2024 Foreign Housing Expense Amounts Released, Notice 2024-31 KPMG TaxNewsFlash - United StatesMarch 20, 2024The IRS today released Notice 2024-31 [PDF 156 KB] providing the adjustments to the limitation on housing expenses, under section 911, for specifi...
No Further Funding Cuts For IRS In FY24 Other than a planned repurposing of Inflation Reduction Act supplemental funding, the Internal Revenue Service saw no other cuts as the President signed off on the resolution to keep the federa...
CA - Updated guidance issued on internet sales Updated guidance is issued on internet sales for purposes of California sales and use tax. Internet sales are treated in the same way as sales made at retail stores, by sales representatives, over the...
Taxpayers received about $659 million in refunds during fiscal year 2023, representing a 2.7 percent increase in the amount of refunded to taxpayers in the previous fiscal year.
Taxpayers received about $659 million inrefundsduring fiscal year2023, representing a 2.7 percent increase in the amount of refunded to taxpayers in the previous fiscal year.
Therefundswere on nearly $4.7 trillion in gross revenues collected by theInternal Revenue Service, which represents about 96 percent of the funding that supports federal government operations, the agencyreportedin its annualData Bookfor fiscal year2023, which was released April 18, 2024. This is down from more than $4.9 trillion in gross tax revenues inFY2022.
Business income taxes declined in2023to nearly $457 billion inFY2023from nearly $476 billion in the previous fiscal year. Individual and estate and trust income taxes declined to nearly $2.6 trillion from just over $2.9 trillion. Employment taxes, estate and trust taxes, and excise and gift taxes all grew fiscal year-over-year.
More than 271.4 million tax returns and other forms were processed duringFY2023, theIRSreported. Of those, 163.1 million were individual tax returns. Thereportdescribes the2023filing season as"successful".
Paid prepared filed more than 84 million individual tax returns electronically, and taxpayers file nearly 2.9 million returns using theIRSFree File program, the agencyreported.
The Taxpayer Advocate Servicereportedit resolved 219,251 cases inFY2023. The top five case types included:
Processing amended returns (36,171)
Pre-refundwage verification hold (26,052)
Decedent accountrefunds(12,695)
Identity theft (11,915)
Earned Income Tax Credit (10,507)
On the compliance side, theIRSreportedthat for all returns from tax years 2013 through 2021, it examined 0.44 percent of individual returns filed and 0.74 percent of corporate returns filed. Additionally, the agency examined 8.7 percent of taxpayers filing individual returnsreportingtotal positive income of $10 million or more. Isolating tax year 2019 (the most recent year outside the statute of limitations period), the examination rate was 11.0 percent.
InFY2023, theIRSsaid it"closed 582,944 tax return audits, resulting in $31.9 billion in recommended additional tax."Additionally, the agency “completed 2,584 criminal investigations” across three areas:
1,052 illegal-source financial crimes cases
979 legal-source tax crime cases
553 narcotics-related financial crimes cases
On the collections side, theIRSinFY2024 collected more than $104.1 billion in unpaid assessments on returns filed with additional tax due, netting about $68.3 billion after credit transfers. It also assessed more than $25.6 billion in additional taxes for returns not filed timely and collected nearly $2.8 billion with delinquent returns.
The IRS announced that final regulations related to required minimum distributions (RMDs) under Code Sec. 401(a)(9) will apply no earlier than the 2025 distribution calendar year. In addition, the IRS has provided transitionrelief for 2024 for certain distributions made to designated beneficiaries under the 10-year rule. The transitionreliefextends similar relief granted in 2021, 2022, and 2023.
TheIRSannounced that final regulations related torequired minimum distributions(RMDs) underCode Sec. 401(a)(9)will apply no earlier than the 2025 distribution calendar year. In addition, theIRShas providedtransitionrelieffor2024for certain distributions made to designated beneficiaries under the 10-year rule. Thetransitionreliefextendssimilarreliefgranted in 2021, 2022, and 2023.
SECURE Act Changes
The Setting Every Community Up for Retirement Enhancement Act of 2019 (SECURE Act) (P.L. 116-94) changed theRMDrules for employees and IRA owners who died after December 31, 2019. UnderCode Sec. 401(a)(9)(H)(i), if an employee in a defined contribution plan or IRA owner has a designated beneficiary, the 5-year distribution period has been lengthened to 10 years, and the 10-year rule applies regardless of whether the employee dies before the required beginning date. Proposed regulations would interpret the 10-year rule to require the beneficiary of an employee who died after his required beginning date to continue to take an annualRMDbeginning in the first calendar year after the employee’s death. This aspect of the 10-year rule differs from the 5-year rule, which required noRMDuntil the end of the 5-year period. Thus, theIRSprovidedtransitionrelieffor 2021, 2022, and 2023.
Guidance for SpecifiedRMDsfor2024
Under thetransitionguidance, a defined contribution plan will not be treated as having failed to satisfyCode Sec. 401(a)(9)for failing to make anRMDin2024that would have been required under the proposed regulations. Thereliefalso applies to an individual who would have been liable for an excise tax underCode Sec. 4974. The guidance applies to any distribution that, under the interpretation included in the proposed regulations, would be required to be made underCode Sec. 401(a)(9)in2024under a defined contribution plan or IRA that is subject to the rules ofCode Sec. 401(a)(9)(H)for the year in which the employee (or designated beneficiary) died if that payment would be required to be made to:
a designated beneficiary of an employee or IRA owner under the plan if the employee or IRA owner died in 2020, 2021, 2022 or 2023, and on or after the employee’s (or IRA owner’s) required beginning date and the designated beneficiary is not using the lifetime or life expectancy payments exception underCode Sec. 401(a)(9)(B)(iii); or
a beneficiary of an eligible designated beneficiary if the eligible designated beneficiary died in 2020, 2021, 2022, or 2023, and that eligible designated beneficiary was using the lifetime or life expectancy payments exception underCode Sec. 401(a)(9)(B)(iii).
Applicability Date of Final Regulations
TheIRShas announced that final regulations regardingRMDsunderCode Sec. 401(a)(9)and related provisions are anticipated to apply for determiningRMDsfor calendar years beginning on or after January 1, 2025.
The IRS, in connection with other agencies, have issued finalrules amending the definition of "short term, limited duration insurance" (STLDI), and adding a notice requirement to fixed indemnity excepted benefits coverage, in an effort to better distinguish the two from comprehensive coverage.
The IRS, in connection with other agencies, have issuedfinalrulesamending thedefinitionof"short term, limited duration insurance"(STLDI), and adding a notice requirement to fixed indemnity excepted benefits coverage, in an effort to better distinguish the two from comprehensive coverage.
Comprehensive coverage is health insurance which is subject to certain federal consumer protections. BothSTLDIand fixed indemnity excepted benefits coverage generally provide limited benefits at lower premiums than comprehensive coverage, and enrollment is typically available at any time rather than being restricted to open and special enrollment periods. However, the government is concerned about the financial and health risks that consumers face if they use either form of coverage as a substitute for comprehensive coverage, particularly as a long-term substitute. Consumers who do not understand key differences betweenSTLDI, fixed indemnity excepted benefits coverage, and comprehensive coverage may unknowingly take on significant financial and health risks if they purchaseSTLDIor fixed indemnity excepted benefits coverage under the misunderstanding that such products provide comprehensive coverage.
TheDefinitionofSTLDI
STLDIis a type of health insurance coverage sold by health insurance issuers that is primarily designed to fill temporary gaps in coverage that may occur when an individual is transitioning from one plan or coverage to another (for example, due to application of a waiting period for employer coverage). BecauseSTLDIfalls outside of"individual health insurance coverage,"it is generally exempt from the Federal individual market consumer protections and requirements for comprehensive coverage. This can be an issue because individuals who enroll inSTLDIare often not aware that they will not be guaranteed these key consumer protections.
Under thedefinitionin thefinalrules,STLDIis health insurance coverage provided pursuant to a policy, certificate, or contract of insurance that has an expiration date specified in the policy, certificate, or contract of insurance that is no more than three months after the original effective date of the policy, certificate, or contract of insurance, and taking into account any renewals or extensions, has a duration no longer than four months in total. For purposes of thisdefinition, a renewal or extension includes the term of a newSTLDIpolicy, certificate, or contract of insurance issued by the same issuer to the same policyholder within the 12-month period beginning on the original effective date of the initial policy, certificate, or contract of insurance.
STLDIissuers must display a notice on the first page (in either paper or electronic form, including on a website) of the policy, certificate, or contract of insurance, and in any marketing, application, and enrollment materials (including reenrollment materials) provided to individuals at or before the time an individual has the opportunity to enroll or reenroll in the coverage, in at least 14-point font. A sample notice has been provided by the agencies.
Fixed Indemnity Insurance
Federal consumer protections and requirements for comprehensive coverage do not apply to any individual coverage or any group health plan in relation to its provision of certain types of benefits, known as"excepted benefits."Like other forms of excepted benefits, fixed indemnity excepted benefits coverage does not provide comprehensive coverage. Rather, its primary purpose is to provide income replacement benefits. Benefits under this type of coverage are paid in a fixed cash amount following the occurrence of a health-related event, such as a period of hospitalization or illness. In addition, benefits are provided at a pre-determined level regardless of any health care costs incurred by a covered individual with respect to the health-related event. Although a benefit payment may equal all or a portion of the cost of care related to an event, it is not necessarily designed to do so, and the benefit payment is made without regard to the amount of health care costs incurred.
In an effort to give consumers an informed choice, thefinalrulesadopt the requirement of a consumer notice that must be provided when offering fixed indemnity excepted benefits coverage in the group market and update the existing notice for such coverage offered in the individual market. Thefinalruledoes not address any other provision of the 2023 proposedrules(NPRM REG-120730-21) relating to fixed indemnity excepted benefits coverage.
Effective Date
Thefinalrulesapply to newSTLDIpolicies sold or issued on or after September 1, 2024. For fixed indemnity coverage, plans and issuers will be required to comply with the notice provisions for plan years (in the individual market, coverage periods) beginning on or after January 1, 2025.
The Tax Court has ruled against the IRS's denial of a conservation easementdeduction by declaring a Treasury regulation to be invalid under the enactment requirements of the Administrative Procedure Act (APA).
TheTax Courthas ruled against the IRS's denial of aconservation easementdeductionby declaring a Treasuryregulationto beinvalidunder the enactment requirements of the Administrative Procedure Act (APA).
AnLLCconveyed aconservation easementof land to a foundation that was properly registered with the county clerk. The deed conveyed the easement in perpetuity, allowing for extinguishment only in cases where the conservation purposes became impossible to accomplish or if the property were to be condemned by the local government through eminent domain. TheLLCthen timely filed Form 1065,U.S. Return of Partnership Income,claiming a $14.8 milliondeductionunderCode Sec. 170(h)for conveyance of the easement, and included with the return Form 8283,Noncash Charitable Contributions.
The IRS disallowed thedeductionstating the conservation purpose of the easement was not"protected in perpetuity"as required byCode Sec. 170(h)(5)(A)and, specifically, by operation ofReg. § 1.170A-14(g)(6)(ii). TheLLCcontended thatReg. § 1.170A-14(g)(6)(ii)is procedurallyinvalidunder the APA and that the deed therefore need not comply with its requirements.
TheTax Courtdecided to reverse its prior position regarding the validity of thisregulationinOakbrook Land Holdings,LLC,(154TC180,Dec. 61,663; aff’d, CA-6, 2022-1 USTC ¶50,128). Despite the fact the Sixth Circuit affirmed this earlier opinion, the Eleventh Circuit had reversed theTax Courton the same issue. This case is situated in the Tenth Circuit, which had not ruled on this issue.
TheTax Courtagreed with theLLC’s argument thatReg. § 1.170A14(g)(6)(ii) isinvalidbecause the concerns expressed in significant comments filed during the rulemaking process were inadequately responded to by the Treasury Department in the finalregulation’s"basis and purpose"statement, in violation of the APA’s procedural requirements.
Four judges dissented, arguing there is no substantial basis for reversing their opinion of only four years prior, and that invalidating aregulationfor failing to include a statement of basis and purpose should not occur when the basis and purpose are"obvious."
For purposes of the energy investment credit, the IRS released 2024application and allocation procedures for the environmental justice solar and wind capacity limitation under the low-incomecommunitiesbonus credit program. Many of the procedures reiterate the rules in Reg. §1.48(e)-1 and Rev. Proc. 2023-27, but some special rules are also provided.
For purposes of theenergy investment credit, theIRSreleased2024applicationand allocation procedures for the environmental justice solar and wind capacity limitation under thelow-incomecommunitiesbonuscredit program. Many of the procedures reiterate the rules inReg. §1.48(e)-1andRev. Proc. 2023-27, but some special rules are also provided.
TheIRSwill publicly announce the opening and closing dates for the2024Program yearapplicationperiod on the Department of Energy (DOE) landing page for the Program (Program Homepage) athttps://www.energy.gov/justice/low-income-communities-bonus-credit-program. DOE will not accept newapplicationsubmissions for the2024Program year after 11:59 PM ET on the date theapplicationperiod closes. The owner of the solar or wind facility is the person who mustapplyfor an allocation and is the recipient of any awarded allocation.
An applicant mustapplyfor an allocation of Capacity Limitation through DOE online Program portal system (Portal) athttps://eco.energy.gov/ejbonus/s/. Applicants must register in the Portal before they can begin theapplicationprocess; and they must create a login.gov account before accessing the Portal. The Program Homepage includes an Applicant User Guide.
Identifying Category and Sub-Reservation
In addition to the other information detailed below, theapplicationmust identify the relevant facility category:
-- Category 1: Project Located in aLow-IncomeCommunity(and theapplicationmust also specify whether the facility is a behind the meter (BTM) or front of the meter (FTM) facility),
-- Category 2: Project Located on Indian Land,
-- Category 3: QualifiedLow-IncomeResidential Building Project, or
An applicant may submit only oneapplicationfor the2024program year. Thus, if an applicant wishes to change its chosen category (or its Category 1 sub-reservation), it must withdraw its firstapplicationand submit a second one. Otherwise, anyapplicationsubmitted after the firstapplicationis treated as a duplicateapplication.
ApplicationContents
Theapplicationmust contain all required information, documentation, and attestations submitted under penalties of perjury by a person who has personal knowledge of the relevant facts. That person must also be legally authorized to bind the applicant entity for federal income tax purposes, to communicate with DOE about theapplication, and to receive notifications, letters, and other communications from DOE and theIRS.
The guidancedetailsthe required information regarding the applicant and the facility, as well as the required documentation. The guidance also describes the information that must be submitted if an applicant wants to be considered under the additional ownership criteria or the additional geographic criteria. The DOE may require additional information in its publicly available written procedures.
DOE Review and Selection
DOE will reviewapplicationsand provide a recommendation to theIRS. If the DOE identifies an error in theapplication, such as missing or incorrect information or documentation, it will notify the applicant through the Portal. The applicant will have 12 business days to correct the information; otherwise, DOE will treat theapplicationas withdrawn.
Once theapplicationperiod opens for the2024Program year, allapplicationssubmitted during the first 30 days are treated as submitted at the same time. DOE will publicly announce on the Program Homepage the opening and closing dates of this 30-day period. Ifapplicationsduring this period exhaust the available allocation for a category, DOE will conduct an allocation lottery. After the 30-day period, DOE will reviewapplicationsin the order they are submitted until the available capacity in the identified category is allocated.
Receiving an Allocation and Claiming theBonusCredit
After theIRSreceives the DOE recommendation, it will award an allocation or reject theapplication. TheIRSwill send final decision letters through the Portal, which will identify the amount of any allocation awarded. However, an allocation is not a final determination that the facility is eligible for thebonuscredit.
The owner of a facility that receives an allocation must use the Portal to report the date the facility is placed in service. The guidancedetailsthe additional information the owner must provide with the notification. After the facility is placed in service, and the owner submits the additional documentation and attestations, the owner is notified that it may claim thebonuscredit.
After theIRSawards all the Capacity Limitation within each facility category, or the2024Program year is closed, DOE will stop reviewingapplications. At the end of the2024Program year, no further action will be taken onapplicationsthat were not awarded an allocation. DOE will publicly announce on the Program Homepage when the2024Program year closes.
Effect on Other Documents
Rev. Proc. 2023-27, I.R.B. 2023-35, 655, is superseded solely with respect to the2024program year.
The IRS has provided a limited waiver of the addition to tax under Code Sec. 6655 for underpayments of estimated income taxrelated to application of the corporate alternative minimum tax (CAMT), as amended by the Inflation Reduction Act (P.L. 117-169).
TheIRShas provided a limitedwaiverof theaddition to taxunderCode Sec. 6655forunderpaymentsofestimated income taxrelatedto application of thecorporate alternative minimum tax(CAMT), as amended by the Inflation Reduction Act (P.L. 117-169).
The Inflation Reduction Act added a newcorporate AMTunderCode Sec. 55, beginning after December 31, 2022, based on acorporation's adjusted financial statement income.Code Sec. 6655generally requirescorporationsto payestimated income taxesquarterly, with anaddition to taxfor failure to make sufficient and timely payments. The quarterlyestimated tax paymentsmust add up to 100 percent of the income tax due.
Estimated Taxes
TheIRSwaivedtheaddition to taxunderCode Sec. 6655that is attributable to acorporation’sCAMTliability for the installment ofestimated taxthat is due on or before April 15, 2024, or May 15, 2024 (in the case of a fiscal year taxpayer with a taxable year beginning in February 2024). Accordingly, a corporate taxpayer’s required installment ofestimated taxthat is due on or before April 15, 2024, or on or before May 15, 2024 (in the case of a fiscal year taxpayer with a taxable year beginning in February 2024), need not include amounts attributable to itsCAMTliability underCode Sec. 55to prevent the imposition of anaddition to taxunderCode Sec. 6655. However, if acorporationfails to pay itsCAMTliability, other Code sections may apply. For instance,additions to taxunderCode Sec. 6651could be imposed.
Instructions to Form 2220
The instructions to Form 2220,UnderpaymentofEstimated TaxbyCorporations, will be modified to clarify that noaddition to taxwill be imposed underCode Sec. 6655based on acorporation’s failure to makeestimated tax paymentsof itsCAMTliability for any coveredCAMTyear. Taxpayers may exclude such amounts when calculating the amount of its required annual payment on Form 2220. Affected taxpayers must still file Form 2220 with their income tax return, even if they owe noestimated taxpenalty.
Applicability Date
Thewaiverof theaddition to taximposed byCode Sec. 6655applies to the installment ofestimated taxthat is due on or before April 15, 2024, or on or before May 15, 2024 (in the case of a fiscal year taxpayer with a taxable year beginning in February 2024).
The IRS has issued proposedregulations that would provideguidance on the application of the new excise tax on repurchases of corporate stock made after December 31, 2022 (NPRMREG-115710-22). Another set of proposed rules would provideguidance on the procedure and administration for the excise tax (NPRMREG-118499-23).
The IRS has issuedproposedregulationsthat wouldprovideguidanceon the application of the newexcise taxonrepurchasesof corporatestockmade after December 31, 2022 (NPRMREG-115710-22). Another set ofproposedrules wouldprovideguidanceon the procedure and administration for theexcise tax(NPRMREG-118499-23).
Code Sec. 4501 and IRSGuidance
Beginning in 2023,Code Sec. 4501subjects a covered corporation to anexcise taxequal to one percent of the fair market value of itsstockthat is repurchased by the corporation during the tax year. Acovered corporationfor this purpose is any domestic corporation thestockof which is traded on an establishedsecuritiesmarket.
Repurchaseincludesstockredemptions and economically similar transactions as determined by the IRS. The amount of repurchase subject to the tax is reduced by the value of newstockissued to the public or employees during the year. Repurchase of the covered corporation’sstockby its specified affiliate (a more-than-50-percent owned domestic subsidiary or partnership) also subjects the covered corporation to theexcise tax.
Theexcise taxdoes not apply if the total amount ofstockrepurchasesduring the year is less than $1 million and in certain other situations.
Notice 2023-2, 2023-3 I.R.B. 374, provides initialguidanceregarding the application of theexcise tax. It describes rules expected to be provided in forthcomingproposedregulationsfor determining the amount ofstockrepurchaseexcise taxowed, along with anticipated rules for reporting and paying any liability for the tax.
ProposedOperative Rules under Code Sec. 4501 (NPRMREG-115710-22)
Theproposedregulationswouldprovidegeneral rules regarding the application and computation of thestockrepurchaseexcise tax, the statutory exceptions, and the application ofCode Sec. 4501(d). Specifically, theproposedregulationswouldprovideguidanceaddressing the following:
Certain issues related to the effective date and transition relief, including:
repurchasesbefore January 1, 2023, are not taken into account for purposes of applying the de minimis exception;
in the case of a covered corporation that has a tax year that both begins before January 1, 2023, and ends after December 31, 2022, that covered corporation may apply the netting rule to reduce the fair market value of the covered corporation’srepurchasesduring that tax year by the fair market value of all issuances of itsstockduring the entirety of that tax year;
contributions to an employer-sponsored retirement plan during the 2022 portion of a tax year beginning before January 1, 2023, and ending after December 31, 2022, should be taken into account for purposes ofCode Sec. 4501(e)(2);
the date of repurchase for a regular-way sale ofstockon an establishedsecuritiesmarket is the trade date.
Definition ofstockand the application of theexcise taxto various types ofstock, options, and financial instruments. Theproposedregulationsgenerally would maintain the definition of"stock"fromNotice 2023-2, but would exclude"additional tier 1 preferredstock"; therefore, unless the limited-scope exception regarding additional tier 1 preferredstockapplies, thestockrepurchaseexcise taxwould apply to preferredstockin the same manner as to commonstock.
Rules for valuation ofstock. Generally, theproposedregulationswould adopt the valuation approach ofNotice 2023-2that the fair market value ofstockrepurchased or issued is the market price of thestockon the date thestockis repurchased or issued, respectively.
Rules for timing of issuances andrepurchases. The approach thatstockgenerally should be treated as repurchased when tax ownership of thestocktransfers to the covered corporation or to the specified affiliate (as appropriate) would generally be retained.
Rules regarding becoming or ceasing to be a covered corporation and determining specified affiliate status.
Rules regardingCode Sec. 301distributions, and complete and partial liquidations.
Treatment of taxable transactions, including LBOs and other taxable"take private"transactions.
Application of the statutory exceptions, including repurchase as part of a reorganization, contributions to employer-sponsored retirement plans, the de minimis exception,repurchasesby dealers insecurities,repurchasesby RICs and REITs, and the dividend exception.
Application of the netting rule (the adjustment forstockissued by a covered corporation, includingstockissued or provided to employees of a covered corporation or its specified affiliate).
Considerations for mergers and acquisitions with post-closing price adjustments and troubled companies.
Theproposedregulations, other than theproposedregulationsunderCode Sec. 4501(d), would generally apply torepurchasesofstockof a covered corporation occurring after December 31, 2022, and during tax years ending after December 31, 2022, and to issuances and provisions ofstockof a covered corporation occurring during tax years ending after December 31, 2022. However, certain rules that were not described in Notice 2023-2 would apply torepurchases, issuances, or provisions ofstockof a covered corporation occurring after April 12, 2024, and during tax years ending after April 12, 2024.
Except as described below, so long as a covered corporation consistently follows the provisions of theproposedregulations, the covered corporation may rely on theseproposedregulationswith respect to (1)repurchasesofstockof the covered corporation occurring after December 31, 2022, and on or before the date of publication of finalregulationsin the Federal Register, and (2) issuances and provisions ofstockof the covered corporation occurring during tax years ending after December 31, 2022, and on or before the date of publication of finalregulationsin the Federal Register.
In addition, so long as a covered corporation consistently follows the provisions of Notice 2023-2 corresponding to the rules in theproposedregulations, the covered corporation may choose to rely on Notice 2023-2 with respect to (1)repurchasesofstockof a covered corporation occurring after December 31, 2022, and on or before April 12, 2024, and (2) issuances and provisions ofstockof a covered corporation occurring during taxable years ending after December 31, 2022, and on or before April 12, 2024.
A covered corporation that relies on the provisions of Notice 2023-2 corresponding to theproposedrules with respect to (1)repurchasesoccurring after December 31, 2022, and on or before April 12, 2024, and (2) issuances and provisions ofstockof a covered corporation occurring during tax years ending after December 31, 2022, and on or before April 12, 2024, may also choose to rely on the provisions of theproposedregulationswith respect to (1)repurchasesoccurring after April 12, 2024, and on or before the date of publication of finalregulationsin the Federal Register, and (2) issuances and provisions ofstockof a covered corporation occurring after April 12, 2024, and on or before the date of publication of finalregulationsin the Federal Register.
Special applicability dates are provided for theproposedrules underCode Sec. 4501(d).
Rules Regarding Procedure and Administration (NPRMREG-118499-23)
The IRS has alsoproposedregulationswithguidanceon the manner and method of reporting and paying thestockrepurchaseexcise tax. Theseproposedregulationsproviderequirements for return and recordkeeping, the time and place for filing the return and paying the tax, and tax return preparers.
Consistent with Notice 2023-2, theproposedregulationsadd rules on procedure and administration inproposedsubpart B of theproposedStockRepurchaseExcise TaxRegulations(26 CFR part 58) underCode Secs. 6001,6011,6060,6061,6065,6071,6091,6107,6109,6151,6694,6695, and6696.
In addition to requiring theexcise taxto be reported on IRS Form 720, Quarterly FederalExcise TaxReturn, theproposedregulationsinclude items relevant to tax forms other than Form 720 (such as Form 1120, U.S. Corporation Income Tax Return, and Form 1065, U.S. Return of Partnership Income) to assist in identifying transactions subject to the tax.
Applicability Date ofProposedProcedural Rules
ProposedReg. §58.6001-1would be applicable torepurchases, adjustments, or exceptions required to be shown in anystockrepurchaseexcise taxreturn required to be filed after the date of publication of finalregulationsin the Federal Register.
The rest of theproposedregulationswould be applicable tostockrepurchaseexcise taxreturns and claims for refund required to be filed after the date of publication of finalregulationsin the Federal Register.
Effect on Other Documents
Notice 2023-2, 2023-3 I.R.B. 374, is obsoleted forrepurchases, issuances, and provisions ofstockof a covered corporation occurring after April 12, 2024.
Requests for Comments
Written or electronic comments and requests for a public hearing with respect to theproposedoperative rules must be received by the date that is 60 days after April 12, 2024, the date of publication in the Federal Register. Comments and requests for a public hearing on theproposedprocedural rules must be received by the date that is 30 days after publication in the Federal Register.
Maintaining good financial records is an important part of running a successful business. Not only will good records help you identify strengths and weaknesses in your business' operations, but they will also help out tremendously if the IRS comes knocking on your door.
Maintaining good financial records is an important part of running a successful business. Not only will good records help you identify strengths and weaknesses in your business' operations, but they will also help out tremendously if the IRS comes knocking on your door.
The IRS requires that business owners keep adequate books and records and that they be available when needed for the administration of any provision of the Internal Revenue Code (i.e., an audit). Here are some basic guidelines:
Copies of tax returns. You must keep records that support each item of income or deduction on a business return until the statute of limitations for that return expires. In general, the statute of limitations is three years after the date on which the return was filed. Because the IRS may go back as far as six years to audit a tax return when a substantial understatement of income is suspected, it may be prudent to keep records for at least six years. In cases of suspected tax fraud or if a return is never filed, the statute of limitations never expires.
Employment taxes. Chances are that if you have employees, you've accumulated a great deal of paperwork over the years. The IRS isn't looking to give you a break either: you are required to keep all employment tax records for at least 4 years after the date the tax becomes due or is paid, whichever is later. These records include payroll tax returns and employee time documentation.
Business assets. Records relating to business assets should be kept until the statute of limitations expires for the year in which you dispose of the asset in a taxable disposition. Original acquisition documentation, (e.g. receipts, escrow statements) should be kept to compute any depreciation, amortization, or depletion deduction, and to later determine your cost basis for computing gain or loss when you sell or otherwise dispose of the asset. If your business has leased property that qualifies as a capital lease, you should retain the underlying lease agreement in case the IRS ever questions the nature of the lease.
For property received in a nontaxable exchange, additional documentation must be kept. With this type of transaction, your cost basis in the new property is the same as the cost basis of the property you disposed of, increased by the money you paid. You must keep the records on the old property, as well as on the new property, until the statute of limitations expires for the year in which you dispose of the new property in a taxable disposition.
Inventories.If your business maintains inventory, your recordkeeping requirements are even more arduous. The use of special inventory valuation methods (e.g. LIFO and UNICAP) may prolong the record retention period. For example, if you use the last-in, first-out (LIFO) method of accounting for inventory, you will need to maintain the records necessary to substantiate all costs since the first year you used LIFO.
Specific Computerized Systems Requirements
If your company has modified, or is considering modifying its computer, recordkeeping and/or imaging systems, it is essential that you take the IRS's recently updated recordkeeping requirements into consideration.
If you use a computerized system, you must be able to produce sufficient legible records to support and verify amounts shown on your business tax return and determine your correct tax liability. To meet this qualification, the machine-sensible records must reconcile with your books and business tax return. These records must provide enough detail to identify the underlying source documents. You must also keep all machine-sensible records and a complete description of the computerized portion of your recordkeeping system.
Some additional advice: when your records are no longer needed for tax purposes, think twice before discarding them; they may still be needed for other nontax purposes. Besides the wealth of information good records provide for business planning purposes, insurance companies and/or creditors may have different record retention requirements than the IRS.
After your tax returns have been filed, several questions arise: What do you do with the stack of paperwork? What should you keep? What should you throw away? Will you ever need any of these documents again? Fortunately, recent tax provisions have made it easier for you to part with some of your tax-related clutter.
After your tax returns have been filed, several questions arise: What do you do with the stack of paperwork? What should you keep? What should you throw away? Will you ever need any of these documents again? Fortunately, recent tax provisions have made it easier for you to part with some of your tax-related clutter.
The IRS Restructuring and Reform Act of 1998 created quite a stir when it shifted the "burden of proof" from the taxpayer to the IRS. Although it would appear that this would translate into less of a headache for taxpayers (from a recordkeeping standpoint at least), it doesn't let us off of the hook entirely. Keeping good records is still the best defense against any future questions that the IRS may bring up. Here are some basic guidelines for you to follow as you sift through your tax and financial records:
Copies of returns. Your returns (and all supporting documentation) should be kept until the expiration of the statute of limitations for that tax year, which in most cases is three years after the date on which the return was filed. It's recommended that you keep your tax records for six years, since in some cases where a substantial understatement of income exists, the IRS may go back as far as six years to audit a tax return. In cases of suspected tax fraud or if you never file a return at all, the statute of limitations never expires.
Personal residence. With tax provisions allowing couples to generally take the first $500,000 of profits from the sale of their home tax-free, some people may think this is a good time to purge all of those escrow documents and improvement records. And for most people it is true that you only need to keep papers that document how much you paid for the house, the cost of any major improvements, and any depreciation taken over the years. But before you light a match to the rest of the heap, you need to consider the possibility of the following scenarios:
Your gain is more than $500,000 when you eventually sell your house. It could happen. If you couple past deferred gains from prior home sales with future appreciation and inflation, you could be looking at a substantial gain when you sell your house 15+ years from now. It's also possible that tax laws will change in that time, meaning you'll want every scrap of documentation that will support a larger cost basis in the home sold.
You did not use the home as a principal residence for a period. A relatively new income inclusion rule applies to home sales after December 31, 2008. Under the Housing and Economic Recovery Act of 2008, gain from the sale of a principal residence will no longer be excluded from gross income for periods that the home was not used as the principal residence. These periods of time are referred to as "non-qualifying use." The rule applies to sales occurring after December 31, 2008, but is based only on non-qualified use periods beginning on or after January 1, 2009. The amount of gain attributed to periods of non-qualified use is the amount of gain multiplied by a fraction, the numerator of which is the aggregate period of non-qualified use during which the property was owned by the taxpayer and the denominator of which is the period the taxpayer owned the property. Remember, however, that "non-qualified" use does not include any use prior to 2009.
You may divorce or become widowed. While realizing more than a $500,000 gain on the sale of a home seems unattainable for most people, the gain exclusion for single people is only $250,000, definitely a more realistic number. While a widow(er) will most likely get some relief due to a step-up in basis upon the death of a spouse, an individual may find themselves with a taxable gain if they receive the house in a property settlement pursuant to a divorce. Here again, sufficient documentation to prove a larger cost basis is desirable.
Individual Retirement Accounts. Roth IRA and education IRAs require varying degrees of recordkeeping:
Traditional IRAs. Distributions from traditional IRAs are taxable to the extent that the distributions exceed the holder's cost basis in the IRA. If you have made any nondeductible IRA contributions, then you may have basis in your IRAs. Records of IRA contributions and distributions must be kept until all funds have been withdrawn. Form 8606, Nondeductible IRAs, is used to keep track of the cost basis of your IRAs on an ongoing basis.
Roth IRAs. Earnings from Roth IRAs are not taxable except in certain cases where there is a premature distribution prior to reaching age 59 1/2. Therefore, recordkeeping for this type of IRA is the fairly simple. Statements from your IRA trustee may be worth keeping in order to document contributions that were made should you ever need to take a withdrawal before age 59 1/2.
Education IRAs. Because the proceeds from this type of an IRA must be used for a particular purpose (qualified tuition expenses), you should keep records of all expenditures made until the account is depleted (prior to the holder's 30th birthday). Any expenditures not deemed by the IRS to be qualified expenses will be taxable to the holder.
Investments. Brokerage firm statements, stock purchase and sales confirmations, and dividend reinvestment statements are examples of documents you should keep to verify the cost basis in your securities. If you have securities that you acquired from an inheritance or a gift, it is important to keep documentation of your cost basis. For gifts, this would include any records that support the cost basis of the securities when they were held by the person who gave you the gift. For inherited securities, you will want a copy of any estate or trust returns that were filed.
Keep in mind that there are also many nontax reasons to keep tax and financial records, such as for insurance, home/personal loan, or financial planning purposes. The decision to keep financial records should be made after all factors, including nontax factors, have been considered.
With home values across the country at the highest levels seen in years, you may find that you could actually have a gain from the sale of your home in excess of the new IRS exclusion amount of $500,000 ($250,000 for single and married filing separately taxpayers). In order to determine your potential gain or loss from the sale, you will first need to know the basis of your personal residence.
With home values across the country dropping significantly from just a year ago, but still generally much higher then they had been even five years ago, you may find that you could actually have a gain from the sale of your home in excess of the new IRS exclusion amount of $500,000 ($250,000 for single and married filing separately taxpayers). In order to determine your potential gain or loss from the sale, you will first need to know the basis of your personal residence.
Note. The Housing and Economic Recovery Act of 2008 modified the home sale exclusion applicable to home sales after December 31, 2008. Under the new rule, gain from the sale of a principal residence that is attributable to periods that the home was not used as a principal residence (i.e. "non-qualifying use") will be no longer be excluded from income. A transition rule provided in the new law applies the new income inclusion rule to nonqualified use periods that begin on or after January 1, 2009. This is a generous transition rule in light of the new requirement.
The basis of your personal residence is generally made up of three basic components: original cost, improvements, and certain other basis adjustments.
Original cost
How your home was acquired will need to be considered when determining its original cost basis.
Purchase or Construction. If you bought your home, your original cost basis will generally include the purchase price of the property and most settlement or closing costs you paid. If you or someone else constructed your home, your basis in the home would be your basis in the land plus the amount you paid to have the home built, including any settlement and closing costs incurred to acquire the land or secure a loan.
Examples of some of the settlement fees and closing costs that will increase the original cost basis of your home are:
Attorney's fees,
Abstract fees,
Charges for installing utility service,
Transfer and stamp taxes,
Title search fees,
Surveys,
Owner's title insurance, and
Unreimbursed amounts the seller owes but you pay, such as back taxes or interest; recording or mortgage fees; charges for improvements or repairs, or selling commissions.
Gift. If you acquired your home as a gift, your basis will be the same as it would be in the hands of the donor at the time it was given to you. However, the basis for loss is the lesser of the donor's adjusted basis or the fair market value on the date you received the gift.
Inheritance. If you inherited your home, your basis is the fair market value on the date of the deceased's death or on the "alternate valuation" date, as indicated on the federal estate tax return filed for the deceased.
Divorce. If your home was transferred to you from your ex-spouse incident to your divorce, your basis is the same as the ex-spouse's adjusted basis just before the transfer took place.
Improvements
If you've been in your home any length of time, you most likely have made some home improvements. These improvements will generally increase your home's basis and therefore decrease any potential gain on the sale of your residence. Before you increase your basis for any home improvements, though, you will need to determine which expenditures can actually be considered improvements versus repairs.
An improvement materially adds to the value of your home, considerably prolongs its useful life, or adapts it to new uses. The cost of any improvements can not be deducted and must be added to the basis of your home. Examples of improvements include putting room additions, putting up a fence, putting in new plumbing or wiring, installing a new roof, and resurfacing your patio.
Repairs, on the other hand, are expenses that are incurred to keep the property in a generally efficient operating condition and do not add value or extend the life of the property. For a personal residence, these costs cannot be do not add to the basis of the home. Examples of repairs are painting, mending drywall, and fixing a minor plumbing problem.
Other basis adjustments
Additional items that will increase your basis include expenditures for restoring damaged property and assessing local improvements. Some common decreases to your home's basis are:
Insurance reimbursements for casualty losses.
Deductible casualty losses that aren't covered by insurance.
Payments received for easement or right-of-way granted.
Deferred gain(s) on previous home sales.
Depreciation claimed after May 6, 1997 if you used your home for business or rental purposes.
Recordkeeping
In order to document your home's basis, it is wise to keep the records that substantiate the basis of your residence such as settlement statements, receipts, canceled checks, and other records for all improvements you made. Good records can make your life a lot easier if the IRS ever questions your gain calculation. You should keep these records for as long as you own the home. Once you sell the home, keep the records until the statute of limitations expires (generally three years after the date on which the return was filed reporting the sale)
The Internet has taken investing to a whole different level: inexpensive online trading and real-time stock market data have made many of us 'armchair investors'. As you actively manage your investments, you will no doubt incur additional expenses. Many of these expenses are deductible investment expenses.
The Internet has taken investing to a whole different level: inexpensive online trading and real-time stock market data have made many of us 'armchair investors'. As you actively manage your investments, you will no doubt incur additional expenses. Many of these expenses are deductible investment expenses.
Tax law allows taxpayers to deduct investment expenses if those expenses are ordinary and necessary for the production or collection of income, or for the management, conservation or maintenance of property held for the production of income.
What are investment expenses? Investment expenses are any expenses that you incur as you manage your investments. Some of these expenses are deductible (e.g. professional fees you paid related to investment activities; custodian fees, safe deposit rental; and subscriptions to investment-oriented publications), and some are not (e.g. costs related to tax-exempt securities; trading commissions (these increase the basis of the investment); and certain convention/seminar costs).
Who can deduct investment expenses? Investment expenses can be deducted by most individuals on their personal income tax returns. How these expenses are claimed depends on what type of investor a person is. Generally, investors fall into two categories: casual investor and professional trader.
Casual Investor
This category of investor describes most people actively managing their own investments. Investment expenses (except interest) are claimed on the taxpayer's return as miscellaneous itemized deductions. These expenses can be deductible on the return to the extent that they, when added to other "miscellaneous itemized deductions", exceed 2% of your adjusted gross income (AGI). The actual tax benefits derived from these excess miscellaneous itemized deductions may be further reduced due to AGI limitations for all itemized deductions and the alternative minimum tax (AMT).
In addition to the expenses noted above, if you use your computer extensively in the management of your investments, there are some other expenses to be aware of:
Online fees: You may deduct the portion of your monthly charges paid to your Internet Service Provider (ISP) incurred to manage your investments. If you subscribe to additional online services geared towards investors (e.g. The Wall Street Journal Interactive Edition) where you can follow your investments, these fees are also deductible investment expenses. Trading fees paid to online brokerages (e.g. E*Trade) are not currently deductible but are added to the basis of your investment, which will result in a reduced gain (or increased loss) upon disposition of the asset.
Software: If you purchase software that helps you manage and/or track your investments, the cost of the software may be depreciated over three years, and written off completely in the year of obsolescence. Programs that are useful for one year or less should be expensed in the year purchased, rather than depreciated.
Depreciation: Since the casual investor's investment-related use of a personal computer (and related equipment) is probably less than 50%, the cost of this equipment must be depreciated over five years using the straight-line method. The Section 179 expense deduction is not available for this type of investor.
A word of caution for self-employed individuals: if you use your home office for both business and investment purposes, you run the risk of losing your home office deduction for business purposes. A home office deduction is not available for the investment-related expenses for the casual investor. To claim a deduction for a home office for business purposes, your home office must be used exclusively for business; if you are performing investment activities in the same office space, you've just violated the "exclusive use" test.
Professional Trader
A professional trader is defined by the courts someone in between a dealer and an investor. A professional trader is a person that conducts trading activity focusing on short-term investments in large volumes on a regular and consistent basis, receives no compensation for his services, and does not have any customers. Participating in an investment club or partnership does not qualify a person as a professional trader.
If you meet the tough definition of a professional trader, you will be treated as a self-employed individual and all your investment expenses may be claimed on Schedule C of your return. You can also deduct all of your home office expenses, and you can claim Section 179 expenses for computers and other equipment used more than 50% in your business as a professional trader.
Below is a list of questions and answers to some of the basic topics you come across when reporting the sale of stock. Stock basis, holding periods, wash sale rules and sales of mutual funds are just a few of the items clarified.
Below is a list of questions and answers to some of the basic topics you come across when reporting the sale of stock.
Is stock a capital asset?
As a general rule, any property that is owned and used by an individual for either personal or investment purposes is a capital asset. Some examples of this can be homes, furniture, cars, stocks and bonds. A sale of most capital assets will require reporting to the Internal Revenue Service (IRS) on your tax return. Losses on the sale of personal items, such as a car, furniture or personal residence, are not deductible, but may still be reportable.
What is a "holding period"?
Gains and losses on sales of stock need to be categorized as either long-term or short-term holding periods depending upon the length of time the stock is held. The date of disposition, called the trade date, is the date used for the sale. A short-term holding period would be defined as less than 1 year from date of purchase to date of sale. A long-term holding period would be one year or more.
What is meant by "stock basis"?
The cost of your stock is usually the basis. This will include commissions and recording or transfer fees. The basis of inherited stock is its fair market value (FMV) at the date of the decedent's death (unless a federal estate tax return was filed and an alternate valuation date chosen). To determine the basis of stock you receive as a gift, you must know the adjusted basis in the hands of the donor just before it was given to you, its FMV at the time it was given to you, and the amount of gift tax, if any, paid on it.
Do I need to save the purchase confirmations when I buy stock?
Yes! This helps support your documentation showing the purchase date, price and expenses. With mutual funds and stocks, it is important to keep the last statement of the year as this normally provides a summary for the year of all purchases, dividend reinvestments, etc.
What amount do I report as my sales price?
If you sold your stock through a broker, you should receive Form 1099-B, Statement for Recipients of Proceeds From Broker and Barter Exchange Transactions, by February 1 of the year following the year the transaction occurred. The amount reported to you on Form 1099-B as gross proceeds will usually consists of the total proceeds of the sale less any commissions or fees incurred on the sale. If, for some reason the amount reported as "Gross Proceeds" does not take into account any commissions or fees paid, you should add these selling expenses to the basis of the stock sold.
How important is Form 1099-B?
The amount reported on Form 1099-B is entered into the IRS computer and "matched" against the amount reported on your tax return. As a result, Form 1099-B is very important if you wish to avoid any further correspondence and/or inquiry by the IRS.
What is a wash sale?
A wash sale occurs when you sell a specific stock and, within 30 days before or after the sale, you purchase substantially identical stock. Losses from wash sales are not deductible, but are used to figure the basis of the new stock. Any gain, however, is taxable.
Is there a limit on the amount of capital loss I can deduct?
Yes. If, after combining all your capital gains and losses for the year you end up with a net capital loss, the maximum loss you may deduct would be limited to $3,000 per year ($1,500 if you are married and file a separate return). Net losses in excess of $3,000 can be carried forward to the following years until they are used up.
I frequently switch from one mutual fund to another. Do I have to report these transactions on my tax return?
Yes! If you sell or exchange shares of a mutual fund with a fluctuating share price, the IRS considers the transaction a taxable event, just like the sale of stock. You must calculate a capital gain or loss for each sale or exchange -- whether made by telephone, wire, mail or even a check. You should receive a Form 1099-B for each transaction.
Calculating gain or loss on the sale of mutual fund shares can be quite complex. Please feel free to contact the office for additional information regarding the different methods available for determining basis in your mutual funds.