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

An eligible taxpayer can deduct qualified interest on a qualified student loan for an eligible student's qualified educational expenses at an eligible institution. The amount of the deduction is limited, and it is phased out for taxpayers whose modified adjusted gross income (AGI) exceeds certain thresholds.

An eligible taxpayer can deduct qualified interest on a qualified student loan for an eligible student's qualified educational expenses at an eligible institution. The amount of the deduction is limited, and it is phased out for taxpayers whose modified adjusted gross income (AGI) exceeds certain thresholds.

The maximum deduction allowed for educational loan interest is $2,500. This amount is not adjusted for inflation.  For tax years beginning in 2017, the $2,500 maximum deduction for interest paid on qualified education loans is reduced when modified adjusted gross income (AGI) exceeds $65,000 ($135,000 for joint returns), and is completely eliminated when modified AGI reaches $80,000 ($165,000 for joint returns).

Planning tip: Some taxpayers may choose to take out a home equity loan to pay off their student debt. Use of a home-equity loan of up to $100,000 principal is allowed for purposes other than home improvement or purchase. Interest up to that amount is fully deduction, as an itemized mortgage interest deduction.

Student loan interest is an “above-the-line” deduction; the taxpayer need not itemize. 

Eligible student. An eligible student for purposes of eligible debt is a student enrolled in a college degree, certificate or other program, including a program of study abroad approved for credit at an institution of higher learning where the student is enrolled, and leading to a recognized educational credential at an eligible educational institution. The student must also carry at least one half of the normal full-time workload for the course of study being pursued during at least one academic period beginning during the tax year.

Student loan interest is not deductible if a dependency exemption is allowed for the taxpayer on someone else's return. Thus, if parents take a dependency exemption for a student who is the only person legally obligated to pay interest on a qualified loan, neither the parents nor the student is entitled to deduct any interest paid by the student during the time he is claimed as a dependent. A student may deduct interest paid in years after the student has ceased to be a dependent. 

Legal obligation. The taxpayer claiming the deduction must be legally obligated to make the interest payments. Thus, a parent who had signed for the student loan and is liable personally for its payment may deduct interest paid on the loan.

If a third party who is not legally obligated makes an interest payment on behalf of a taxpayer who is legally obligated, the taxpayer is treated as receiving the payment from the third party and using it to pay the interest. For instance, if an employer makes an interest payment on behalf of the employee, and the payment is included in the employee's income as compensation, the employee can deduct the payment. Similarly, if a parent pays interest on behalf of a non-dependent borrower, the borrower may deduct the interest.

Lawmakers from both parties spent much of June debating and discussing tax reform, but without giving many details of what a comprehensive tax reform package could look like before year-end. At the same time, several bipartisan tax bills have been introduced in Congress, which could see their way to passage.

Lawmakers from both parties spent much of June debating and discussing tax reform, but without giving many details of what a comprehensive tax reform package could look like before year-end. At the same time, several bipartisan tax bills have been introduced in Congress, which could see their way to passage.

Tax reform

House Speaker Paul Ryan, R-Wisc., predicted that tax reform would be accomplished in 2017. “Transformational tax reform can be done, and we are moving forward," Ryan said in June. We need to get this done in 2017. We cannot let this once-in-a-generation moment slip by.” Last year, House Republicans unveiled their “Better Way Blueprint,” which sets principles for tax reform, including lower individual tax rates, a reduced corporate tax rate, and a border adjustment tax, among other measures.

“Republicans have been afraid to expose their Blueprint to scrutiny,” Rep. Lloyd Doggett, D-Texas, a senior member of the House Ways and Means Committee, said. “The Republican Blueprint is both the wrong way for tax policy and the wrong way to legislate tax reform,” Doggett said.

In the Senate, the chair of the Senate Finance Committee (SFC), Orrin Hatch, R-Utah, asked stakeholders for input on tax reform. Hatch requested recommendations on individual, business and international tax reform. "After years of committee hearings, public statements, working groups, and conceptual exercises, Congress is poised to make significant steps toward comprehensive tax reform," Hatch said. “As we work to achieve those goals, it is essential that Congress has the best possible advice and insight from experts and stakeholders," he added.

Sen. Ron Wyden, D-Oregon, is ranking member of the SFC and urged lawmakers to take a bipartisan approach to tax reform. "The only way to pass lasting, job-creating tax reform that’s more than an economic sugar-high is for it to be bipartisan," Wyden said. "Tax reform takes a lot of careful consideration to write a bipartisan tax reform bill, and I know because I’ve written two of them."

Small business

The Senate Small Business Committee explored tax reform at a hearing in June. “Tax compliance costs are 67 percent higher for small businesses," Committee Chair James Risch, R-Idaho, said. Ranking member Jeanne Shaheen, D-N.H., said that “small businesses spend 2.5-billion hours complying with IRS rules.”

Mark Mazur, former Treasury assistant secretary for tax policy, was one of the experts who testified before the committee. Mazur said that small businesses generally have a larger per-unit cost of tax compliance than larger businesses. “One particular area that adds to the complexity of complying with the tax code is accrual accounting,” he said.

Other tax legislation

In June, the House passed HR 1551, a bipartisan bill. The legislation generally modifies the tax credit for advanced nuclear power facilities.

A number of bipartisan stand-alone tax bills have been introduced in Congress recently. They include:

• The Invent and Manufacture in America Bill, a bipartisan bill that would enhance the research tax credit. Generally, the bill would increase the value of the credit by up to 25 percent for qualified research activities.
• The Graduate Student Savings Bill, introduced by a group of Senate Democrats and Republicans. The bill would generally allow funds from a graduate student’s stipend or fellowship to be deposited into an individual retirement account (IRA).
• The Adoption Tax Credit Refundability Act is another bipartisan bill. The measure generally would enhance the adoption tax credit.
• Another bipartisan proposal would treat bicycle sharing systems as mass transit facilities for purposes of qualified transportation fringe benefits.

Additionally, a group of House Democrats and Republicans wrote to Treasury Secretary Steven Mnuchin in June. The bipartisan group of lawmakers asked Mnuchin to preserve the state and local sales tax deduction in any tax reform plan.

If you have any questions about tax reform, please contact our office.

Shortly after resuming operations post-government shutdown, the IRS told taxpayers that the start of the 2014 filing season will be delayed by one to two weeks. The delay will largely impact taxpayers who want to file their 2013 returns early in the filing season. At the same time, the White House clarified on social media that no penalty under the Affordable Care Act's (ACA) individual mandate would be imposed during the enrollment period for obtaining coverage through an ACA Marketplace.

Shortly after resuming operations post-government shutdown, the IRS told taxpayers that the start of the 2014 filing season will be delayed by one to two weeks. The delay will largely impact taxpayers who want to file their 2013 returns early in the filing season. At the same time, the White House clarified on social media that no penalty under the Affordable Care Act's (ACA) individual mandate would be imposed during the enrollment period for obtaining coverage through an ACA Marketplace.

IRS shutdown

On October 1, many IRS employees in Washington, D.C. and nationwide were furloughed after Congress failed to approve funding for the government's fiscal year (FY 2014). During the shutdown, only 10 percent of the IRS' approximately 90,000 employees remained on the job, most engaged in criminal investigations and infrastructure support. Employees on furlough, including revenue agents assigned to exams and hearing officers assigned to collection due process cases, were expressly prohibited from doing any work, including checking email and voice messages.

Employees return to work

The IRS reopened on October 17. The previous day, Congress had passed legislation to fund the government through mid-January 2014. The IRS immediately cautioned taxpayers to expect longer wait times and limited service as it would take time for employees to resume work and process backlogged inventory. Upon their return to work, IRS employees began reviewing email, voice messages and their files as well as completing administrative tasks to reopen operations. The IRS reported that it received 400,000 pieces of correspondence during the furlough period in addition to nearly one million items already being processed before the shutdown.

Returns and refunds

The 16-day furlough overlapped with the October 15 deadline for taxpayers on extension to file 2012 returns. The IRS reported that during the shutdown it continued as many automated processes as possible, including accepting returns and processing payments. The Free File system also was open during the furlough period. However, refunds were not issued while the IRS was closed. Refunds are now being processed. If you have any questions about a refund or payment, please contact our office.

Filing season

The start of the 2014 filing season will be delayed approximately one to two weeks so the IRS can program and test tax processing systems following the 16-day federal government closure. The IRS had anticipated opening the 2014 filing season on January 21. With a one- to two-week delay, the IRS would start accepting and processing 2013 individual tax returns no earlier than January 28, 2014 and no later than February 4, 2014. The IRS reported it will make a final determination on the start of the 2014 filing season in mid-December.

The IRS explained that the government shutdown took place during the peak period for preparing its return processing systems for the 2014 filing season. The IRS must program, test and deploy more than 50 systems to handle processing of nearly 150 million tax returns.

"Readying our systems to handle the tax season is an intricate, detailed process, and we must take the time to get it right," Acting Commissioner Daniel Werfel said in a statement. "The adjustment to the start of the filing season provides us the necessary time to program, test and validate our systems so that we can provide a smooth filing and refund process for the nation's taxpayers. We want the public and tax professionals to know about the delay well in advance so they can prepare for a later start of the filing season."

Affordable Care Act

Beginning January 1, 2014, the Affordable Care Act generally requires individuals - unless exempt - to carry health insurance or make a shared responsibility payment (also known as a penalty). Individuals exempt from the payment include individuals covered by most employer-sponsored health plans, Medicare, Medicaid, and other government programs. The penalty is $95 in 2014 or the flat fee of one percent of taxable income, $325 in 2015 or the flat fee of two percent of taxable income, $695 in 2016 or 2.5 percent of taxable income (the $695 amount is indexed for inflation after 2016).

The Obama administration launched individual Marketplaces (formerly known as Exchanges) on October 1 in all 50 states and the District of Columbia. The enrollment period for coverage for 2014 began on October 1 and is scheduled to end March 31, 2014, which is after the January 1 effective date of the individual mandate. In late October, the Obama administration clarified on social media that individuals who enroll in coverage through a Marketplace at anytime during the enrollment period will not be responsible for a penalty.

Because of technical problems, some applications on HealthCare.gov have not been running at 100 percent, the U.S. Department of Health and Human Services (HHS) reported. Individuals can, however, enroll and obtain insurance at in-person assistance centers. Marketplace customer call centers are also open, HHS explained.

Despite the 16-day government shutdown in October, a number of important developments took place impacting the Patient Protection and Affordable Care Act, especially for individuals and businesses. The Small Business Health Option Program (SHOP) was temporarily delayed, Congress took a closer look at income verification for the Code Sec. 36B premium assistance tax credit, and held a hearing on the Affordable Care Act's employer mandate. Individuals trying to enroll in coverage through HealthCare.gov also experienced some technical problems in October.

Despite the 16-day government shutdown in October, a number of important developments took place impacting the Patient Protection and Affordable Care Act, especially for individuals and businesses. The Small Business Health Option Program (SHOP) was temporarily delayed, Congress took a closer look at income verification for the Code Sec. 36B premium assistance tax credit, and held a hearing on the Affordable Care Act's employer mandate. Individuals trying to enroll in coverage through HealthCare.gov also experienced some technical problems in October.

SHOP

The Affordable Care Act created two vehicles to deliver health insurance: Marketplaces for individuals and the SHOP for small businesses. Marketplaces launched as scheduled on October 1 in every state and the District of Columbia. Qualified individuals can enroll in a Marketplace to obtain health insurance. Coverage through a Marketplace will begin January 1, 2014.

The October 1 start of SHOP, however, was delayed. Small employers may start the application process on October 1, 2013 but all functions of SHOP will not be available until November, the U.S. Department of Health and Human Services (HHS) reported. If employers and employees enroll by December 15, 2013, coverage will begin January 1, 2014, HHS explained.

SHOP is closely related to the Code Sec. 45R small employer health insurance tax credit. This tax credit is designed to help small employers offset the cost of providing health insurance to their employees. After 2013, small employers must participate in SHOP to take advantage of the Code Sec. 45R tax credit. For tax years beginning during or after 2014, the maximum Code Sec. 45R credit for an eligible small employer (other than a tax-exempt employer) is 50 percent of the employer's premium payments made on behalf of its employees under a qualifying arrangement for QHPs offered through a SHOP Marketplace. The maximum credit for tax-exempt employers for those years is 35 percent. Maximum and minimum credits are based upon the level of employee wages. If you have any questions about SHOP and the Code Sec. 45R credit, please contact our office.

Code Sec. 36B tax credit

Effective January 1, 2014, qualified individuals may be eligible for the Code Sec. 36B premium assistance tax credit to help pay for health coverage through a Marketplace. The credit is linked to household income in relation to the federal poverty line (FPL). Generally, taxpayers whose household income for the year is between 100 percent and 400 percent of the federal poverty line for their family size may be eligible for the credit.

When taxpayers apply for coverage in a Marketplace, the Marketplace will estimate the amount of the Code Sec. 36B credit that the taxpayer may be able to claim for the tax year. Based upon the estimate made by the Marketplace, the individual can decide if he or she wants to have all, some, or none of the estimated credit paid in advance directly to the insurance company to be applied to monthly premiums. Taxpayers who do not opt for advance payment may claim the credit when they file their federal income tax return for the year.

The October 16 agreement to reopen the federal government directed HHS to certify to Congress that Marketplaces verify eligibility for the Code Sec. 36B credit. HHS must submit a report to Congress by January 1, 2014 on the procedures for verifying eligibility for the credit and follow-up with a report by July 1, 2014 on the effectiveness of its income verification procedures.

Employer mandate

The Affordable Care Act generally requires an applicable large employer to make an assessable payment (a penalty) if the employer fails to offer minimum essential health coverage and a number of other requirements are not met. The employer mandate was scheduled to take effect January 1, 2014. However, the Obama administration delayed it for an additional year, to 2015.

In October, the House Small Business Committee heard testimony on the definition of full-time employee status for purposes of the employer mandate. An applicable large employer for purposes of the employer mandate is an employer that employs at least 50 full-time employees or a combination of full-time and part-time employees that equals at least 50. A full-time employee with respect to any month is an employee who is employed on average at least 30 hours of service per week.

Employers testifying before the GOP-chaired committee urged an increase in the 30-hour threshold. "Many small businesses simply cannot afford to provide coverage to employees who average 30 hours per week," the owner of a supermarket told the committee. "Business owners will have to make tough choices and many part-time employees will face reduced hours," he added. "Many franchise businesses are being turned upside down by the new costs, complexities and requirements of the law," another business owner told the committee.

Legislation (HR 2575) has been introduced in the House to repeal the 30-hour threshold for classification as a full-time equivalent employee for purposes of the employer mandate and to replace it with 40 hours. The bill has been referred to the House Ways and Means Committee.

HealthCare.gov

As has been widely reported, the individuals seeking to enroll in Marketplace coverage through HealthCare.gov experienced some online problems in October. The U.S. Department of Health and Human Services (HHS) has undertaken a comprehensive review of HealthCare.gov. In the meantime, HHS reminded individuals that in-person assistance centers are open as are customer call centers.

Enrollment

The Affordable Care Act generally requires individuals to carry health insurance after 2013 or make a shared responsibility payment (also known as a penalty). For 2014, the penalty is $95 or the flat fee of one percent of taxable income, $325 in 2015 or the flat fee of two percent of taxable income, $695 in 2016 or 2.5 percent of taxable income (the $695 amount is indexed for inflation after 2016).

Open enrollment in the Affordable Care Act's Marketplaces began October 1, 2013 and runs through March 31, 2014. The enrollment period overlaps with the January 1, 2014 requirement to carry health insurance or make a shared responsibility payment. On social media, the Obama administration clarified that individuals who enroll in coverage through a Marketplace at anytime during the enrollment period will not be responsible for a penalty.

If you have any questions about these developments or the Affordable Care Act in general, please contact our office.

The arrival of year end presents special opportunities for most taxpayers to take steps in lowering their tax liability. The tax law imposes tax liability based upon a "tax year." For most individuals and small business, their tax year is the same as the calendar year. As 2013 year end gets closer, most taxpayers have a more accurate picture of what their tax liability will be in 2013 than at any other time during the current year. However, if you don't like what you see, you have until year end to make improvements before your tax liability for 2013 is permanently set in stone.

The arrival of year end presents special opportunities for most taxpayers to take steps in lowering their tax liability. The tax law imposes tax liability based upon a "tax year." For most individuals and small business, their tax year is the same as the calendar year. As 2013 year end gets closer, most taxpayers have a more accurate picture of what their tax liability will be in 2013 than at any other time during the current year. However, if you don't like what you see, you have until year end to make improvements before your tax liability for 2013 is permanently set in stone.

A good part of year-end tax planning involves techniques to accelerate or postpone income or deductions, as your tax situation dictates. Efforts are generally focused on keeping projected tax liability for 2013 slightly lower than that anticipated for 2014, not overweighing projected tax liability for any one year. Having spikes in taxable income in any one tax year puts you in a higher average tax bracket than you would be in if you had evened out the amount of taxable income between the current and subsequent year.

Right to income versus cash receipt

Generally, a cash-basis taxpayer (which includes most individuals) recognizes income when it is received and takes deductions when expenses are paid. There is a subtle but important difference between the two:

• Income is generally taxable in the year that it is received, by cash or check or direct deposit. You cannot postpone tax on income by refusing payment until the following year once you have the right to that payment in the current year. However, if you make deferred payments a part of the overall transaction, you may legitimately postpone both the income and the tax on it into the year or years in which payment is made. Postponement in this context usually takes place in a business setting. Examples include: installment sales, on which gain is prorated and taxed based upon the years over which installment payments are made; like-kind exchanges through which no gain is realized except to the extent other non-like-kind property (including cash) may change hands; and, on a higher level, tax-free corporate reorganizations pursuant to special tax code provisions.
• Deductions, on the other hand, are generally not allowed until you pay for the item or service for which you want to take the deduction. Merely accepting the liability to pay for a deductible item does not make it deduction. Therefore, a doctor's bill does not become a medical expense deduction necessarily in the year that services are rendered or the bill is sent for payment. Rather, it is only considered deductible in the year in which you pay the bill. Determining when you pay your bills for tax purposes also has its nuances. A bill may be paid when cash is tendered; when a credit card is charged; or when a check is put in the mail (even if it is delivered in due course a few days into a new calendar year).

Compensation arrangements

Compensation arrangements carry their own special set of tax rules. The timing of the inclusion and deduction of compensation is largely governed by the employee's and the employer's normal methods of accounting. Under the cash method of accounting, amounts are includible in income when they are actually or constructively received and deductible when they are paid. Most employees are on the cash method.

Cash-basis employers can only deduct the cost of compensation the employee actually or constructively received. Constructive receipt comes into play when an employee attempts to decline offered compensation in order to defer its receipt and thereby postpone tax. Under the constructive receipt rule, the employee is currently taxed in this situation. However, there is no analogous constructive payment rule. Thus, a cash-basis employer may not take a deduction for amounts that it is willing to pay, and that it may have debited on its corporate books, but that it has not actually paid.

Deferred compensation plans, however, may be used to modify these general rules. There are basically two kinds of deferred compensation plans: qualified plans (such as 401(k) plans) and nonqualified plans or arrangements (common in executive compensation packages). Qualified plans are tax favored in that an employer can take an immediate deduction even though the employee might not recognize the income for years. With a nonqualified plan, the employer cannot take its deduction until the employee recognizes the income.

Particularly relevant to employers at year end is an annual bonus rule. Bonuses paid within a brief period of time after the end of the employer's tax year may be deducted in that tax year. Compensation is generally considered to be paid within a brief period of time if it is paid within two and one-half months of the end of the employer's tax year.

For a customized examination of what deferral or acceleration planning at year end may work best for you, please contact this office.