. Records must be kept showing the cost of acquiring a capital asset, when the asset was acquired, how the asset was used, and, if sold, the date of sale, the selling price and the expenses of the sale.
• Basis of Property. Homeowners must keep records of the purchase price, any purchase expenses, the cost of home improvements and any basis adjustments, such as depreciation and deductible casualty losses.
• Basis of Property Received as a Gift. A donee must have a record of the donor's adjusted basis in the property and the property's fair market value when it is given as a gift. The donee must also have a record of any gift tax the donor paid.
• Service Performed for Charitable Organizations. The taxpayer should keep records of out-of-pocket expenses in performing work for charitable organizations to claim a deduction for such expenses.
• Pay Statements. Taxpayers with deductible expenses withheld from their paychecks should keep their pay statements for a record of the expenses.
• Divorce Decree. Taxpayers deducting alimony payments should keep canceled checks or financial account statements and a copy of the written separation agreement or the divorce, separate maintenance or support decree.

Don't forget receipts. In addition, the IRS recommends that the following receipts be kept:

• Proof of medical and dental expenses;
• Form W-2, Wage and Tax Statement, and canceled checks showing the amount of estimated tax payments;
• Statements, notes, canceled checks and, if applicable, Form 1098, Mortgage Interest Statement, showing interest paid on a mortgage;
• Canceled checks or receipts showing charitable contributions, and for contributions of $250 or more, an acknowledgment of the contribution from the charity or a pay stub or other acknowledgment from the employer if the contribution was made by deducting $250 or more from a single paycheck;
• Receipts, canceled checks and other documentary evidence that evidence miscellaneous itemized deductions; and
• Pay statements that show the amount of union dues paid.

Electronic Records/Electronic Storage Systems

Records maintained in an electronic storage system, if compliant with IRS specifications, constitute records as required by the Code. These rules apply to taxpayers that maintain books and records by using an electronic storage system that either images their hard-copy books and records or transfers their computerized books and records to an electronic storage media, such as an optical disk.

The electronic storage rules apply to all matters under the jurisdiction of the IRS including, but not limited to, income, excise, employment and estate and gift taxes, as well as employee plans and exempt organizations. A taxpayer's use of a third party, such as a service bureau or time-sharing service, to provide an electronic storage system for its books and records does not relieve the taxpayer of the responsibilities described in these rules. Unless otherwise provided under IRS rules and regulations, all the requirements that apply to hard-copy books and records apply as well to books and records that are stored electronically under these rules.

A limited liability company (LLC) is a business entity created under state law. Every state and the District of Columbia have LLC statutes that govern the formation and operation of LLCs.

The main advantage of an LLC is that in general its members are not personally liable for the debts of the business. Members of LLCs enjoy similar protections from personal liability for business obligations as shareholders in a corporation or limited partners in a limited partnership. Unlike the limited partnership form, which requires that there must be at least one general partner who is personally liable for all the debts of the business, no such requirement exists in an LLC.

A second significant advantage is the flexibility of an LLC to choose its federal tax treatment. Under IRS's "check-the-box rules, an LLC can be taxed as a partnership, C corporation or S corporation for federal income tax purposes. A single-member LLC may elect to be disregarded for federal income tax purposes or taxed as an association (corporation).

LLCs are typically used for entrepreneurial enterprises with small numbers of active participants, family and other closely held businesses, real estate investments, joint ventures, and investment partnerships. However, almost any business that is not contemplating an initial public offering (IPO) in the near future might consider using an LLC as its entity of choice.

Deciding to convert an LLC to a corporation later generally has no federal tax consequences. This is rarely the case when converting a corporation to an LLC. Therefore, when in doubt between forming an LLC or a corporation at the time a business in starting up, it is often wise to opt to form an LLC. As always, exceptions apply. Another alternative from the tax side of planning is electing "S Corporation" tax status under the Internal Revenue Code.

A business with a significant amount of receivables should evaluate whether some of them may be written off as business bad debts. A business taxpayer may deduct business bad debts if the receivable becomes partially or completely worthless during the tax year.

In general, most business taxpayers must use the specific charge-off method to account for bad debts. The deduction in any case is limited to the taxpayer's adjusted basis in the receivable.

The deduction allowed for bad debts is an ordinary deduction, which can serve to offset regular business income dollar for dollar. If the taxpayer holds a security, which is a capital asset, and the security becomes worthless during the tax year, the tax law only allows a deduction for a capital loss. However, notes receivable obtained in the ordinary course of business are not capital assets. Therefore, if such notes become partially or completely worthless during the tax year, the taxpayer may claim an ordinary deduction for bad debts.

For a taxpayer to sustain a bad debt deduction, the debt must be bona fide. The IRS looks carefully at a bad debt of a family member.

To be entitled to a business debt write off, the taxpayer must also make a reasonable attempt to collect the debt. However, in a nod to reality, the IRS does not request the taxpayer to turn the debt over to a collection agency or file a lawsuit in an attempt to collect the debt if doing so has little probability of success.

Deadlines for claiming a write off for any past business bad debt must be watched. Taxpayers have until the later of (1) seven years from the date they timely filed their tax return or (2) two years from the time they paid the tax, to claim a refund for a deduction for a wholly worthless debt not deducted on the original return.

Estimated tax is used to pay tax on income that is not subject to withholding or if not enough tax is being withheld from a person's salary, pension or other income. Income not subject to withholding can include dividends, capital gains, prizes, awards, interest, self-employment income, and alimony, among other income items. Generally, individuals who do not pay at least 90 percent of their tax through withholding must estimate their income tax liability and make equal quarterly payments of the "required annual payment" liability during the year.

Estimated tax is used to pay tax on income that is not subject to withholding or if not enough tax is being withheld from a person's salary, pension or other income. Income not subject to withholding can include dividends, capital gains, prizes, awards, interest, self-employment income, and alimony, among other income items. Generally, individuals who do not pay at least 90 percent of their tax through withholding must estimate their income tax liability and make equal quarterly payments of the "required annual payment" liability during the year.

Basic rules

The "basic" rules governing estimated tax payments are not always synonymous with "straightforward" rules. The following addresses some basic rules regarding estimated tax payments by corporations and individuals:

Corporations. For calendar-year corporations, estimated tax installments are due on April 15, June 15, September 15, and December 15. If any due date falls on a Saturday, Sunday or legal holiday, the payment is due on the first following business day. To avoid a penalty, each installment must equal at least 25 percent of the lesser of:

• 100 percent of the tax shown on the corporation's current year's tax return (or of the actual tax, if no return is filed); or
• 100 percent of the tax shown on the corporation's return for the preceding tax year, provided a positive tax liability was shown and the preceding tax year consisted of 12 months.

A lower installment amount may be paid if it is shown that use of an annualized income method, or for corporations with seasonal incomes, an adjusted seasonal method, would result in a lower required installment.

Individuals. For individuals (including sole proprietors, partners, self-employeds, and/or S corporation shareholders who expect to owe tax of more than $1,000), quarterly estimated tax payments are due on April 15, June 15, September 15, and January 15. Individuals who do not pay at least 90 percent of their tax through withholding generally are required to estimate their income tax liability and make equal quarterly payments of the "required annual payment" liability during the year. The required annual payment is generally the lesser of:

• 90 percent of the tax ultimately shown on your return for the 2015 tax year, or 90 percent of the tax due for the year if no return is filed;
• 100 percent of the tax shown on your return for the preceding (2014) tax year if that year was not for a short period of less than 12 months; or
• The annualized income installment.

For higher-income taxpayers whose adjusted gross income (AGI) shown on your 2014 tax return exceeds $150,000 (or $75,000 for a married individual filing separately in 2015), the required annual payment is the lesser of 90 percent of the tax for the current year, or 110 percent of the tax shown on the return for the preceding tax year.

Adjusting estimated tax payments

If you expect an uneven income stream for 2015, your required estimated tax payments may not necessarily be the same for each remaining period, requiring adjustment. The need for, and the extent of, adjustments to your estimated tax payments should be assessed at the end of each installment payment period.

For example, a change in your or your business's income, deductions, credits, and exemptions may make it necessary to refigure estimated tax payments for the remainder of the year. Likewise for individuals, changes in your exemptions, deductions, and credits may require a change in estimated tax payments. To avoid either a penalty from the IRS or overpaying the IRS interest-free, you may want to increase or decrease the amount of your remaining estimated tax payments.

Refiguring tax payments due

There are some general steps you can take to reconfigure your estimated tax payments. To change your estimated tax payments, refigure your total estimated tax payments due. Then, figure the payment due for each remaining payment period. However, be careful: if an estimated tax payment for a previous period is less than one-fourth of your amended estimated tax, you may be subject to a penalty when you file your return.

If you would like further information about changing your estimated tax payments, please contact our office.

The tax rules surrounding the dependency exemption deduction on a federal income tax return can be complicated, with many requirements involving who qualifies for the deduction and who qualifies to take the deduction. The deduction can be a very beneficial tax break for taxpayers who qualify to claim dependent children or other qualifying dependent family members on their return. Therefore, it is important to understand the nuances of claiming dependents on your tax return, as the April 18 tax filing deadline is just around the corner.

The tax rules surrounding the dependency exemption deduction on a federal income tax return can be complicated, with many requirements involving who qualifies for the deduction and who qualifies to take the deduction. The deduction can be a very beneficial tax break for taxpayers who qualify to claim dependent children or other qualifying dependent family members on their return. Therefore, it is important to understand the nuances of claiming dependents on your tax return, as the April 18 tax filing deadline is just around the corner.

Dependency deduction

You are allowed one dependency exemption deduction for each person you claim as a qualifying dependent on your federal income tax return. The deduction amount for the 2010 tax year is $3,650. If someone else may claim you as a dependent on their return, however, then you cannot claim a personal exemption (also $3,650) for yourself on your return. Additionally, your standard deduction will be limited.

Only one taxpayer may claim the dependency exemption per qualifying dependent in a tax year. Therefore, you and your spouse (or former spouse in a divorce situation) cannot both claim an exemption for the same dependent, such as your son or daughter, when you are filing separate returns.

Who qualifies as a dependent?

The term "dependent" includes a qualifying child or a qualifying relative. There are a number of tests to determine who qualifies as a dependent child or relative, and who may claim the deduction. These include age, relationship, residency, return filing status, and financial support tests.

The rules regarding who is a qualifying child (not a qualifying relative, which is discussed below), and for whom you may claim a dependency deduction on your 2010 return, generally are as follows:

-- The child is a U.S. citizen, or national, or a resident of the U.S., Canada, or Mexico;

-- The child is your child (including adopted or step-children), grandchildren, great-grandchildren, brothers, sisters (including step-brothers, and -sisters), half-siblings, nieces, and nephews;

 -- The child has lived with you a majority of nights during the year, whether or not he or she is related to you;

 -- The child receives less than $3,650 of gross income (unless the dependent is your child and either (1) is under age 19, (2) is a full-time student under age 24 before the end of the year), or (3) any age if permanently and totally disabled;

 -- The child receives more than one-half of his or her support from you; and

 -- The child does not file a joint tax return (unless solely to obtain a tax refund).

Qualifying relatives

The rules for claiming a qualifying relative as a dependent on your income tax return are slightly different from the rules for claiming a dependent child. Certain tests must also be met, including a gross income and support test, and a relationship test, among others. Generally, to claim a "qualifying relative" as your dependent:

-- The individual cannot be your qualifying child or the qualifying child of any other taxpayer; -- The individual's gross income for the year is less than $3,650; -- You provide more than one-half of the individual's total support for the year; -- The individual either (1) lives with you all year as a member of your household or (2) does not live with you but is your brother or sister (include step and half-siblings), mother or father, grandparent or other direct ancestor, stepparent, niece, nephew, aunt, or uncle, or inlaws. Foster parents are excluded.

Although age is a factor when claiming a qualifying child, a qualifying relative can be any age.

Special rules for divorced and separated parents

Certain rules apply when parents are divorced or separated and want to claim the dependency exemption. Under these rules, generally the "custodial" parent may claim the dependency deduction. The custodial parent is generally the parent with whom the child resides for the greater number of nights during the year.

However, if certain conditions are met, the noncustodial parent may claim the dependency exemption. The noncustodial parent can generally claim the deduction if:

-- The custodial parent gives up the tax deduction by signing a written release (on Form 8332 or a similar statement) that he or she will not claim the child as a dependent on his or her tax return. The noncustodial parent must attach the statement to his or her tax return; or

-- There is a multiple support agreement (Form 2120, Multiple Support Declaration) in effect signed by the other parent agreeing not to claim the dependency deduction for the year.

In order to be tax deductible, compensation must be a reasonable payment for services. Smaller companies, whose employees frequently hold significant ownership interests, are particularly vulnerable to IRS attack on their compensation deductions.

In order to be tax deductible, compensation must be a reasonable payment for services. Smaller companies, whose employees frequently hold significant ownership interests, are particularly vulnerable to IRS attack on their compensation deductions.

Reasonable compensation is generally defined as the amount that would ordinarily be paid for like services by like enterprises under like circumstances. This broad definition is supplemented, for purposes of determining whether compensation is deductible as an ordinary and necessary expense, by a number of more specific factors expressed in varying forms by the IRS, the Tax Court and the Circuit Courts of Appeal, and generally relating to the type and extent of services provided, the financial concerns of the company, and the nature of the relationship between the employee and the employer.

Why IRS Is Interested

A chief concern behind the IRS's keen interest in what a company calls "compensation" is the possibility that what is being labeled compensation is in fact a constructive dividend. If employees with ownership interests are being paid excessive amounts by the company, the IRS may challenge compensation deductions on the grounds that what is being called deductible compensation is, in fact, a nondeductible dividend.

Another area of concern for the IRS is the payment of personal expenses of an employee that are disguised as businesses expenses. There, the business is trying to obtain a business expense deduction without the offsetting tax paid by the employee in recognizing income. In such cases, a business and its owners can end up with a triple loss after an IRS audit: taxable income to the individual, no deduction to the business and a tax penalty due from both parties.

Factors Examined

The factors most often examined by the IRS in deciding whether payments are reasonable compensation for services or are, instead, disguised dividend payments, include:

1. The salary history of the individual employee
2. Compensation paid by comparable employers to comparable employees
3. The salary history of other employees of the company
4. Special employee expertise or efforts
5. Year-end payments
6. Independent inactive investor analysis
7. Deferred compensation plan contributions
8. Independence of the board of directors
9. Viewpoint of a hypothetical investor contemplating purchase of the company as to whether such potential investor would be willing to pay the compensation.

Failure to pass the reasonable compensation test will result in the company's loss of all or part of its deduction. Analysis and examination of a company's compensation deductions in light of the relevant listed factors can provide the company with the assurance that the compensation it pays will be treated as reasonable -- and may in the process prevent the loss of its deductions.

Note: In the case of publicly held corporations, a separate $1 million dollar per person cap is also placed on deductible compensation paid to the CEO and each of the four other highest-paid officers identified for SEC purposes. (Certain types of compensation, including performance-based compensation approved by outside directors, are not included in the $1 million limitation.)

The S Corp Enigma

The opposite side of the reasonable compensation coin is present in the case of some S corporations. By characterizing compensation payments as dividends, the owners of these corporations seek to reduce employment taxes due on amounts paid to them by their companies. In these cases, the IRS attempts to recharacterize dividends as salary if the amounts were, in fact, paid to the shareholders for services rendered to the corporation.

Caution. In the course of performing the compensation-dividend analysis, watch out for contingent compensation arrangements and for compensation that is proportional to stock ownership. While not always indicators that payments are distributions of dividends instead of compensation for services, their presence does suggest the possibility. Compensation plans should not be keyed to ownership interests. Contingent and incentive arrangements are also scrutinized by the IRS. The courts have frequently ruled that a shareholder has a built-in interest in seeing that the company is successful and rewarding him for increasing the value of his own property is inappropriate. Similar to the reasonable compensation test, however, this rule is not hard and fast. Accordingly, the rules followed in each jurisdiction will control there.

Conclusions

Determining whether a shareholder-employee's compensation is reasonable depends upon many variables, such as the contributions that employee makes to your business, the compensation levels within your industry, and whether an independent investor in your company would accept the employee's compensation as reasonable.

Please call our office for a more customized analysis of how your particular compensation package fits into the various rules and guidelines. Further examination of your practices not only may help your business better sustain its compensation deductions; it may also help you take advantage of other compensation arrangements and opportunities.