Newsletters

The IRS issued frequently asked questions (FAQs) addressing the new deduction for qualified overtime compensation added by the One, Big, Beautiful Bill Act (OBBBA). The FAQs provide general information to taxpayers and tax professionals on eligibility for the deduction and how the deduction is determined.

The IRS issued frequently asked questions (FAQs) addressing the new deduction for qualified overtime compensation added by the One, Big, Beautiful Bill Act (OBBBA). The FAQs provide general information to taxpayers and tax professionals on eligibility for the deduction and how the deduction is determined.

General Information

The FAQs explain what constitutes qualified overtime compensation for purposes of the deduction, including overtime compensation required under section 7 of the Fair Labor Standards Act (FLSA) that exceeds an employee’s regular rate of pay. The FAQs also describe which individuals are covered by and not exempt from the FLSA overtime requirements.

FLSA Overtime Eligibility

The FAQs address how individuals, including federal employees, can determine whether they are FLSA overtime-eligible. For federal employees, eligibility is generally reflected on Standard Form 50 and administered by the Office of Personnel Management, subject to certain exceptions.

Deduction Amount and Limits

The FAQs explain that the deduction is limited to a maximum amount of qualified overtime compensation per return and is subject to phase-out based on modified adjusted gross income. Special filing and identification requirements also apply to claim the deduction.

Reporting and Calculation Rules

The FAQs describe how qualified overtime compensation is reported for tax purposes, including special reporting rules for tax year 2025 and required separate reporting by employers for tax years 2026 and later. The FAQs also outline methods taxpayers may use to calculate the deduction if separate reporting is not provided.

FS-2026-1

IR 2026-10

Proposed regulations regarding the deduction for qualified passenger vehicle loan interest (QPVLI) and the information reporting requirements for the receipt of interest on a specified passenger vehicle loan (SPVL), Code Sec. 163(h)(4), as added by the One Big Beautiful Bill Act (P.L. 119-21), provides that for tax years beginning after December 31, 2024, and before January 1, 2029, personal interest does not include QPVLI. Code Sec. 6050AA provides that any person engaged in a trade or business who, in the course of that trade or business, receives interest from an individual aggregating $600 or more for any calendar year on an SPVL must file an information return reporting the receipt of the interest.

Proposed regulations regarding the deduction for qualified passenger vehicle loan interest (QPVLI) and the information reporting requirements for the receipt of interest on a specified passenger vehicle loan (SPVL), Code Sec. 163(h)(4), as added by the One Big Beautiful Bill Act (P.L. 119-21), provides that for tax years beginning after December 31, 2024, and before January 1, 2029, personal interest does not include QPVLI. Code Sec. 6050AA provides that any person engaged in a trade or business who, in the course of that trade or business, receives interest from an individual aggregating $600 or more for any calendar year on an SPVL must file an information return reporting the receipt of the interest.

Qualified Personal Vehicle Loan Interest

QPVLI is deductible by an individual, decedent's estate, or non-grantor trust, including a with respect to a grantor trust or disregarded entity deemed owned by the individual, decedent's estate, or non-grantor trust. The deduction for QPVLI may be taken by taxpayers who itemize deductions and those who take the standard deduction. Lease financing would not be considered a purchase of an applicable passenger vehicle (APV) and, thus, would not be considered a SPVL. QPVLI would not include any amounts paid or accrued with respect to lease financing.

Indebtedness will qualify as an SPVL only to the extent it is incurred for the purchase of an APV and for any other items or amounts customarily financed in an APV purchase transaction and that directly relate to the purchased APV, such as vehicle service plans, extended warranties, sales, and vehicle-related fees. Indebtedness is an SPVL only if it was originally incurred by the taxpayer, with an exception provided for a change in obligor due to the obligor's death. Original use begins with the first person that takes delivery of a vehicle after the vehicle is sold, registered, or titled and does not begin with the dealer unless the dealer registers or titles the vehicle to itself.

Personal use is defined to mean use by an individual other than in any trade or business, except for use in the trade or business of performing services as an employee, or for the production of income. An APV is considered purchased for personal use if, at the time of the indebtedness is incurred, the taxpayer expects the APV will be used for personal use by the taxpayer that incurred the indebtedness, or by certain members of that taxpayer's family and household, for more than 50 percent of the time. Rules with respect to interest that is both QPVLI and interest otherwise deductible under Code Sec. 163(a) or other Code section are provided and intended to provide clarity and to prevent taxpayers from claiming duplicative interest deductions. The $10,000 limitation of Code Sec. 163(h)(4)(C)(i) applies per federal tax return. Therefore, the maximum deduction on a joint return is $10,000. If two taxpayers have a status of married filing separately, the $10,000 limitation would apply separately to each return.

Information Reporting Requirements

If the interest recipient receives from any individual at least $600 of interest on an SPVL for a calendar year, the interest recipient would need to file an information return with the IRS and furnish a statement to the payor or record on the SPVL. Definitions of terms used in the proposed rules are provided in Prop. Reg. §1.6050AA-1(b).

Assignees of the right to receive interest payments from the lender of record are permitted to rely on the information in the contract if it is sufficient to satisfy its information reporting obligations. The assignee may choose to make arrangements to obtain information regarding personal use from the obligor, lender of record, or by other means. The written statement provided to the payor of record must include the information that was reported to the IRS and identify the statement as important tax information that is being furnished to the IRS and state that penalties may apply for overstated interest deductions.

Effective Dates and Requests for Comments

The regulations are proposed to apply to tax years in which taxpayers may deduct QPVLI pursuant to Code Sec. 163(h)(4). Taxpayers may rely on the proposed regulations under Code Sec. 163 with respect to indebtedness incurred for the purchase of an APV after December 31, 2024, and on or before the regulations are published as final regulations, so long as the taxpayer follows the proposed regulations in their entirety and in a consistent manner. Likewise, interest recipients may rely on the proposed regulations with respect to indebtedness incurred for the purchase of an APV after December 31, 2024, and on or before the date the regulations are published as final regulations, so long as the taxpayer follows the proposed regulations in their entirety and in a consistent manner.

Written or electronic comments must be received by February 2, 2026. A public hearing is scheduled for February 24, 2026.

Proposed Regulations, NPRM REG-113515-25

IR 2025-129

The IRS has released interim guidance to apply the rules under Regs. §§1.168(k)-2 and 1.1502-68, with some modifications, to the the acquisition date requirement for property qualifying for 100 percent bonus depreciation under Code Sec. 168(k)(1), as amended by the One Big Beautiful Bill Act (OBBBA) (P.L. 119-21). In addition, taxpayers may apply modified rules under to the elections to claim 100-percent bonus depreciation on specified plants, the transitional election to apply the bonus rate in effect in 2025, prior to the enactment of OBBBA, and the addition of qualified sound recording productions to qualified property under Code Sec, 168(k)(2). Proposed regulations for Reg. §1.168(k)-2 and Reg. §1.1502-68 are forthcoming.

The IRS has released interim guidance to apply the rules under Regs. §§1.168(k)-2 and 1.1502-68, with some modifications, to the the acquisition date requirement for property qualifying for 100 percent bonus depreciation under Code Sec. 168(k)(1), as amended by the One Big Beautiful Bill Act (OBBBA) (P.L. 119-21). In addition, taxpayers may apply modified rules under to the elections to claim 100-percent bonus depreciation on specified plants, the transitional election to apply the bonus rate in effect in 2025, prior to the enactment of OBBBA, and the addition of qualified sound recording productions to qualified property under Code Sec, 168(k)(2). Proposed regulations for Reg. §1.168(k)-2 and Reg. §1.1502-68 are forthcoming.

Under OBBBA qualified property acquired and specified plants planted or grafted after January 19, 2025, qualify for 100 percent bonus depreciation. When determining whether such property meets the acquisition date requirements, taxpayers may generally apply the rules under Regs. §§1.168(k)-2 and 1.1502-68 by substituting “January 19, 2025” for “September 27, 2017” and “January 20, 2025” for “September 28, 2017” each place it appears. In addition taxpayers should substitute “100 percent” for “the applicable percentage” each place it appears, except for the examples provided in Reg. § 1.168(k)-2(g)(2)(iv). Specifically, these rules apply to the acquisition date (Reg. § 1.168(k)-2(b)(5) and Reg. §1.1502-68(a) through (d)) and the component election for components of larger self-constructed property (Reg. § 1.168(k)-2(c)).

With regards to the Code Sec. 168(k)(5) election to claim 100-percent bonus depreciation on specified plants, taxpayer may follow the rules set forth in Reg. § 1.168(k)-2(f)(2). Taxpayers making the transitional election to apply the lower bonus rate in effect in 2025, prior to the enactment of OBBBA may follow Reg. § 1.168(k)-2(f)(3) after substituting “January 19, 2025” for “September 27, 2017”, “January 20, 2025” for “September 28, 2017”, and “40 percent” (“60 percent” in the case of Longer production period property or certain noncommercial aircrafts) for “50 percent”, and applicable Form 4562, Depreciation and Amortization,” for “2017 Form 4562, “Depreciation and Amortization,” each place it appears .

For qualified sound recording productions acquired before January 20, 2025, in a tax year ending after July 4, 2025, taxpayers should apply the rules under Reg. § 1.168(k)-2 as though a qualified sound recording production (as defined in Code Sec. 181(f)) is included in the list of qualified property provided in Reg. § 1.168(k)-2(b)(2)(i). If electing out of bonus depreciation for a qualified sound recording production under Code Sec. 168(k)(7) a taxpayer should follow the rules under Reg. § 1.168(k)-2(f)(1) as if the definition of class of property is expanded to each separate production of a qualified sound recording production.

Taxpayers may rely on this guidance for property placed in service in tax years beginning before the date the forthcoming proposed regulations are published in the Federal Register.

Notice 2026-11

IR 2026-6

The IRS released the optional standard mileage rates for 2026. Most taxpayers may use these rates to compute deductible costs of operating vehicles for:

• business,
• medical, and
• charitable purposes

Some members of the military may also use these rates to compute their moving expense deductions.

The IRS released the optional standard mileage rates for 2026. Most taxpayers may use these rates to compute deductible costs of operating vehicles for:

• business,
• medical, and
• charitable purposes

Some members of the military may also use these rates to compute their moving expense deductions.

2026 Standard Mileage Rates

The standard mileage rates for 2026 are:

• 72.5 cents per mile for business uses;
• 20.5 cents per mile for medical uses; and
• 14 cents per mile for charitable uses.

Taxpayers may use these rates, instead of their actual expenses, to calculate their deductions for business, medical or charitable use of their own vehicles.

FAVR Allowance for 2026

For purposes of the fixed and variable rate (FAVR) allowance, the maximum standard automobile cost for vehicles places in service after 2026 is:

• $61,700 for passenger automobiles, and
• $61,700 for trucks and vans.

Employers can use a FAVR allowance to reimburse employees who use their own vehicles for the employer’s business.

2026 Mileage Rate for Moving Expenses

The standard mileage rate for the moving expense deduction is 20.5 cents per mile. To claim this deduction, the taxpayer must be:

• a member of the Armed Forces of the United States,
• on active military duty, and
• moving under an military order and incident to a permanent change of station

The Tax Cuts and Jobs Act of 2017 suspended the moving expense deduction for all other taxpayers until 2026.

Unreimbursed Employee Travel Expenses

For most taxpayers, the Tax Cuts and Jobs Act suspended the miscellaneous itemized deduction for unreimbursed employee travel expenses. However, certain taxpayers may still claim an above-the-line deduction for these expenses. These taxpayers include:

• members of a reserve component of the U.S. Armed Forces,
• state or local government officials paid on a fee basis, and
• performing artists with relatively low incomes.

Notice 2025-5, is superseded.

Notice 2026-10

IR 2025-128

The IRS issued frequently asked questions (FAQs) addressing the limitation on the deduction for business interest expense under Code Sec. 163(j). The FAQs provide general information to taxpayers and tax professionals and reflect statutory changes made by the Tax Cuts and Jobs Act, the CARES Act, and the One, Big, Beautiful Bill.

The IRS issued frequently asked questions (FAQs) addressing the limitation on the deduction for business interest expense under Code Sec. 163(j). The FAQs provide general information to taxpayers and tax professionals and reflect statutory changes made by the Tax Cuts and Jobs Act, the CARES Act, and the One, Big, Beautiful Bill.

General Information

The FAQs explain the Code Sec. 163(j) limitation, identify taxpayers subject to the limitation, and describe the gross receipts test used to determine whether a taxpayer qualifies as an exempt small business.

Excepted Trades or Businesses

The FAQs address trades or businesses that are excepted from the Code Sec. 163(j) limitation, including electing real property trades or businesses, electing farming businesses, regulated utility trades or businesses, and services performed as an employee.

Determining the Section 163(j) Limitation Amount

The FAQs explain how to calculate the Code Sec. 163(j) limitation, including the definitions of business interest expense and business interest income, the computation of adjusted taxable income, and the treatment of disallowed business interest expense carryforwards.

CARES Act Changes

The FAQs describe temporary modifications to Code Sec. 163(j) made by the CARES Act, including increased adjusted taxable income percentages and special rules and elections applicable to partnerships and partners for taxable years beginning in 2019 and 2020.

One, Big, Beautiful Bill Changes

The FAQs outline amendments made by the One, Big, Beautiful Bill, including changes affecting the calculation of adjusted taxable income for tax years beginning after Dec. 31, 2024, and the application of Code Sec. 163(j) before interest capitalization provisions for tax years beginning after Dec. 31, 2025.

FS-2025-9

IR 2025-126

The IRS issued frequently asked questions (FAQs) addressing updates to the Premium Tax Credit. The FAQs clarified changes to repayment rules, the removal of outdated provisions and how the IRS will treat updated guidance.

The IRS issued frequently asked questions (FAQs) addressing updates to the Premium Tax Credit. The FAQs clarified changes to repayment rules, the removal of outdated provisions and how the IRS will treat updated guidance.

Removal of Repayment Limitations

For tax years beginning after December 31, 2025, limitations on the repayment of excess advance payments of the Premium Tax Credit no longer applied.

Previously Applicable Provisions

Premium Tax Credit rules that applied only to tax years 2020 and 2021 were no longer applicable and were removed from the FAQs.

Updated FAQs

The FAQs were updated throughout for minor style clarifications, topic updates and question renumbering.

Reliance on FAQs

The FAQs were issued to provide general information to taxpayers and tax professionals and were not published in the Internal Revenue Bulletin.

Legal Authority

If an FAQ was inconsistent with the law as applied to a taxpayer’s specific circumstances, the law controlled the taxpayer’s tax liability.

Penalty Relief

Taxpayers who reasonably and in good faith relied on the FAQs were not subject to penalties that included a reasonable cause standard for relief, to the extent reliance resulted in an underpayment of tax.

FS-2025-10

IR 2025-127

The IRS issued guidance providing penalty relief to individuals and corporations that make a valid Code Sec. 1062 election to defer taxes on gains from the sale of qualified farmland. Taxpayers who opt to pay their applicable net tax liability in four annual installments will not be penalized under sections 6654 or 6655 for underpaying estimated taxes in the year of the sale.

The IRS issued guidance providing penalty relief to individuals and corporations that make a valid Code Sec. 1062 election to defer taxes on gains from the sale of qualified farmland. Taxpayers who opt to pay their applicable net tax liability in four annual installments will not be penalized under sections 6654 or 6655 for underpaying estimated taxes in the year of the sale.

The relief permits these taxpayers to exclude 75 percent of the deferred tax from their estimated tax calculations for that year. However, 25 percent of the tax liability must still be paid by the return due date for the year of the sale. The IRS emphasized that this waiver applies automatically if the taxpayer qualifies and does not self-report the penalty.

Taxpayers who have already reported a penalty or receive an IRS notice can request abatement by filing Form 843, noting the relief under Notice 2026-3. This measure aligns with the policy objectives of the One, Big, Beautiful Bill Act of 2025, which introduced section 1062 to support farmland continuity by facilitating sales to qualified farmers. The IRS also plans to update relevant forms and instructions to reflect the changes, ensuring clarity for those seeking relief.

Notice 2026-3

The IRS has extended the transition period provided in Rev. Rul. 2025-4, I.R.B. 2025-6, for states administering paid family and medical leave (PFML) programs and employers participating in such programs with respect to the portion of medical leave benefits a state pays to an individual that is attributable to employer contributions, for an additional year.

The IRS has extended the transition period provided in Rev. Rul. 2025-4, I.R.B. 2025-6, for states administering paid family and medical leave (PFML) programs and employers participating in such programs with respect to the portion of medical leave benefits a state pays to an individual that is attributable to employer contributions, for an additional year.

The IRS found that states with PMFL statuses have requested that the transition period be extended for an additional year or that the effective date be amended because the required changes cannot occur within the current timeline. For this reason, calendar year 2026 will be regarded as an additional transition period for purposes of IRS enforcement and administration with respect to the following components:

• For medical leave benefits a state pays to an individual in calendar year 2026,with respect to the portion of the medical leave benefits attributable to employer contributions, (a) a state or an employer is not required to follow the income tax withholding and reporting requirements applicable to third-party sick pay, and (b)consequently, a state or employer would not be liable for any associated penalties under Code Sec. 6721 for failure to file a correct information return or under Code Sec. 6722 for failure to furnish a correct payee statement to the payee; and

• For medical leave benefits a state pays to an individual in calendar year 2026, with respect to the portion of the medical leave benefits attributable to employer contributions, (a) a state or an employer is not required to comply with § 32.1 and related Code sections (as well as similar requirements under § 3306) during thecalendar year; (b) a state or an employer is not required to withhold and pay associatedtaxes; and (c) consequently, a state or employer would not be liable for any associated penalties.

This notice is effective for medical leave benefits paid from states to individuals during calendar year 2026.

Notice 2026-6

Addressing health care will be the key legislative priority a 2026 starts, leaving little chance that Congress will take up any significant tax-related legislation in the coming election year, at least until health care is taken care of.

Addressing health care will be the key legislative priority a 2026 starts, leaving little chance that Congress will take up any significant tax-related legislation in the coming election year, at least until health care is taken care of.

Top legislative staff from the tax writing committees in Congress (House Ways and Means Committee and Senate Finance Committee) were all in basic agreement during a January 7, 2026, panel discussion at the 2026 D.C. Bar Tax Conference that health care would be tackled first.

“I will say that my judgement, and this is not the official party line, by that my judgement is that a deal on health care is going to have to unlock before there’s a meaningful tax vehicle,” Andrew Grossman, chief tax counsel for the House Ways And Means Committee Democratic staff, said, adding that it is difficult to see Democratic members working on tax extenders and other provisions when 15 million are about to lose their health insurance.

Sean Clerget, chief tax counsel for the Ways and Means GOP staff, added that “our view’s consistent with what Andrew [Grossman] said, adding that committee chairman Jason Smith (R-Mo.) “would be very open to having a tax vehicle whether or not there’s a health care deal, but obviously we need bipartisan cooperation to move something like that. And so, Andrew’s comments are sort of very important to the outlook on this.”

Even some of the smaller items that may have bipartisan support could be held up as the parties work to find common ground on health care legislation.

“It’s hard to see some of the smaller tax items that are hanging out there getting over the finish line without a deal on health, Sarah Schaefer, chief tax advisor to the Democratic staff of the Senate Finance Committee, said. “And I think our caucus will certainly hold out for that.”

Randy Herndon, deputy chief tax counsel for the Finance Committee Republican staff, added that he agreed with Clerget and said that Finance Committee Chairman Mike Crapo (R-Idaho) would be “open to a tax vehicle absent any health care deal, but understand, again, the bipartisan cooperation that would be required.”

No Planned OBBBA Part 2

Clerget said that currently there no major reconciliation bill on the horizon to follow up on the One Big Beautiful Bill Act, but “I’ve always thought that if there were to be a second reconciliation bill, it would need to be very narrow for a very specific purpose, rather than a large kind of open, multicommittee, big bill.”

Herndon added that Chairman Crapo’s “current focus is on pursuing potential bipartisan priorities in the Finance Committee jurisdiction,” noting that a lot of the GOP priorities were addressed in the OBBBA “and our members are very invested in seeing that through the implementation process.”

Of the things we can expect the committees to work on, Herndon identified areas ripe for legislative activity in the coming year, including crypto and tax administration bills and other focused issues surrounding affordability, but GOP members will more be paying attention to the implementation of OBBBA.

Schaefer said that Finance Committee Democrats will maintain a focus on the child tax credit as well as working to get reinstated clean energy credits that were allowed to expire.

Clerget said that of the things that could happen on this legislative calendar is on the taxation of digital assets, stating that “I think there’s a lot of interest in establishing clear tax rules in the digital asset space.… I think we have a good prospect of getting bipartisan cooperation on the tax side of digital assets.”

He also said there has been a lot of bipartisan cooperation on tax administration in 2025, suggesting that the parties could keep working on improving the taxpayer experience in 2026.

By Gregory Twachtman, Washington News Editor

The Fifth Circuit Court of Appeals held that a "limited partner" in Code Sec. 1402(a)(13) is a limited partner in a state-law limited partnership that has limited liability. The court rejected the "passive investor" rule followed by the IRS and the Tax Court in Soroban Capital Partners LP (Dec. 62,310).

The Fifth Circuit Court of Appeals held that a "limited partner" in Code Sec. 1402(a)(13) is a limited partner in a state-law limited partnership that has limited liability. The court rejected the "passive investor" rule followed by the IRS and the Tax Court in Soroban Capital Partners LP (Dec. 62,310).

Background

A limited liability limited partnership operated a business consulting firm, and was owned by several limited partners and one general partner. For the tax years at issue, the limited partnership allocated all of its ordinary business income to its limited partners. Based on the limited partnership tax exception in Code Sec. 1402(a)(13), the limited partnership excluded the limited partners’ distributive shares of partnership income or loss from its calculation of net earnings from self-employment during those years, and reported zero net earnings from self-employment.

The IRS adjusted the limited partnership's net earnings from self-employment, and determined that the distributive share exception in Code Sec. 1402(a)(13) did not apply because none of the limited partnership’s limited partners counted as "limited partners" for purposes of the statutory exception. The Tax Court upheld the adjustments, stating it was bound by Soroban.

Limited Partners and Self Employment Tax

Code Sec. 1402(a)(13) excludes from a partnership's calculation of net earnings from self-employment the distributive share of any item of income or loss of a limited partner, as such, other than guaranteed payments in Code Sec. 707(c) to that partner for services actually rendered to or on behalf of the partnership to the extent that those payments are established to be in the nature of remuneration for those services.

In Soroban, the Tax Court determined that Congress had enacted Code Sec. 1402(a)(13) to exclude earnings from a mere investment, and intended for the phrase “limited partners, as such” to refer to passive investors. Thus, the Tax Court there held that the limited partner exception of Code Sec. 1402(a)(13) did not apply to a partner who is limited in name only, and that determining whether a partner is a limited partner in name only required an inquiry into the limited partner's functions and roles.

Passive Investor Treatment

Here, the Fifth Circuit rejected the interpretation that "limited partner" in Code Sec. 1402(a)(13) refers only to passive investors in a limited partnership. Reviewing the text of the statute, the court determined that dictionaries at the time of Code Sec. 1402(a)(13)’s enactment defined "limited partner" as a partner in a limited partnership that has limited liability and is not bound by the obligations of the partnership. Also, longstanding interpretation by the Social Security Administration and the IRS had confirmed that a "limited partner" is a partner with limited liability in a limited partnership. IRS partnership tax return instructions had for decades defined "limited partner" as one whose potential personal liability for partnership debts was limited to the amount of money or other property that the partner contributed or was required to contribute to the partnership.

The Fifth Circuit determined that the interpretation of "limited partner" as a mere "passive investor" in a limited partnership is wrong. The court stated that the passive-investor interpretation makes little sense of the "guaranteed payments" clause in Code Sec. 1402(a)(13), and that the text of the statute contemplates that "limited partners" would provide actual services to the partnership and thus participate in partnership affairs. A strict passive-investor interpretation that defined "limited partner" in a way that prohibited him from providing any services to the partnership would make the "guaranteed payments" clause superfluous.

Further, the court stated that had Congress wished to only exclude passive investors from the tax, it could have easily written the exception to do so, but it did not do so in Code Sec. 1402(a)(13). Additionally, the passive investor interpretation would require the IRS to balance an infinite number of factors in performing its "functional analysis test," and would make it more complicated for limited partners to determine their tax liability.

The Fifth Circuit rejected the Tax Court's conclusion in Soroban that by adding the words "as such" in Code Sec. 1402(a)(13), Congress had made clear that the limited partner exception applies only to a limited partner who is functioning as a limited partner. Adding "as such" did not restrict or narrow the class of limited partners, and does not upset the ordinary meaning of "limited partner."

Vacating and remanding an unreported Tax Court opinion.

Sirius Solutions, L.L.L.P., CA-5

In many parts of the country, residential property has seen steady and strong appreciation for some time now. In an estate planning context, however, increasing property values could mean a potential increase in federal estate tax liability for the property owner's estate. Many homeowners, who desire to pass their appreciating residential property on to their children and save federal estate and gift taxes at the same time, have utilized qualified personal residence trusts.

In many parts of the country, residential property has seen steady and strong appreciation for some time now. In an estate planning context, however, increasing property values could mean a potential increase in federal estate tax liability for the property owner's estate. Many homeowners, who desire to pass their appreciating residential property on to their children and save federal estate and gift taxes at the same time, have utilized qualified personal residence trusts.

What is a QPRT?

The qualified personal residence trust, referred to as a "QPRT," is an estate planning technique used to transfer a personal residence from one generation to the next without incurring federal estate tax on the trust property. This type of irrevocable trust allows a homeowner to make a future gift of the family home or a vacation property to his or her children, while retaining the right to continue living in the home for a term of years that the homeowner selects.

Creating a QPRT

The homeowner transfers title to his or her residence into trust for a set time period (for example, 10 years), but retains the right to live in the house during the trust term. At the end of the term, the trust property is distributed to the donor's children without passing through the donor's estate, thereby avoiding federal estate tax on the trust assets. However, if the donor wishes to continue living in the residence after the end of the trust term, the donor must pay fair market rent to his or her children, the new owners of the residence.

Gift tax advantage

Through the use of a QPRT, the full value of your residence can be transferred to your children. However, for federal gift tax purposes, the property is valued at a discount. The actual value of the gift (and the gift tax savings) depends upon your age, the length of the QPRT term, and the federal interest rates in effect at the time you transfer the house to the trust. For example, the longer the trust term, the lower the gift value for gift tax purposes and the greater the gift tax savings. Also, the higher the applicable federal interest rate, the greater the potential gift tax savings.

If you would like to discuss how a QPRT might work for you as part of your overall estate plan, or if you currently have an established QPRT and you wish to review its effect in light of current interest rates and other factors, please do not hesitate to contact this office.

Possible changes on the tax front including Estate Taxes, 1031 Exchange limitations, and a SALT workaround for some Californians

September 1, 2021

We are pleased to bring you the next edition of Praetorian Advisors’ every so often tax musings direct from our national office in Corona del Mar; ok, our only office.  It is our hope that this edition finds you both happy and healthy.

So, what is the latest on the tax front?  Well, there has been a lot of talk but no action on the federal level (that is not a bad thing), and a recent welcome surprise for some of those impacted by California income taxes.  Here is the rundown:

Federal Income, Estate & Gift Changes

Since before the Biden administration took over in January, a wish list of income tax increases, and estate and gift exemption decreases has been much discussed.  We fielded questions from some of you in the spring about moves to make given this wish list.  Having been in this business for almost 20 years at Praetorian Advisors (anniversary gifts accepted in October), and in the tax business for another 7 (Patti) and 12 years (Paul, because it’s always fun to remind him he is older) prior to Praetorian’s inception, we have seen many proposals come and go over the years.  As a result, we typically do not advise drastic actions be taken based on the prospect of tax law changes and have felt the same way so far in 2021...although we continue to keep an eye on the landscape.  Our view on the Biden proposed tax increases is one of extreme positions in so many tax areas that the end game is to get a few of the proposals passed, allowing the administration to claim the “Great Compromise of 2021”.

Given the very narrow majorities in both the House and Senate, the differing goals of the moderate and extreme wings of the Democrats, and mid-terms being a mere 15 months away, less change is more likely than a lot of change.  When Afghanistan, inflation, rising gas prices, immigration and border issues, and Covid are considered, tax increases presumably will or at least should be a lower priority.  Here are some of the more impactful proposals:

Ordinary and capital gains tax rates – the Biden administration wants to restore the top ordinary tax rate to 39.6% and increase the top long term capital gains rate from 20% to the same 39.6% for those with over $1 million of income.  Add the Obamacare/net investment income tax of 3.8% on top of that and 43.4% is the new proposed top rate.  This would impact far too much of our client base.  Add another 13.3% for our California clients and 56.4% is your number.  That hardly inspires one to recognize any gains or motivate to build a business and provide jobs to many.

Perhaps our bias as your tax advisors that you should get to keep more of your money than the government is shining through.  When politicians and talking heads mention that the top tax rate was 70% decades ago, they dishonestly fail to mention that taxpayers could deduct just about anything they spent money on back then.  Today, the most impactful individual deductions are down to: $10,000 of state and local taxes (SALT) that includes real property taxes, mortgage and investment interest, and charitable contributions.

Section 1031 Exchanges – Also called the like-kind exchange, this provision of tax law dates back almost 100 years and allows the taxpayer to defer gain on the sale of trade or business assets (limited to real estate only by President Trump as of 2018) if the proceeds are reinvested into another piece of property.  President Biden wants to eliminate the Section 1031 exchange for those with income over $400,000.

Corporate Tax Rates – Proposed increase from 21% to 28% (was 35% in 2017).  Many, including us, feel this has a better chance to pass than the other proposals because it is still 7% lower than the rate before Trump cut them a few years ago.  What many fail to realize is that corporations pass along price increases, whether it be for product or taxes, onto the consumer which has an inflationary effect.  In our opinion it makes little sense to be pushing for a corporate tax increase at home while pushing for a global minimum tax rate of 15% abroad.  We will let the economists handle the rest of that one.

Estate and Gift Tax (Part 1) – The current estate and gift tax exemption is $11.7 million per person, meaning someone can gift up to this amount without having to pay a gift tax to the government.  To the extent the gift exemption is not fully utilized, each person can use the estate exemption against his or her assets before having to pay an estate or death tax at the end of life.  The current proposal is to reduce the estate exemption to $3.5 million and the gift exemption to $1 million.  Even Obama was good with a $5 million estate and gift exemption.

Planning Tip: Note that the current estate exemption (adjusted for inflation each year) is set to expire and return to approximately $6 million at the end of 2025.  Therefore, if you might otherwise be making substantial gifts by the end of 2025, DO IT NOW.  We advise this for those who can live at their accustomed lifestyle with remaining assets after the gifting, and those who are much closer to the end than the beginning (was that gentle enough?) who have enough assets to live out the remainder of their lives.  If you will be implementing a gifting plan, you need to consult with us or your estate attorney (or both) as some assets are better to gift than others.

Estate and Gift Tax (Part 2) – For many decades (Paul was 10 and Patti 4 at the time), people’s estates have received a “basis step up” upon death, adjusting the tax basis of assets left for a surviving spouse or heirs to the date of death value.  For example, you bought a home on Balboa Island in 1983 for $300,000 and today it is worth $6 million.  Assuming the home is part of your estate (not shifted/gifted to an irrevocable trust), there will be a step up in basis to $6 million at your death, meaning your surviving spouse or heirs can sell that home and not recognize a capital gain on sale.  How can this be you ask?  The idea is that because an estate tax exists that assesses a tax based on the value of your assets, an income tax on sale of the same asset should not apply.

The Biden administration has proposed not only an elimination on the basis step up rules, but also an immediate capital gains tax at death for someone not subject to the estate tax!  Assume you die before the end of 2025.  Your Balboa home combined with your investments total $9 million.  Under this proposal, your heirs would have to pay capital gains tax on the $5.7 million “gain” even though the home isn’t sold…yet…plus whatever gains exist in your investment portfolio.  At 43.4%, that’s almost $2.5 million of capital gains tax!  It sounds like the kids will have to sell the house after the funeral reception there.

Estate and Gift Tax (Part 3) – Biden wants to eliminate use of effective estate and gift planning trusts called Grantor Retained Annuity Trusts (GRATs) and dynasty (multi-generational) trusts, and has also proposed capital gains tax upon transfer of assets to a trust.  Yikes!

Retroactive Application - The administration also floated retroactive application to January 1, 2021 of any new tax law changes.  Isn’t that unconstitutional you ask?  We all thought so until the Clinton tax increases of 1993 which were retroactive, and it held up in court.  While retroactivity is a possibility, with each passing day it is less and less probable.  Given that we are already into the 8^th month of the year and so much is still up in the air, we expect any (if any) changes will be effective January 1, 2022. 

Another factor is the IRS still being months behind processing returns and correspondence due to what we call their Covid vacation.  It turns out the good people working at the IRS do not take kindly to the vacation comment, but the fact remains they are months behind where they should be.  Retroactive application of tax law changes at this juncture might be the end of them.  Now there is an idea!

Crystal Ball Predictions

If we had to guess, our prediction is the corporate tax rate hike is most likely to pass, the estate and gift tax provisions the least likely to pass, the income tax rate changes less likely to pass, and elimination of the 1031 exchange – your guess is as good as ours.

The SALT Workaround – Relief for some Californians

Are you tired of hearing about the rich and how they need to pay their fair share?  We sure are because we see how much you pay.  Not just the numbers, but the percentage of income paid in taxes by some of you is astounding.

Have you also been trained to think that you got completely hosed by the $10,000 state and local tax (SALT) limitation?  As we have shown to many of you that has not been the case…for some.  Significant changes to the Alternative Minimum Tax (AMT) structure and a lower tax rates have resulted in lower overall tax liability even though the SALT limit has created higher taxable income.  Now for those over $1 million of ordinary income (you know who you are), the sting of the SALT limitation is real. 

Relief is on the way due to a recent California law enacted, but only for those with income from partnership and S Corp K-1s, and even that is not as straightforward as it sounds.  Given that there are a multitude of questions to be answered by the state government given the newness of the law, here we provide a top-level overview here of how it is designed to work.

S Corporations and partnerships doing business in California may make an election on March 15, 2022 to remit California taxes at 9.3% of flow through income on behalf of its shareholders/partners, and get a federal tax deduction for the taxes remitted.  A quick example: you own a S Corp that reports $1,000,000 of income on your K-1.  Rather than you remitting quarterly individual estimated taxes to California on the expected K-1 income, the S Corp instead elects to remit $93,000 in March 2022 on your behalf.  Your K-1 from the S Corp will now reflect federal taxable income of $907,000 instead of $1,000,000.  State taxes have never been deductible for state purposes, so your California K-1 will still show $1,000,000 plus or minus other federal/California tax differences.  At the 37% tax rate, the $93,000 deduction saves $34,410 in federal taxes. That’s the concept in a nutshell.  Here is what else we know:

• If the S Corp or partnership fails to make the election and remit the tax by March 15, 2022 then it is an opportunity missed. However, to get the deduction on your 2021 federal K-1, the tax must be remitted before December 31, 2021 on a yet to be published estimate form.  You can already see that this is going to get confusing!
  
  
• To be eligible for the 2022 tax year, the greater of $1,000 or 50% of what was paid by March 15, 2022 for the 2021 tax year must be remitted by June 15, 2022. The balance owed for 2022 will be due March 15, 2023.  For each subsequent year, it is rinse, lather, repeat but only through 2025 when the SALT limitation is set to expire, or until (if) the SALT limitation is repealed by Congress.  If the proper June 15^th payment is not remitted, it’s an opportunity missed for that year.
  
  However, if you want the deduction to be reflected on your 2021 K-1 the entity will need to remit the tax before December 31, 2021 on a yet to be published tax form.
  
  
• The workaround applies to all types of income on a K-1, including ordinary income, rental income, and investment income (interest, dividends, capital gains, etc).
  
  
• If a partnership has another partnership as even one of its partners, the entire partnership, and hence all individual partners, are disqualified from participating in the SALT workaround. This will likely eliminate participation if you are in a large investment partnership with hundreds of partners.
  
  
• Each eligible partner or shareholder must make the election with the partnership or S Corporation.
  
  
• For those of you who earn your income solely from W-2 wages, this whole concept is not applicable. We have said before that we prefer tax law that avoids choosing winners and losers, but this idea only passes muster with the IRS when a flow through entity is involved, trusts excluded.
  
  
• Planning Alert! (emoji with red sirens here if I knew how to do that): many of you have single member LLCs (SMLLC) for operating businesses, rental properties, etc that provide legal liability protection without the hassle of filing a separate federal entity return. While they are great vehicles for simplification and protection, the SALT workaround does not apply to SMLLCs.  Depending on the amount of income generated by your SMLLC, converting to a multi-member LLC has the potential to save significant tax dollars even after paying for preparation of additional tax returns.  For 2021, whether the full year’s LLC activity or only the multi-member period can be counted for the SALT workaround is not known at this time.
  
  
• If you are in a higher California tax bracket (up to 13.3%) and/or have other sources of income from wages, investment income, etc, there likely will still be a need to remit quarterly estimated tax payments that are subject to the SALT limitation.
  
  
• Unrelated to the California law, many other states to date have SALT workaround laws in varying formats. The current list of states that have passed or have pending SALT workaround legislation are: Arizona, Connecticut, Georgia, Idaho, Illinois, Louisiana, Maryland, Massachusetts, New Jersey, New York, North Carolina, Oklahoma, Rhode Island, and Wisconsin (no doubt with more to come).  For those of you in these states, we can review your situation to ensure maximum tax savings are achieved as well.

There is the quick rundown on what we do know, but there is much to still be clarified.  As we learn more about application of the new law, we will contact you about your next planning move, but do expect that this could impact the third and fourth quarter estimated tax payments for some of you.

Five pages of updates is enough for now.  Stay tuned for more in the future, and we look forward to continuing to serve your tax and financial needs.

Tax preparation during a global pandemic

Latest Praetorian Advisors Tax Season Update – Please Read! 

Well, much has changed in the past several days.  We are on lockdown and can no longer work from our office.  While not a huge deal because we can get work done from our home offices, it is still disruptive to our normal tax season life.  There is an oxymoron: “normal tax season life” as there is nothing normal about the way we live during tax season!  In addition, the internet and the news is all virus, all the time. 

One minute it feels like this may all be a severe overreaction when the numbers are put into perspective.  The California governor predicts 22 million of the 40 million Golden State’s residents will get the virus (56%), while China claims (insert chuckle here) 81,000 cases with 1.6 billion people (billion with a B – less than 1/100^th of 1%), and Italy has 41,000 cases with 60 million people, well less than 1/10^th of 1%).  Virus deaths globally now total over 10,000, while the flu typically kills about 35,000 Americans annually.  Imagine if we got an e-mail or phone call from building management or a restaurant every time it was determined someone had been there with the flu; it would make us nuts.  The governor’s math seems quite fuzzy, and it sure feels like an overreaction…

…Until the next minute we hear of doctors in ICU, few test kits available, well respected Dr. Fauci sounding alarm bells, cases spiking, people rushing stores to potentially hunker down for months, the most populous state in the country on lockdown, while this ultimate Black Swan event crushes a thriving economy as we come to a grinding halt.  Unless you are a U.S. Senator, your stock portfolio has also been crushed.

Time will tell if the spring breakers in Florida or the toilet paper hoarders/preppers were correct. The truth most likely lies somewhere in the middle.

While we have additional thoughts, the Op-Ed is over; now to the tax season update:

• Finally, the federal tax deadline to file and pay remaining 2019 taxes was extended this morning to July 15^th. California is conforming as well, like many other states.  Some states have yet to extend deadlines, and we are keeping an eye on those states for you, if applicable to your filings.
  
  Note that for federal purposes, if you owe more than $1 million for 2019 you can only defer payment on the first $1 million, while the remainder must be paid by April 15^th.
  
  
• The extension of time to file and pay applies to all entities, including trusts.
  
  
• Federal first quarter 2020 estimated tax payments are now due June 15^th. The second quarter estimate is also due June 15^th.  The $1 million cap on deferral also applies to estimated tax payments.
  
  
• California has made everything simpler. Any payments, including balances due, the $800 minimum tax for entities, 2020 estimated taxes, etc, are due July 15^th.  This includes first and second quarter 2020 estimates.  For those of you filing in other states, we will be in touch to discuss your filing and payment deadlines.

Our approach to the lengthened tax season is to continue working hard but get a little more sleep than we normally do this time of year to try to stay healthy, while dealing with the challenges to our lives that we all face right now.  We are prioritizing completion of returns as follows, being mindful of the disruption in cash flow this has all caused for many people:

• Partnership and S Corporation returns with K-1s that are to be distributed to investors in the entities, so we are not delaying someone’s ability to claim a refund.
  
  
• Individual and trust returns expecting a refund that will not be applied to 2020.
  
  
• Returns for which we had all information in early.
  
  
• Returns for which we have all information that came in later. This includes returns that may have been extended at April 15^th in the past, but we will be able to complete before the extended deadline this year.
  
  
• For those of you who file in the Fall because you are waiting on K-1s well into the Summer, we will work on your extension calculations after April 15^th, except for those who may owe over $1 million who need to know the figures sooner.

Given all that is going on, as a firm we welcome the extension this year.  However, we have no desire to be in busy season mode for the next four months.  As hectic as the April 15^th deadline is, we also look forward to tax season being over every year so we can get back to our lives and families, and take a little time off.  To that end, we ask you to continue getting us information so we can continue working diligently on your behalf.  If you normally get us information right about now, stick with it rather than thinking you can show up on July 1^st with a stack of information and expect that we will get it done by the July 15^th deadline.  That would be misguided thinking on your part.  There are only so many closets you can clean or movies you can watch while in lockdown, so spend some time getting that tax information together, too.

Once we get more clarity on this lockdown, hopefully we can get back into the office for at least a limited time and have some drop off hours.  Stay tuned.

Lastly, we encourage you to consider that this is not the end of the world; many of us may have already had the virus and not even known it; don’t beat your spouse or kick the dog while having all of this together time; watch some old classic movies or newer ones you have been meaning to get to; do a puzzle or play a board game with your family; drink that special bottle of wine you have been saving, just live your life while taking prudent precautions to be safe.  In the meantime, we will be doing taxes.

Tax change possibilities following the election

Great News! Only one more month to go and 2020 will finally be behind us! Turning back the clock one hour in November wasn’t worth the extra sleep, and 2020 even managed to slip in an extra day on us back in February – cruel, cruel, cruel.

Although there is much to say about 2020 with liberal use of four letter  words a big part of it, our purpose here is to look forward at some thoughts and ideas as we look forward to turning the page on 2020. Here we focus on your wealth matters… because your wealth matters. See what we did there? Not bad for CPAs, huh?

Over the past 10 or so years, there have been several significant tax law changes signed into law in mid to late December creating year end planning chaos crammed into a few short days, during the holidays. Lumps of coal for all our “friends” in D.C. This year we won’t have that, it’s worse! The never-ending election still hasn’t ended, and we won’t know the color of the Senate majority until January. Why does this matter?

As it relates to your taxes and wealth, we aren’t 100% certain. There seem to be a few schools of thought, both of which assume President Trump’s multiple legal appeals fall short and Joe Biden becomes President. Note that if President Trump miraculously was successful in the appeals, then most of this letter was mostly a waste of time because nothing will change on the tax front.

School One – The Senate is blue, along with the House and Presidency. Bring on the Green New Deal and more regulations, back in the Iran nuclear deal and Paris accord, higher income taxes, and lower gift and estate tax exemptions, just to name a few.

School Two – The Senate, House, and Presidency are all blue but the moderate Democrats, sleeping with one eye open and knowing the 2022 midterms are just around the  corner, push back against the far left of the party and vote Republicans on major legislation in the name of their own political survival. Don’t even forget it’s not about you, but about politician’s political survival. A case in point: Joe Manchin, Democrat Senator from West Virginia, has already announced he won’t have any part in a Supreme Court packing scheme (his words, not ours). If the Dems do get control of Congress and the White House, it will be by the slimiest of majorities, and not the mandate Nancy Pelosi likes to claim. In fact, if both Georgia Senate seats go blue, it will be a 50-50 tie, with Kamala Harris as the tiebreaking vote.

School Three – At least one of the Georgia Senate seats goes red, Mitch McConnell maintains his leadership position, and he advances to the Senate floor what he wants, albeit with a tad more pressure to compromise than he has faced the past four years. This is what we call gridlock, a dirty word when trying to get home on the 405 on a Friday afternoon. In politics however (and down on Wall St.), gridlock is viewed as a positive by the 70% or so in the middle (center-left to center-right).

So what does all this uncertainty mean to you? With your thumb holding your pinky, hold up your other three fingers on your right hand together – try again, not just the one finger but all three – that’s better, and do as the Boy Scouts do – Be Prepared!

Wagering on Schools Two or Three may very well be a solid bet, which we think are more likely then School One… but be prepared for School One just in case.

Income Taxes

Assuming School One wins out, advice here is trickier than you might think depending on your income. We have a secret shared with some of you over the past two years. The 2017 Tax Cuts and Jobs Act (TCJA) was the biggest federal tax overhaul since 1986. That’s not the secret though. The secret is that most of the tax benefits were in fact for the “middle” class (middle in quotes as we have seen taxes go down for those earners up to roughly $800,000, not your classic definition of middle class). Yes, this is true even with the limitations on state tax and property tax deductions. (SALT). Lower tax rates, an overhaul to the good of Alternative Minimum Tax (AMT), and a deduction for certain Qualified Business income have all contributed to these lower taxes.

            Although the media and certain politicians have been saying otherwise, the people paying more taxes under the TCJA are those with ordinary income in the seven figure and up range. Why? Without getting into great detail here, those of you in this income neighborhood were previously getting SALT benefit from the deduction. Those below $800,000 weren’t reaping full benefit due to the dreaded AMT. The million plus earners are now capped b y SALT and paying higher total federal income taxes.

Our advice is not one size fits all, but here are general guidelines. We can work with you specifically on your situation.

• If income acceleration or deferral is possible, maximize taxes paid at the 24% income tax bracket (and maybe higher).
• For the seven figure earners, do not pay your fourth quarter 2020 estimate until it is due in January 2021. This is president in the event Biden and company restore the SALT deduction, something Pelosi and Schumer have both been wanting for their high state income tax constituents.

Capital Gains

            Joe Biden has talked about increasing the long term capital gains rate from 20% to a person’s marginal tax rate which is currently as high as 37% (and going higher?? BE PREPARED!) Slap the 3.8% Obamacare tax on there and you are looking at a long term rate of almost 41% (or higher – BE PREPARED!)

            You already have the easy answer to that, right? Sell your long term gains before year end and take “advantage” of the lower rates. Not so fast my friend. Other factors need to be considered:

• Cost opportunity. Assuming California residency and a 11% income tax at the state level, you will pay roughly 35% tax on those gains (24% fed including Obamacare tax and 11% Cal). Paying tax on a $100,000, or $35,000 less working for you.

2020 Filing deadline extended and lingering questions about estimated tax due dates...

Praetorian Advisors Brief Tax Update
Spring 2021

Greetings from Praetorian Advisors!

As you may have heard, the individual tax deadline has been extended for the second straight year, this time to May 17^th (the 15^th is a Saturday so it bumps to Monday).  This means that no remaining tax payments are due for the 2020 tax year until that date as well.  All states except Arizona and New Hampshire have complied with the extended due date.  Given the sheer volume of information and ever-expanding disclosure requirements of the government, we would welcome a permanent due date change to May, but they haven’t asked us yet.

The IRS left the April 15^th due date unchanged for corporations and trusts.  That’s simple enough and reasonable.  What isn’t simple and is unreasonable is the IRS did not change the first quarter due date for estimated taxes, which was kept at April 15^th. 

Originally, the IRS commissioner resisted changing any due dates in spite of the IRS’ 6 month backlog, claiming that extending any due dates would be confusing.  So he agreed to extend some due dates but not others, which is…what’s the word…oh yes, confusing!

We held off sending this update, awaiting further guidance from the IRS on one key issue.  The so-called guidance came out a few days ago and only reiterated what was originally announced, leaving out the answer to the following question:

What if a taxpayer includes Q1 2021 payments in an extension payment not remitted until May 17^th?  Will the overpayment be applied as if made on April 15^th or May 17^th?

This is an obvious question to be answered yet we wait.

As those of you who extend every year know, building a Q1 payment into your extension is standard operating procedure here, as it serves two purposes: 1) it allows you to remit one payment rather than two, and 2) it provides cushion if the extension amount is short of what was needed, and we can make up for it in a subsequent quarter’s payment.

Because of the IRS’ lack of clarity, we will go the “safe” route and provide a Q1 2021 estimate for payment on April 15^th, with the 2020 extension payments happening by May 17^th unless better guidance is announced.  Those of you who do not typically remit estimates can ignore all of this!

In the meantime, we continue to grind away at a busy season pace even with the individual extended due date.  We appreciate you and appreciate your patience as we work through another tax season.

Patti, Paul, and your team at Praetorian Advisors.