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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.

By Mark A. Luscombe

August 11, 2022 1:28 PM

On Sunday, Aug. 7, 2022, the Senate passed the Inflation Reduction Act by a party-line vote of 51 to 50, with Vice President Harris casting the deciding vote, and Speaker Nancy Pelosi promising that the House would pass it on Friday, Aug. 12, 2022. Following long-term negotiations between Senators Chuck Schumer and Joe Manchin, the two finally reached an agreement on a bill much reduced from the original Build Back Better legislation, and even then, last-minute changes were needed to win the vote of Senator Kyrsten Sinema and the support of the Senate parliamentarian to make sure in complied with the budget requirements to be passed with only a simple majority under budget reconciliation. 

By Mark A. Luscombe

August 11, 2022 1:28 PM

On Sunday, Aug. 7, 2022, the Senate passed the Inflation Reduction Act by a party-line vote of 51 to 50, with Vice President Harris casting the deciding vote, and Speaker Nancy Pelosi promising that the House would pass it on Friday, Aug. 12, 2022. Following long-term negotiations between Senators Chuck Schumer and Joe Manchin, the two finally reached an agreement on a bill much reduced from the original Build Back Better legislation, and even then, last-minute changes were needed to win the vote of Senator Kyrsten Sinema and the support of the Senate parliamentarian to make sure in complied with the budget requirements to be passed with only a simple majority under budget reconciliation.

Major provisions of the bill focus on tax breaks for green energy and health care, corporate taxes and funding the IRS. The main revenue raisers are a 15% minimum corporate tax, a 1% excise tax on stock buybacks, and estimated additional Internal Revenue Services collections resulting from the increased funding. The following are some of the most important provisions.

Green energy
The legislation includes a wide variety of provisions in support of green energy, estimated to cost $370 billion over 10 years, and a few in support of fossil fuels as well. Some of these provisions extend or expand existing tax provisions while others create new incentives. Extended provisions include the Code Sec. 45 Production Tax Credit, to the beginning of 2025, and the Code Sec. 48 Investment Tax Credit, to the start of 2025, with geothermal projects given an extension to the beginning of 2035 and electricity produced by zero-emissions projects to the beginning of 2033, and with expanded eligible equipment. The Code Sec 45Q Carbon Capture Credit is extended to the beginning of 2033. The Code Sec. 48C Advance Energy Project Credit would be expanded to include certain clean energy manufacturing facilities.

New provisions include a production tax credit for clean hydrogen starting in 2023 and ending after 2032, a credit for sustainable aviation fuel, and a new Advance Manufacturing Production Credit to promote domestic production of green energy components and critical materials. New tax credits have also been created for zero-emission nuclear power production and fuels with lower emissions.

Other changes provide for enhanced rates when prevailing wage and apprenticeship requirements are met and enhanced credits when domestic content or favored location requirements are met. Other enhancements include the ability to transfer energy tax credits, a three-year carryback period, and an option to obtain the credits through a direct pay option.

The plug-in electric vehicle credit, which is now called the Clean Vehicle Credit and includes fuel-cell and hydrogen vehicles, is extended through 2032, and the 200,000 vehicle cap per manufacturer is lifted. In addition to the $7,500 credit for new vehicles, there is a new $4,000 credit for used vehicles. Purchasers also have the option to get the credit as a price reduction at the time of purchase. However, the legislation also imposes restrictions requiring increased sourcing over time of components from the U.S. or other countries with which the U.S. has free trade agreements, puts limits on the price of eligible vehicles, and puts limits on the incomes of eligible taxpayers. These restrictions may limit the vehicles eligible for the credit for some period of time.

The $500 lifetime Nonbusiness Energy Property Credit transforms into a $1,200 annual credit. Rebates of up to $14,000 would be available to assist in installation of certain energy-efficient home installations and rebates of up to $4,000, or $8,000 for low- and moderate-income households, for retrofitting homes based on projected energy savings. Rebates may in some cases be available at the time of sale. HUD housing is also authorized grants to upgrade public housing. Tax credits for developers of energy-efficient homes are also enhanced.

The Residential Energy Efficient Property Credit, which includes solar and small wind installations, which was already starting to phase out, was extended as a 30% credit through 2032. Tax credits were also made available for low-income community solar projects and apartment complexes. Small businesses can qualify for tax deductions of up to $1 per square foot for energy-efficient expenditures and a 30% credit for conversion to clean vehicles.

There are also some non-tax provisions to assist drought-stricken parts of the country.

In order to obtain passage, the legislation also expands oil and gas leasing in the Gulf of Mexico and Alaska and promotes some pipeline construction.

Health care
The legislation permits Medicare to negotiate lower drug prices (up to 10 drugs in 2026, another 15 in each of 2027 and 2028, and another 20 annually starting in 2029) and puts a cap on annual out-of-pocket costs at $2,000.

The provision in the American Rescue Plan to expand premium assistance for Affordable Care Act coverage would be extended through 2025.

Revenue raisers
A new corporate minimum tax of 15% would be imposed on corporations with an average book income of over $1 billion. Last-minute changes would help to preserve manufacturers' ability to write off capital assets and exclude companies owned by private-equity firms. The exclusion of subsidiaries of private-equity firms was paid for with a two-year extension of the limitation on business losses. This provision is projected to raise $258 billion over 10 years.

The removal of an enhanced tax on carried interests from the legislation at the insistence of Senator Sinema resulted in the replacement of the revenue with a 1% tax on stock buybacks. This provision is projected to raise $74 billion over 10 years.

The allocation of nearly $80 billion to the IRS with the hope of expanding enforcement activities was projected to raise revenue from those enforcement activities.

Research credit and payroll taxes
The legislation would increase the limitation on the ability of small businesses to claim the research credit against payroll taxes from $250,000 to $500,000.

Deficit reduction
In support of the name of the legislation, the bill was estimated to reduce inflation by around $300 billion over the next 10 years, although the figure is subject to much debate.

Summary
The legislation was expected to be enacted with only Democratic support, with Sen. Schumer indicating that it included all of their priorities, including promoting clean energy and health care, corporate tax increases, IRS funding and deficit reduction. Republicans criticized the plan as raising taxes when the country was facing a recession. It remains to be seen what impact, if any, the legislation may have on the November elections.

Mark A. Luscombe

Principal Federal Tax Analyst, Wolters Kluwer Tax & Accounting

To our business clients:

New Item: Form 1099-NEC, was created last year to be used for reporting nonemployee compensation (NEC). This form must be filed by January 31, 2022 with the IRS and also provided to the recipient by this date. For 2021, California is participating 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 31^st. 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:

• $50 per form if correctly filed within 30 days of the due date;
• $110 per form if correctly filed after 30 days of the due date but by August 1st;
• $280 per form if filed after August 1st, or not filed (assuming there was no intentional disregard);
• At least $570 per form with no maximum penalty if due to intentional disregard of the requirements.
• 60 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 may impose its own penalties when conducting an audit, the most severe of which is for failure to file 1099 forms to independent contractors. In those cases, California can effectively negate the deduction for those expenses by imposition of its penalties.

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 a 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

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

Businesses who file 250 or more informational returns are required to file electronically through the IRS' FIRE System (Filing Information Returns Electronically). We can help you with this.

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 2021.
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 proper name 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 2021, or
3. Figure the amount you've paid for 2021 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 2022 Employment Development Department reporting requirement for independent contractors.

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

To our business clients:

2022 FEDERAL PAYROLL DEPOSIT REQUIREMENTS:

July 1 Change to 2022 Standard Mileage Rates

Due to the gas price increase caused by Russia’s invasion of Ukraine, the IRS is increasing the standard rate for business mileage effective July 1^st to 62.5 cents per mile. The rate for January-June has been 58.5 cents per mile.

Effective July 1st 2022, standard mileage rate for the use of your car for medical expenses or deductible moving expenses will increase to 22 cents per mile. The rate for January-June has been 18 cents per mile.

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

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 25% 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 SDI ($128,298) or FICA ($142,800), divide the desired net by .5592 to arrive at the gross.
2. If the employee has exceeded the SDI limit only, divide the desired net by .5692 to arrive at the gross.
3. If the employee has exceeded both the SDI and FICA limits, divide the desired net by .6312 to arrive at the gross.

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

If the employee has earned $4,000.00 for 2021, they are subject to all taxes. Dividing $100.00 by .5592 (See #1 above) yields a gross of $178.83. Deductions would be: Federal income tax $44.71 (25%); Social Security $11.09 (6.2%); Medicare $2.59 (1.45%); State income tax $18.29 (10.23%); SDI $2.15 (1.2%).

The percentages and example shown above pertain to checks dated prior to January 1, 2022. For checks dated after December 31, 2021, you must use the 2022 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 2022 need to include the value of the personal use of the vehicles from November 1, 2021 to October 31, 2022 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-office/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 2021-October 2022.
   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 2022. The employer must have notified the employee in writing by January 31, 2022 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 2021, the employee must be notified in writing by January 31, 2023 or within 30 days of receiving the vehicle, in order to avoid 2023 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 done soon and included on the 2022 W-2 forms.

 Click here to view the Business Car Usage

With certain key exceptions, employers must pay nonunion, non-exempt employees (who are not working an alternative workweek schedule) at least time and one-half pay for: *Hours worked in excess of eight hours in one day, *Hours worked in excess of 40 hours in one workweek, and *The first eight hours worked on the seventh day of work in a given workweek.

In addition, employers must pay employees at least double time for any hours worked in excess of 12 hours in one day and hours worked in excess of eight hours on any seventh day of a workweek.

Under the new law compensatory time off in lieu of payment for hours worked by non-exempt employees in excess of the normal workday and workweek (as described above) is no longer permissible

Exceptions

Employees, who on July 1, 1999, were voluntarily working an alternate workweek schedule (adopted without an employee election), may continue to work that schedule, of not more than 10 hours work a day, and continue to be exempt from the overtime rules if the employer approves a written request by the employee to continue to work that schedule. In addition, employees may elect, by two-thirds vote, to work an alternative workweek of up to 10-hour work days within a 40-hour workweek without being subject to the overtime rules.

Personal Time Off

Employees may make up lost time due to a personal obligation by giving a signed, written request to an employer to make up the work. Please note however that, if an employer approves an employee's written request to make up work time that is lost as a result of a personal obligation, the hours of that makeup work time, if performed in the same workweek in which the time was lost, should not be counted toward computing the total number of hours worked in a day for purposes of the overtime pay requirements. The only exception would be in the case of an employee who works more than 11 hours in one day or 40 hours in one workweek.

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 released the annual inflation adjustments for 2023 for the income tax rate tables, plus more than 60 other tax provisions. The IRS makes these cost-of-living adjustments (COLAs) each year to reflect inflation.

The IRS has released the annual inflation adjustments for 2023 for the income tax rate tables, plus more than 60 other tax provisions. The IRS makes these cost-of-living adjustments (COLAs) each year to reflect inflation.

2023 Income Tax Brackets

For 2023, the highest income tax bracket of 37 percent applies when taxable income hits:

• $693,750 for married individuals filing jointly and surviving spouses,
• $578,125 for single individuals,
• $578,100 for heads of households,
• $346,875 for married individuals filing separately, and
• $14,450 for estates and trusts.

2023 Standard Deduction

The standard deduction for 2023 is:

• $27,700 for married individuals filing jointly and surviving spouses,
• $20,800 for heads of households, and
• $13,850 for single individuals and married individuals filing separately.

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

• $1,250 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:

• $1,500 for married taxpayers and surviving spouses, or
• $1,850 for other taxpayers.

Alternative Minimum Tax (AMT) Exemption for 2023

The AMT exemption for 2023 is:

• $126,500 for married individuals filing jointly and surviving spouses,
• $81,300 for single individuals and heads of households,
• $63,250 for married individuals filing separately, and
• $28,400 for estates and trusts.

The exemption amounts phase out in 2023 when AMT exceeds:

• $1,156,300 for married individuals filing jointly and surviving spouses,
• $578,150 for single individuals, heads of households, and married individuals filing separately, and
• $94,600 for estates and trusts.

Expensing Code Sec. 179 Property in 2023

For tax years beginning in 2023, taxpayers can expense up to $1,160,000 in Code Sec. 179 property. However, this dollar limit is reduced when the cost of Code Sec. 179 property placed in service during the year exceeds $2,890,000.

Estate and Gift Tax Adjustments for 2023

The following inflation adjustments apply to federal estate and gift taxes in 2023:

• the gift tax exclusion is $17,000 per donee, or $175,000 for gifts to spouses who are not U.S. citizens;
• the federal estate tax exclusion is $12,920,000; and
• the maximum reduction for real property under the special valuation method is $1,310,000.

2023 Inflation Adjustments for Other Tax Items

The maximum foreign earned income exclusion amount in 2023 is $120,000.

The IRS also provided inflation-adjusted amounts for the:

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

Effective Date of 2023 Adjustments

These inflation adjustments generally apply to tax years beginning in 2023, so they affect most returns that will be filed in 2024. However, some specified figures apply to transactions or events in calendar year 2023.

The 2023 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. 

The 2023 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 2023 cost-of-living adjustments (COLAs) were released for:

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

Highlights of Changes for 2023

The contribution limit has increased from $20,500 to $22,500 for employees who take part in:

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

The annual limit on contributions to an IRA increased from $6,000 to $6,500.

The catch-up contribution limit for individuals aged 50 and over is not subject to an annual cost-of-living adjustment and remains $1,000.

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.

• For single taxpayers covered by a workplace retirement plan, the phase-out range is $73,000 to $83,000, up from between $68,000 and $78,000.
• For joint filers, when the spouse making the contribution takes part in a workplace retirement plan, the phase-out range is $116,000 to $136,000, up from between $109,000 and $129,000.
• For an IRA contributor, who is not covered by a workplace retirement plan but their spouse is, the phase out is between $218,000 and $228,000, up from between $204,000 and $214,000.
• For a married individual covered by a workplace plan filing a separate return, the phase-out range remains between $0 and $10,000.

The phase-out ranges for Roth IRA contributions are:

• $138,000 and $153,000, for singles and heads of household,
• $218,000 and $228,000, for joint filers, and
• $0 to $10,000 for married separate filers.

The income limit for the Saver' Credit is:

• $73,000 for joint filers,
• $54,750 for heads of household, and
• $36,500 for singles and married separate filers.

Lastly, the amount individuals can contribute to their SIMPLE retirement accounts is increased to $15,500, up from $14,000.

For 2023, the Social Security wage cap will be $160,200, and social security and Supplemental Security Income (SSI) benefits will increase by 8.7 percent. These changes reflect cost-of-living adjustments to account for inflation.

For 2023, the Social Security wage cap will be $160,200, and social security and Supplemental Security Income (SSI) benefits will increase by 8.7 percent. These changes reflect cost-of-living adjustments to account for inflation.

Wage Cap for Social Security Tax

The Federal Insurance Contributions Act (FICA) tax on wages is 7.65 percent each for the employee and the employer. FICA tax has two components:

• a 6.2 percent social security tax, also known as old age, survivors, and disability insurance (OASDI); and
• a 1.45 percent Medicare tax, also known as hospital insurance (HI).

For self-employed workers, the Self-Employment tax is 15.3 percent, consisting of:

• a 12.4 percent OASDI tax; and
• a 2.9 percent Medicare tax.

OASDI tax applies only up to a wage base, which includes most wages and self-employment income up to the annual wage cap.

For 2023, the wage base is $160,200. Thus, OASDI tax applies only to the taxpayer’s first $160,200 in wages or net earnings from self-employment. Taxpayers do not pay any OASDI tax on earnings that exceed $160,200.

There is no wage cap for Medicare tax.

Maximum Social Security Tax for 2023

For workers who earn $160,200 or more in 2023:

• an employee will pay a total of $9,932.40 in social security tax ($160,200 x 6.2 percent);
• the employer will pay the same amount; and
• a self-employed worker will pay a total of $19,864.80 in social security tax ($160,200 x 12.4 percent).

Additional Medicare Tax

Higher-income workers may have to pay an Additional Medicare tax of 0.9 percent. This tax applies to wages and self-employment income that exceed:

• $250,000 for married taxpayers who file a joint return;
• $125,000 for married taxpayers who file separate returns; and
• $200,000 for other taxpayers.

The annual wage cap does not affect the Additional Medicare tax.

Benefit Increase for 2023

A cost-of-living adjustment (COLA) will increase social security and SSI benefits for 2023 by 8.7 percent. The COLA is intended to ensure that inflation does not erode the purchasing power of these benefits.

The IRS has released the 2022-2023 special per diem rates. Taxpayers use the per diem rates to substantiate certain expenses incurred while traveling away from home. 

The IRS has released the 2022-2023 special per diem rates. Taxpayers use the per diem rates to substantiate certain expenses incurred while traveling away from home. These special per diem rates include:

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

Transportation Industry Special Per Diem Rates

The special M&IE rates for taxpayers in the transportation industry are:

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

Incidental Expenses Only Rate

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

High-Low Substantiation Method

For purposes of the high-low substantiation method, the 2022-2023 special per diem rates are:

• $297 for travel to any high-cost locality; and
• $204 for travel to any other locality within CONUS.

The amount treated as paid for meals is:

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

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

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

Taxpayers using the high-low method must comply with Rev. Proc. 2019-48, I.R.B. 2019-51, 1392. That procedure provides the rules for using a per diem rate to substantiate the amount of ordinary and necessary business expenses paid or incurred while traveling away from home.

Notice 2021-52, I.R.B. 2021-38, 381 is superseded.

The Financial Crimes Enforcement Network (FinCEN) has issued a final rule implementing the beneficial ownership information reporting provisions under the Corporate Transparency Act (CTA), which was enacted as part of the National Defense Authorization Act for Fiscal Year 2021 ( P.L. 116-283). The CTA amended the Bank Secrecy Act by adding a new provision on beneficial ownership reporting ( 31 USC §5336).

The Financial Crimes Enforcement Network (FinCEN) has issued a final rule implementing the beneficial ownership information reporting provisions under the Corporate Transparency Act (CTA), which was enacted as part of the National Defense Authorization Act for Fiscal Year 2021 ( P.L. 116-283). The CTA amended the Bank Secrecy Act by adding a new provision on beneficial ownership reporting ( 31 USC §5336).

The rule is intended to (1) enhance the ability of FinCEN and other agencies to protect U.S. national security and the U.S. financial system from illicit use, and (2) provide essential information to national security, intelligence, and law enforcement agencies, state, local, and tribal officials, and financial institutions, to help prevent illicit actors from laundering or hiding money and other assets in the United States.

The rule requires reporting companies to file reports with FinCEN that identify the beneficial owners of the entity and the entity’s company applicants. The rule also describes who must file a report, what information must be reported, and when a report is due.

Reporting Companies

There are two types of reporting companies: domestic and foreign. A domestic reporting company is a corporation, limited liability company (LLC), or any entity created by filing a document with a secretary of state or any similar office under state or tribal law. A foreign reporting company is an entity formed under the law of a foreign country that is registered to do business in a state or tribal jurisdiction by filing a document with a secretary of state or any similar office.

FinCEN expects limited liability partnerships, limited liability limited partnerships, business trusts, and most limited partnerships to be reporting companies. FinCEN also expects companies with simple management and ownership structures to be the majority of reporting companies.

Twenty-three types of entities are exempt from “reporting company” treatment, including certain governmental authorities, tax-exempt organizations, banks, broker or dealers, investment companies, insurance companies, accounting firms, and others.

An entity that is a “large operating company” is not a reporting company if it:

• employs more than 20 full time employees in the United States;
• has an operating presence at a physical office within the United States; and
• filed a federal income tax or information return in the United States for the previous year demonstrating over $5,000,000 in gross receipts or sales (excluding gross receipts or sales from sources outside the United States).

Other legal entities, including certain trusts, are also excluded to the extent that they are not created by filing a document with a secretary of state or similar office.

Beneficial Owners

A beneficial owner includes any individual who, directly or indirectly, either (1) exercises substantial control over a reporting company, or (2) owns or controls at least 25 percent of the ownership interests of a reporting company. The rule defines “substantial control” and “ownership interest.”

A beneficial owner does not include a minor child; an individual acting as a nominee, intermediary, custodian, or agent on behalf of another individual; a reporting company employee (but not a senior officer) whose substantial control over or economic benefits from the entity are derived solely from his or her employment status; an individual whose only interest in a reporting company is a future interest through right of inheritance; or a creditor of a reporting company.

Company Applicants

A company applicant is: (1) the individual who directly files the document that creates the entity (for a foreign reporting company, the document that first registers the entity to do business in the United States); and (2) the individual who is primarily responsible for directing or controlling the filing of the relevant document by another.

Reporting companies existing or registered on the effective date of the rule are not required to identify and report on their company applicants. Reporting companies formed or registered after the effective date must report company applicant information but do not need to update it.

Beneficial Ownership Information Reports

In the report filed with FinCEN, a reporting company must identify itself and report four pieces of information about each of its beneficial owners: name, birth date, address, and a unique identifying number and issuing jurisdiction from an acceptable identification document (and the image of that document). Reporting companies created after January 1, 2024, must also provide this information and document image for company applicants.

An individual who provides his or her information to FinCEN directly can obtain a unique identifying number assigned by FinCEN (“FinCEN identifier") which can then be provided to FinCEN on a report instead of the required information about the individual.

Effective Date and Reporting Deadlines

The rule is effective January 1, 2024. Reporting companies created or registered before the effective date have until January 1, 2025, to file their initial reports. Reporting companies created or registered after the effective date have 30 days after receiving notice of their creation or registration to file their initial reports.

A reporting company has 30 days to report changes to the information in its previously filed reports. It also must correct inaccurate information in previously filed reports within 30 days of when it becomes aware or has reason to know of the inaccuracy.

FinCEN has provided a fact sheet which summarizes the new rule.

The IRS issued final regulations to strengthen implementation of the Affordable Care Act by fixing the “family glitch.” The rules amend eligibility for the premium tax credit (PTC) to allow family members of workers who are offered unaffordable family coverage to qualify for premium tax credits. The regulations also add a minimum value rule for family members of employees, based on the benefits provided to the family members. This guidance would affect taxpayers who enroll, or enroll a family member, in individual health insurance coverage through a Health Insurance Exchange (Exchange) and who may be allowed a Premium Tax Credit for the coverage.

The IRS issued final regulations to strengthen implementation of the Affordable Care Act by fixing the “family glitch.” The rules amend eligibility for the premium tax credit (PTC) to allow family members of workers who are offered unaffordable family coverage to qualify for premium tax credits. The regulations also add a minimum value rule for family members of employees, based on the benefits provided to the family members. This guidance would affect taxpayers who enroll, or enroll a family member, in individual health insurance coverage through a Health Insurance Exchange (Exchange) and who may be allowed a Premium Tax Credit for the coverage.

Premium Tax Credit Eligibility

The Premium Tax Credit would be determined based on an employee’s share of the cost of covering the employee and the related individuals. The affordability rule for related individuals represented the better reading of the relevant statutes. This was consistent with Congress’s purpose in the Affordable Care Act (ACA) ( P.L. 111-148) to expand access to affordable health care coverage. The Treasury and the IRS stated that Code Sec. 36B(c)(2)(C)(i), including the flush language that follows Code Sec. 36B(c)(2)(C)(i)(II), was correctly interpreted to provide that the affordability test for a related individual is based on the cost of coverage for the employee and the related individual.

Unless a related individual is also employed by that employer, the related individual may not enroll in the employer’s coverage on a self-only basis. Thus, the minimum essential coverage is what the related individual may enroll in, the family coverage offered by the employer. The affordability for employees is based on the employee’s cost for self-only coverage. The affordability for family members is generally based on the amount an employee must pay to cover the employee and the related individuals included in the employee’s family.

Cost of Coverage

The cost of covering individuals who are offered the coverage but are non-family members is not considered in determining whether the employee’s family members have an offer of affordable employer coverage. Consequently, a non-family member would not need a determination of unaffordable coverage to enroll in an exchange (QHP) and be eligible for the Premium Tax Credit if the individual otherwise qualifies. A non-family member may enroll in a QHP and be eligible for the Premium Tax Credit, if the individual is otherwise eligible, by simply not enrolling in the offered employer coverage. The final regulations do not amend the affordability rule for employees. An individual with multiple offers of employer coverage seeking to enroll in a QHP with advance Premium Tax Credit would provide information to the applicable exchange concerning the required contribution for each coverage offer. The exchange would determine if at least one of the offers is affordable.

In this case, the advance Premium Tax Credit would not be allowed for the individual’s exchange coverage. This process should minimize any burden or confusion relating to whether an individual with multiple offers has an affordable offer that would deny the individual the advance Premium Tax Credit and Premium Tax Credit for exchange coverage. For taxpayers for whom the advance Premium Tax Credit is not paid for their or their family’s QHP coverage, the IRS will update the instructions for Form 8962, Premium Tax Credit (PTC), and Publication 974, Premium Tax Credit (PTC), to address multiple offers of employer coverage.

Minimum Value Rule

The final regulations provide a minimum value rule for related individuals that is separate from the minimum value rule for employees. It requires a plan's share of the total allowed costs of benefits provided to related individuals to be at least 60 percent. This minimum value rule for related individuals is not intended to require the use of a standard population for family members that is separate from the standard population for employees.

Further, an employer plan that provides minimum value to an employee also provides minimum value to related individuals if the scope of benefits and cost sharing including deductibles, co-payments, coinsurance, and out-of-pocket maximums under the plan are the same for employees and family members. The final regulations do not require a departure from the practice of computing minimum value for employees and related individuals based on the provision of benefits to a standard population that includes both employees and related individuals. The final regulations provide that an eligible employer-sponsored plan does not meet minimum value requirements unless it includes substantial coverage of inpatient hospital services and physician services.

Applicability Date

The final regulations apply for tax years beginning after December 31, 2022.

A new revenue procedure provides taxpayer assistance procedures to allow S corporations and their shareholders to resolve frequently encountered issues without requesting a private letter ruling (PLR).

A new revenue procedure provides taxpayer assistance procedures to allow S corporations and their shareholders to resolve frequently encountered issues without requesting a private letter ruling (PLR).

Correcting S Corporation and QSub Election Issues

The new procedure addresses issues that generally do not affect the validity or continuation of an S corporation election, or of an election to treat a S corporation subsidiary as a qualified subchapter S subsidiary (QSub).

The procedure also provides corrective relief procedures to allow taxpayers in some situations to retroactively preserve S elections that are invalid or terminated solely because of certain non-identical governing provisions. A non-identical governing provision is one that, on its own or as part of another governing provision, results in the S corporation having more than one class of stock and, therefore, losing its eligibility to be an S corporation.

The IRS will no longer issue PLRs with respect to certain principal purpose determinations regarding the one class of stock requirement, or comfort rulings regarding certain S corporation and QSub election issues.

Effective Date

The new procedure is generally effective on the date it is published in the Internal Revenue Bulletin.

Under a transition rule, if a taxpayer has a request for a PLR regarding a non-identical governing provision that is postmarked (or if not mailed, received by the IRS) after the procedure is published, the taxpayer has 45 days to notify the Associate Chief Counsel (Passthroughs and Special Industries) of its decision to either:

• rely on this new procedure, withdraw the pending PLR request, and receive a refund of the associated user fee; or
• continue to pursue the pending PLR request.

A taxpayer that fails to notify the IRS is deemed to choose to continue to pursue its pending PLR request.

Effect on Other Documents

Rev. Proc. 2013-30 and Rev. Proc. 2022-1 are amplified, and Rev. Proc. 2022-3 is amplified and modified.

The IRS identified drought-stricken areas where tax relief is available to taxpayers that sold or exchanged livestock because of drought. The relief extends the deadlines for taxpayers to replace the livestock and avoid reporting gain on the sales. These extensions apply until the drought-stricken area has a drought-free year.

The IRS identified drought-stricken areas where tax relief is available to taxpayers that sold or exchanged livestock because of drought. The relief extends the deadlines for taxpayers to replace the livestock and avoid reporting gain on the sales. These extensions apply until the drought-stricken area has a drought-free year.

When Sales of Livestock Are Involuntary Conversions

Sales of livestock due to drought are involuntary conversions of property. Taxpayers can postpone gain on involuntary conversions if they buy qualified replacement property during the replacement period. Qualified replacement property must be similar or related in service or use to the converted property.

Usually, the replacement period ends two years after the tax year in which the involuntary conversion occurs. However, a longer replacement period applies in several situations, such as when sales occur in a drought-stricken area.

Livestock Sold Because of Weather

Taxpayers have four years to replace livestock they sold or exchanged solely because of drought, flood, or other weather condition. Three conditions apply.

First, the livestock cannot be poultry.

Second, the taxpayer must have held the converted livestock for draft, breeding, or dairy purposes.

Third, the weather condition must make the area eligible for federal assistance.

Persistent Drought

The IRS extends the four-year replacement period when a taxpayer sells or exchanges livestock due to persistent drought. The extension continues until the taxpayer’s region experiences a drought-free year.

The first drought-free year is the first 12-month period that (1) ends on August 31 in or after the last year of the four-year replacement period, and (2) does not include any weekly period of drought.

Areas Suffering From Drought

The National Drought Mitigation Center produces weekly Drought Monitor maps that report drought-stricken areas. Taxpayers can view these maps at

https://droughtmonitor.unl.edu/

However, the IRS also provided a list of areas where the year ending on August 31, 2022, was not a drought-free year. The replacement period in these areas will continue until the area has a drought-free year.

Senate Finance Committee Chairman Ron Wyden has indicated to the Internal Revenue Service what his expectations for the recently allocated funds from the Inflation Reduction Act are to be used for.

Senate Finance Committee Chairman Ron Wyden has indicated to the Internal Revenue Service what his expectations for the recently allocated funds from the Inflation Reduction Act are to be used for.

In an October 4, 2022, letter to Department of the Treasury Secretary Janet Yellen and IRS Commissioner Charles Rettig, Chairman Wyden (D-Ore.) identified, in addition to not increasing the audit rates compared to historic levels for those making less than $400,000, the $80 billion being allocated over the next 10 year should be used for the following:

• Improving customer service,
• Investing in technology to improve service and enforcement,
• Rebalancing of audit rates,
• Cracking down on offshore tax evasion,
• Reducing the tax gap, and
• Rebuilding the IRS Criminal Investigation Division.

As part of the requirements, Chairman Wyden committed to continuing "to work on getting ‘direct hire’ authority for the IRS so it can hire agents more quickly" to address balancing audit rates and allow for the IRS to target more high earners who likely have more complex tax returns.

He also noted that the IRS has, due to "persistent" budget cuts, "conducted virtually no oversight of hundreds of thousands of shell companies in offshore tax havens that it has approved as financial institutions" under the Foreign Account Tax Compliance Act. He said this "shell bank" loophole "significantly increases the risk that wealthy taxpayers underreport offshore income."

"I expect IRA funding to be used to monitor whether offshore entities are properly reporting accounts belonging to U.S. persons, and to take enforcement action against foreign banks and other intermediaries who help conceal income," the letter stated.

Overall, Chairman Wyden hopes the funding will help significantly reduce an estimated tax gap of $600 billion annually.

The American Institute of CPAs has posted comments on guidance recently issued by the Internal Revenue Service regarding the deductibility of payments by partnerships and S corporations for certain state and local taxes.

The American Institute of CPAs has posted comments on guidance recently issued by the Internal Revenue Service regarding the deductibility of payments by partnerships and S corporations for certain state and local taxes.

The October 4, 2022, comment letter to the IRS “addresses PTE tax rulings pertaining to accrual basis taxpayers” and “highlights the confusion of the ‘taxable year in which the payment is made’ language.” A catalog of AICPA comment letters can be found at https://us.aicpa.org/content/dam/aicpa/advocacy/tax/downloadabledocuments/56175896-aicpa-salt-deduction-pte-timing-letter-10-4-2022-submit.pdf.

AICPA recommends that Treasury and the IRS "issue guidance that provides that [ Notice 2020-75] does not change, and Treasury and IRS did not intend to change, any section 461, or section 461 regulation, principles."

The IRS announced that is completing the processing on a key group of individual tax returns filed during 2021. Business paper returns filed in 2021 will follow shortly after. The Service began 2022 with a larger than usual inventory of paper tax returns and correspondence filed during 2021 due to the pandemic. The IRS will continue to work on the few remaining 2021 individual tax returns that have processing issues or require additional information from the taxpayer. As of June 10, the IRS had processed over 4.5 million individual paper tax returns received in 2021.

The IRS announced that is completing the processing on a key group of individual tax returns filed during 2021. Business paper returns filed in 2021 will follow shortly after. The Service began 2022 with a larger than usual inventory of paper tax returns and correspondence filed during 2021 due to the pandemic. The IRS will continue to work on the few remaining 2021 individual tax returns that have processing issues or require additional information from the taxpayer. As of June 10, the IRS had processed over 4.5 million individual paper tax returns received in 2021.

To date, more than twice as many returns await processing compared to a typical year at this point in the calendar year. A greater percentage of this year’s inventory awaiting processing is comprised of original returns that, generally, take less time to process than amended returns. To address the unprocessed inventory by the end of this year, the IRS has taken aggressive steps including significant, ongoing overtime for staff throughout 2022, creating special teams of employees focused solely on processing aged inventory and expediting hiring of thousands of new workers and contractors. Additionally, the IRS has improved the process for taxpayers whose paper and electronically filed returns were suspended during processing for manual review and correction.

The IRS reminded taxpayers who have not yet filed their 2021 tax returns this year, including those who requested an extension until October 17, to make sure they file their returns electronically with direct deposit to avoid delays. The IRS urged taxpayers to file as soon as they are ready and to not wait until the last minute before the October 17 extension deadline. Filing sooner avoids potential delays for taxpayers and assists the larger ongoing IRS efforts to complete processing tax returns this year.

The U.S. Supreme Court has granted a petition for certiorari in the case of A. Bittner, CA-5, 2021-2 USTC ¶50,242 . In Bittner, the U.S. Court of Appeals for the Fifth Circuit held that each failure to report a qualifying foreign account on the annual Report of Foreign Bank and Financial Accounts (FBAR) constituted a separate reporting violation subject to penalty. This means that the penalty applies on a per-account basis, not a per-form basis. The Fifth Circuit disagreed with a Ninth Circuit panel that adopted a per-form interpretation ( J. Boyd, CA-9, 2021-1 USTC ¶50,112).

The U.S. Supreme Court has granted a petition for certiorari in the case of A. Bittner, CA-5, 2021-2 USTC ¶50,242 . In Bittner, the U.S. Court of Appeals for the Fifth Circuit held that each failure to report a qualifying foreign account on the annual Report of Foreign Bank and Financial Accounts (FBAR) constituted a separate reporting violation subject to penalty. This means that the penalty applies on a per-account basis, not a per-form basis. The Fifth Circuit disagreed with a Ninth Circuit panel that adopted a per-form interpretation ( J. Boyd, CA-9, 2021-1 USTC ¶50,112).

—

Background

U.S. citizens and residents must keep records and/or file reports when the person makes a transaction or maintains a relation for any person with a foreign financial agency ( 31 USC 5314). Each person with a financial interest in a financial account in a foreign country must report the relationship to the IRS for each year the relationship exists by providing specified information on and filing the FBAR. The FBAR generally must be filed by June 30 of each calendar year for foreign financial accounts over $10,000 maintained during the previous calendar year (31 C.F.R. §§1010.350, 1010.306).

If the person fails to file the FBAR, the IRS can impose a penalty of up to $10,000 for non-willful violations, unless the violation was due to reasonable cause. For a willful violation, the maximum penalty is the greater of $100,000 or 50 percent of (1) the amount of the transaction when a violation involves a transaction, or (2) the balance in the account at the time of the violation when a violation involves a failure to report the existence of an account. There is no reasonable cause exception for willful violations ( 31 USC 5321).

Fifth Circuit: FBAR Penalty Per Account

In A. Bittner, the Fifth Circuit ruled that the text, structure, history, and purpose of the relevant statutory and regulatory provisions showed that the "violation" of 31 USC 5314 contemplated by the 31 USC 5321 penalty was the failure to report a qualifying account, not the failure to file an FBAR. Therefore, the $10,000 penalty cap applied on a per-account basis, not a per-form basis.

The Fifth Circuit agreed with the government that the district court had erred in determining what constituted a "violation" under 31 USC 5314 by focusing on the regulations under section 5314 to the exclusion of section 5314 itself. Section 5314 does not create the obligation to file a single report, stated the Fifth Circuit, but instead gives the Treasury Secretary discretion to prescribe how to fulfill the statute’s requirement of reporting qualifying accounts.

The Fifth Circuit observed that by authorizing a penalty for any "violation of ... any provision of section 5314," as opposed to the regulations under section 5314, section 5314 "naturally reads" as referring to the statutory requirement to report each account, not the regulatory requirement to file FBARs in a particular manner. Further, the circuit court stated that the reasonable cause exception for non-willful violations was framed in terms of "the transaction" and "the account," and thus it also "naturally reads" as excusing the failure to report a transaction or account, not the failure to file an FBAR.

Ninth Circuit: FBAR Penalty Per Form

In J. Boyd, the Ninth Circuit ruled that the IRS can impose only one non-willful penalty when an untimely but accurate FBAR is filed, regardless of the number of foreign financial accounts. The Ninth Circuit determined that the statutory and regulatory scheme under 31 USC 5314 authorizes a single non-willful penalty for the failure to file a timely FBAR, and that the taxpayer’s conduct in failing to timely file the FBAR amounted to one non-willful violation.

The Ninth Circuit was not persuaded by the government's argument that, based on the statutory scheme as a whole and legislative intent, the penalty amount could be assessed on a per-account basis. The Ninth Circuit found nothing in the statute or regulations to suggest that the penalty could be calculated that way for a single failure to file a timely FBAR that is otherwise accurate. The Ninth Circuit presumed that Congress had purposely excluded the per-account language from the non-willful penalty provision because it had included such language in the previously-enacted willful penalty provision. Further, the inclusion of per-account language in the reasonable cause exception supported the view that Congress had intentionally omitted per-account language from the non-willful penalty provision.

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.