Proposed regulations spell out the critical mineral and battery component requirements of the new clean vehicle credit, while also clarifying several other components of the credit. The proposed regs, along with modified Frequently Asked Questions on the IRS website, largely adopt previous IRS guidance, including Rev. Proc. 2022-42, Notice 2023-1, and Notice 2023-16. 

Proposed regulations spell out the critical mineral and battery component requirements of the new clean vehicle credit, while also clarifying several other components of the credit. The proposed regs, along with modified Frequently Asked Questions on the IRS website, largely adopt previous IRS guidance, including Rev. Proc. 2022-42, Notice 2023-1, and Notice 2023-16. Similarly, the critical minerals and battery component regs largely adopt the White Paper the Treasury Department released last December.

However, the proposed regs also:

• detail the income and price limits on the credit,
• prohibit multiple taxpayers from dividing the credit for a single vehicle, and
• coordinate the credit with other credits.

The regs are generally proposed to apply to vehicles placed in service after April 17, 2023, but taxpayers may rely on them for vehicles placed in service before that date. Comments are requested.

Critical Minerals Requirement

For purposes of the $3,750 credit for a qualified vehicle that satisfies the critical minerals requirement, the proposed regs provide a three-step process for determining the percentage of the value of the applicable critical minerals in a battery:

• 1. Determine the procurement chain for each critical mineral.
• 2. Identify qualifying critical minerals.
• 3. Calculate qualifying critical mineral content.

The proposed regs define relevant terms, including "procurement chain," "criticalminerals," "criticalmineral content," "extraction," "processing," "constituent materials," "recycling," and "value added."

For vehicles placed in service in 2023 and 2024, the proposed regs consider a critical mineral to meet the test if at least 50 percent of the value added by extracting, processing or recycling the mineral is due to extraction, processing or recycling in the U.S. or a country with which the U.S. has a free trade agreement in effect. The proposed regs identify the following countries as ones with a free trade agreement in effect with the U.S.: Australia, Bahrain, Canada, Chile, Colombia, Costa Rica, Dominican Republic, El Salvador, Guatemala, Honduras, Israel, Jordan, Korea, Mexico, Morocco, Nicaragua, Oman, Panama, Peru, and Singapore. The regs also propose criteria for identifying additional countries, such as the factors that are part of the Critical Minerals Agreement (CMA) the U.S. recently entered into with Japan.

Battery Component Requirement

For purposes of the $3,750 credit for a qualified vehicle that satisfies the battery components requirement, the proposed regs provide a four-step process for determining the percentage of the value of the battery components in a battery:

• 1. Identify components that are manufactured or assembled in North America.
• 2. Determine the incremental value of each battery component and North American battery component.
• 3. Determine the total incremental value of battery components.
• 4. Calculate the qualifying battery component.

MAGI Limit

The credit does not apply if the taxpayer’s modified adjusted gross income (MAGI) for the credit year or, if less, the previous year exceeds a limit based on filing status. The proposed regs clarify that if the taxpayer’s filing status changes during this two-year period, this test applies the MAGI limit for each year based on the taxpayer's filing status for that year.

The proposed regs also clarify that the MAGI limit does not apply to a corporation or any other taxpayer that is not an individual for which AGI is computed under Code Sec. 62.

MSRP Limits

A vehicle does not qualify for the credit if the manufacturer’s suggested retail price (MSRP) exceeds $80,000 for a van, sport utility vehicle (SUV), or pickup truck; or $55,000 for any other vehicle. The proposed regs adopt the vehicle classification system the IRS announced in Notice 2023-16. This is the vehicle classification that appears on the vehicle label and on the website FuelEconomy.gov. The regs also provide a more detailed definition of "MSRP" using information reported on the label affixed to the vehicle’s windshield or side window.

Vehicle with Multiple Owners

The proposed regs generally prohibit any allocation or proration of the credit if multiple taxpayers place a vehicle in service. However, a partnership or S corporation that places a vehicle in service may allocate the credit among its partners or shareholders. The MAGI limits on the credit apply separately to each individual partner or shareholder. The seller’s report for the vehicle lists the entity’s name and TIN.

Final Assembly in North America

To qualify for the credit, the final assembly of a new clean vehicle must occur in North America. The proposed regs reiterate earlier guidance on this requirement, but they also provide more detailed definitions of "final assembly" and "North America." Taxpayers may rely on the vehicle’s plant of manufacture as reported in the vehicle identification number (VIN), or the final assembly point reported on the label affixed to the vehicle. Taxpayers may also continue to rely on the information in the "VIN decoder sites" at https://afdc.energy.gov/laws/electric-vehicles-for-tax-credit and https://www.nhtsa.gov/vin-decoder.

Coordination with Other Credits

While the new vehicle credit is generally a nonrefundable personal credit, the credit for a depreciable vehicle is treated as part of the general business credit. If the taxpayer’s business use of a qualified vehicle is less than 50 percent of its total use, the proposed regs require the taxpayer to apportion the credit. Only the portion of the credit that corresponds to the percentage of the taxpayer’s business use of the vehicle is part of the general business credit; the rest of the credit remains a nonrefundable personal credit.

The proposed regs clarify that when the new clean vehicle credit is allowed for a particular vehicle, a subsequent buyer in a later tax year may still claim the used clean vehicle credit. However, a subsequent buyer cannot claim the commercial clean vehicle credit.

Effective Dates

Taxpayers may rely on the proposed regulations before they are published as final regs, provided the taxpayer follows them in their entirety and in a consistent manner. The regs are generally proposed to apply to new clean vehicles placed in service after April 17, the date the regs are scheduled to be published in the Federal Register.

Comments Requested

The IRS requests comments on the proposed regs. Comments may be mailed to the IRS, or submitted electronically via the Federal eRulemaking Portal at https://www.regulations.gov (indicate IRS and REG-120080-22). Written or electronic comments and requests for a public hearing must be received by June 16, 2023.

In particular, the IRS seeks comments on the following issues:

• 1. the critical mineral and battery component requirements, including the distinction between processing of applicable critical minerals and manufacturing and assembly of battery components, and related definitions;
• 2. the 50-percent value added test for critical minerals, and the best approach for adopting a more stringent test after 2024;
• 3. the list of countries with which the United States has free trade agreements in effect, proposed criteria for identifying other such countries, and other potential approaches; and
• 4. whether rules similar to those provided for partnerships and S corporation should apply to trusts and similar entities that place a qualified clean vehicle in service.

The IRS is obsoleting Rev. Rul. 58-74, 1958-1 CB 148, as of July 31, 2023. Rev. Rul. 58-74 generally allows a taxpayer that adopted the expense method for research and experimental (R&E) expenses to use a refund claim or amend a return to deduct R&E expenses that the taxpayer failed to deduct when they were paid or accrued.

The IRS is obsoleting Rev. Rul. 58-74, 1958-1 CB 148, as of July 31, 2023. Rev. Rul. 58-74 generally allows a taxpayer that adopted the expense method for research and experimental (R&E) expenses to use a refund claim or amend a return to deduct R&E expenses that the taxpayer failed to deduct when they were paid or accrued.

Rev. Rul. 58-74 conflicts with current procedures for accounting method changes.

TCJA Changes for R&E Expenses

The decision to obsolete Rev. Rul. 58-74 is unrelated to the changes made by the Tax Cut and Jobs Act (TCJA) (P.L. 115-97), even though the ruling relates to pre-TCJA accounting methods for R&E expenses.

Taxpayers could elect to amortize R&E expenses paid or incurred in tax years beginning before 2022, or deduct them currently. If the taxpayer did not make either election, the expenses had to be capitalized. A taxpayer that elected the expense method had to use it for all qualifying expenses unless the IRS consented to a different method for some or all of the expenses.

TCJA ended the expense election for R&E expenses paid or incurred in tax year beginning after 2021. Instead, the expenses must be amortized over five years (15 years for foreign expenses).

Rev. Rul. 57-74 and Change of Accounting Method Procedures

The IRS is obsoleting Rev. Rul. 58-74 because it includes insufficient facts to properly analyze whether the taxpayer’s failure to deduct certain R&E expenditures, such as the cost of obtaining a patent, when it deducted other R&E expenditures, constituted a method of accounting or an error.

For example, Rev. Rul. 58-74 does not explain whether the taxpayer consistently treated the costs of obtaining a patent in determining its taxable income. It also fails to describe the cause and extent of the deviation in the treatment of certain R&E expenditures that were not deducted.

In addition, filing an amended return, refund claim, or administrative adjustment request (AAR) under Rev. Rul. 58-74 is inconsistent with the IRS position that a taxpayer may not, without prior consent, retroactively change from an erroneous to a permissible method of accounting by filing amended returns. Rev. Rul. 58-74 is also inconsistent with the procedures for accounting method changes that qualify for automatic IRS consent.

Prospective Application of Decision to Obsolete Rev. Rul. 58-74

A taxpayer may rely on Rev. Rul. 58-74 if the taxpayer:

However, eligibility to rely on Rev. Rul. 58-74 does not imply that the IRS will grant the refund, deduction, or AAR. Instead, the IRS will continue to challenge the applicability of Rev. Rul. 58-74 when appropriate. For example, the IRS might challenge reliance on Rev. Rul. 58-74 when the taxpayer’s facts are distinguishable from Rev. Rul. 58-74, including where the taxpayer failed to adopt the expense method under pre-TCJA law.

The IRS has issued safe harbor deed language that may be used to amend eligible easement deeds intended to qualify for conservation contribution deductions under Code Sec. 170(f)(3)(B)(iii), to comply with changes to the law created by section 605(d) of the SECURE 2.0 Act of 2022.

The IRS has issued safe harbor deed language that may be used to amend eligible easement deeds intended to qualify for conservation contribution deductions under Code Sec. 170(f)(3)(B)(iii), to comply with changes to the law created by section 605(d) of the SECURE 2.0 Act of 2022. If a donor substitutes the prescribed safe harbor deed language for the corresponding language in the original eligible easement deed, and the amended deed is then signed by the donor and donee and recorded on or before July 24, 2023, the amended eligible easement deed will be treated as effective for purposes of Code Sec. 170 and section 605(d)(2) of the SECURE 2.0 Act. If these requirements are met, the amendment must be treated as effective from the date of the recording of the original easement deed.

The following are not considered an"eligible easement deed" for purposes of this safe harbor - any easement deed relating to any contribution:

• which is not treated as a qualified conservation contribution by reason of Code Sec. 170(h)(7);
• which is part of a reportable transaction under Code Sec. 6707A(c)(1), or is described in Notice 2017-10;
• if a deduction under Code Sec. 170 has been disallowed, the donor has contested such disallowance, and a case is docketed in federal court to resolve this dispute scheduled on a date before the date the amended deed is recorded by the donor; or
• if a claimed contribution deduction under Code Sec. 170 resulted in an underpayment penalty under either Code Sec. 6662 or 6663, and such penalty has been finally determined administratively or by final court decision.

If the safe harbor language is substituted according to the requirements spelled out in this Notice, the amended eligible easement deed will be treated as effective as of the date the eligible easement deed was originally recorded for federal purposes, regardless of whether the amended eligible easement deed is effective retroactively under the relevant state law.

The IRS closed out the 2023 Dirty Dozen campaign with a warning for taxpayers to beware of promoters peddling tax avoidance schemes. These schemes are primarily targeted at high income individuals seeking to reduce or eliminate their tax obligation. The IRS advice taxpayers to seek services from an independent, trusted tax professional and to avoid promotres focused on aggressively marketing and pushing questionable transactions.

The IRS closed out the 2023 Dirty Dozen campaign with a warning for taxpayers to beware of promoters peddling tax avoidance schemes. These schemes are primarily targeted at high income individuals seeking to reduce or eliminate their tax obligation. The IRS advice taxpayers to seek services from an independent, trusted tax professional and to avoid promotres focused on aggressively marketing and pushing questionable transactions.

The IRS has compiled a list of 12 scams and schemes that put taxpayers and tax professionals at risk. Some of them are:

• micro-captive insurance arrangements: is an insurance company whose owners elect to be taxed on the captive's investment income only;
• syndicated conservation easements: are arrangements wherein they attempt to game the system with grossly inflated tax deductions;
• offshore accounts & digital assets: unscrupulous promoters lure taxpayers into placing their asssets in offshore accounts under the pretense of being untraceable by the IRS;
• maltese individual retirement arrangements misusing treaty: are arrangements wherein the taxpayers attempt to avoid tax by contributing to foreign individual retirement arrangements in Malta; and
• puerto rican and other foreign captive insurance: are transactions wherein the business owners of closely held entities participate in a purported insurance arrangement with a Puerto Rican or other foreign corporation in which they have a financial interest.

Taxpayers are adviced to to rely on reputable tax professionals they know and trust to avoid such schemes. The IRS has also created the Office of Fraud Enforcement (OFE) and Office of Promoter Investigations (OPE) to coordinate service-wide enforcement activities against taxpayers committing tax fraud and promoters marketing and selling abusive tax avoidance transactions and schemes to effectuate tax evasion.

As part of the Dirty Dozen awareness effort, the IRS encourages people to report taxpayers who promote improper and abusive tax schemes as well as tax return preparers who deliberately prepare improper returns. To report an abusive tax scheme or a tax return preparer, taxpayers should mail or fax a completed and any supporting materials to the IRS Lead Development Center in the Office of Promoter Investigations. The postal address is: Internal Revenue Service Lead Development Center Stop MS5040 24000 Avila Road Laguna Niguel, California 92677-3405 Fax: 877-477-9135.

As part of the annual Dirty Dozen tax scams effort, the IRS and the Security Summit partners have urged taxpayers to be on the lookout for spearphishing emails. Through these emails, scammers try to steal client data, tax software preparation credentials and tax preparer identities with the goal of getting fraudulent tax refunds. These requests can range from an email that looks like it’s from a potential new client to a request targeting payroll and human resource departments asking for sensitive Form W-2 information.

As part of the annual Dirty Dozen tax scams effort, the IRS and the Security Summit partners have urged taxpayers to be on the lookout for spearphishing emails. Through these emails, scammers try to steal client data, tax software preparation credentials and tax preparer identities with the goal of getting fraudulent tax refunds. These requests can range from an email that looks like it’s from a potential new client to a request targeting payroll and human resource departments asking for sensitive Form W-2 information.

Cyber Security Tips to Prevent Spearphishing

Spearphishing is a tailored phishing attempt to a specific organization or business and usually begins with a suspicious email that may appear as a tax preparation application or another e-service or platform. Some scammers will even use the IRS logo and claim something like "Action Required: Your account has now been put on hold." Often these emails stress urgency and will ask tax pros or businesses to click on links to input or verify information.

How to prevent spearphishing:

• Never click suspicious links.
• Double check the requests with the original sender.
• Be vigilant year-round, not just during filing season.

The IRS and its Security Summit partners continue to see spearphishing attempts that impersonate a new potential client, known as the New Client scam. Lastly, taxpayers should never respond to tax-related phishing or spearfishing or click on the URL link. Instead, the scams should be reported by sending the email or a copy of the text/SMS as an attachment to phishing@irs.gov.

The American Institute of CPAs is recommending the Internal Revenue Service place a greater emphasis on service as the agency works on its strategic plan for the $80 billion in additional appropriations provided to the IRS in the Inflation Reduction Act.

The American Institute of CPAs is recommending the Internal Revenue Service place a greater emphasis on service as the agency works on its strategic plan for the $80 billion in additional appropriations provided to the IRS in the Inflation Reduction Act.

"Given the historic low levels of IRS taxpayer services, we are concerned that there was an insufficient allocation of funding to improve taxpayer services to appropriate levels" the AICPA March 28, 2023, letter to the IRS and the Department of the Treasury states, noting that the COVID-19 pandemic "made it painfully clear that the IRS was not funded to accomplish all its responsibilities."

AICPA argued that the agency’s service deficiencies "prevent taxpayers from complying with their tax obligations and hamper our members’ ability to as professional advisors to do their jobs, which is to help these taxpayers comply."

And despite funds being targeted toward enforcement and a stated goal of ensuring that wealthy individuals and corporations are paying their fair share of taxes, AICPA states that "enforcement actions must be in balance with the services the IRS provides to taxpayers."

The Inflation Reduction Act allocates $45.6 billion to enforcement activities and only $3.1 billion to service, and the AICPA suggested that more money be focused on service-related issues, including allocating sufficient funds for employee training to help replace the institutional knowledge that is expected to be lost in the coming years as the aging workforce retires.

AICPA is also calling on the IRS to develop a comprehensive customer service strategy, including creating more empowered employees; better access to timely information; and access to tailored resources, including resources designed specifically for tax professionals.

Additionally, the organization recommended that the agency develop a comprehensive plan to redesign the agency, including adopting a more customer-focused culture; integrating its technical infrastructure so the disparate legacy systems can communicate with each other; and creating a practitioner services division "that would centralize and modernize its approach to all practitioners."

Finally, AICPA recommended that IRS continue with its business systems modernizations initiatives.

"Currently, the IRS has two of the oldest information systems in the federal government making the information technology functions one of the biggest constraints overall for the IRS" the letter states. "Without modern infrastructure, the IRS is unable to timely and efficiently meet the needs of taxpayers and practitioners. … We recommend that the IRS more fully explore options to allocate IRA enforcement funding to BSM issues."

Automated Collection Notices To Resume

Another area that the organization recommends the funds be used for is the ongoing effort by the agency to reduce the backlog of unprocessed paper tax returns and other paper correspondence.

AICPA acknowledged the work done to reduce levels after the backlog spiked during the pandemic, but stated that "more needs to be done to ensure that taxpayers and practitioners are not faced at any time in 2023 with yet another year with significant levels of unprocessed returns, leading to additional delays in processing and incorrect notices and penalties."

And while this is going on, the organization recommends that the IRS "continue the suspension of certain automated collection notices until it is prepared to devote the necessary resources for a proper and timely resolution of matters. Until the IRS can respond to taxpayer replies to notices in a timely manner, these collection notices should not be restarted."

According to the letter, the agency is planning on restarting automated collection notices in June 2023, even though "this June date has not been widely publicized. The IRS should communicate the stat date of automated collection action to the public, specifically identifying what actions will be part of this process and providing resources for taxpayers on dealing with these actions."

Additionally, the organization is calling for "a streamlined reasonable cause penalty waiver without requiring a written request, similar to the procedures of the FTA administrative waiver, based solely on the pandemic’s effects on both the taxpayer and the practitioner."

By Gregory Twachtman, Washington News Editor

National Taxpayer Advocate Erin Collins offered both praise and criticism of the Internal Revenue Service’s Strategic Operating Plan outlining how it will spend the additional $80 billion allocated to the agency as part of the Inflation Reduction Act of 2022.

National Taxpayer Advocate Erin Collins offered both praise and criticism of the Internal Revenue Service’s Strategic Operating Plan outlining how it will spend the additional $80 billion allocated to the agency as part of the Inflation Reduction Act of 2022.

"This is a game changer to transform how the U.S. government administers the tax laws in a more helpful and efficient manner while focusing on providing the service taxpayers deserve,"Collins wrote in an April 6, 2023, blog post about the plan.

However, she reiterated criticism over how the funds would be allocated throughout the next 10 years. The IRA allocates only $3.2 billion going to taxpayer services and $4.8 billion allocated to business system modernization, two areas that are in need of funding to help improve the service the agency provides to taxpayers.

"Combined, that’s just ten percent of the total," she noted. "By contrast, 90 percent was allocated for enforcement ($45.6 billion) and operations support ($25.3 billion). The additional long-term funding provided by the IRA, while appreciated and welcomed, is disproportionately allocated for enforcement activities, and I believe Congress should reallocate IRS funding to achieve a better balance with taxpayer services and IT modernization."

Collins also cited the report in stating that the funds allocated for taxpayer services will be depleted within four years and cautioned that the agency needs to ensure that funds are continually being allocated for this specific purpose beyond that point.

"Although I share the long-term vision of the SOP, I want to caution that the IRS should not lose sight of its core mission and its immediate challenge of reducing the large backlog of amended returns and taxpayer correspondence."

Gregory Twachtman, Washington News Editor

On April 4, 2023, the Internal Revenue Service released the Strategic Operating Plan, which details the agency’s plans to use Inflation Reduction Act resources to transform the administration of the tax system and services provided to taxpayers.

On April 4, 2023, the Internal Revenue Service released the Strategic Operating Plan, which details the agency’s plans to use Inflation Reduction Act resources to transform the administration of the tax system and services provided to taxpayers.

The goal of the changes outlined in the Strategic Operating Plan is to "provide taxpayers with world-class customer service" and reduce the deficit by "hundreds of billions by pursuing tax evasion by wealthy individuals, big corporations, and complex partnerships," said Deputy Secretary of the Treasury Wally Adeyemo.

The Strategic Operating Plan is organized around five key objectives:

• Dramatically improve services to help taxpayers meet their obligations and receive the tax incentives for which they are eligible.
• Quickly resolve taxpayer issues when they arise.
• Focus expanded enforcement on taxpayers with complex tax filings and high-dollar noncompliance to address the tax gap.
• Deliver cutting-edge technology, data, and analytics to operate more effectively.
• Attract, retain, and empower a highly skilled, diverse workforce and develop a culture that is better equipped to deliver results for taxpayers.

The plan outlines a series of initiatives and projects aligned to each objective, including 42 key initiatives, 190 key projects, and more than 200 specific milestones designed to achieve the objectives set forth by the IRS.

Improved customer service, compliance efforts, and technology updates are also essential to achieving the goals set forth in the Strategic Operating Plan.

With long-term funding in place, the IRS has hired more than 5,000 phone assisters, increased walk-in service availability, and added new digital tools, according to IRS Commissioner Daniel Werfel.

"In the first five years of the 10-year plan, taxpayers will be able to securely file documents and respond to notices online," said Werfel. Taxpayers will also be able securely access and download account data and account history. "For the first time, the IRS will help taxpayers identify potential mistakes before filing, quickly fix errors that could delay their refunds, and more easily claim credits and deductions they may be eligible for," he said.

The Strategic Operating Plan also includes targeted efforts to ensure fair tax law enforcement and compliance with existing laws. The plan focuses on "areas where compliance has eroded the most," specifically compliance issues involving "wealthy individuals, complex partnerships, and large corporations," said Werfel. The IRS will increase hiring efforts for experienced accountants and attorneys to ensure enforcement "at the top." Werfel further noted that the IRS does not intend to increase the audit rate for small businesses or households making less than $400,000.

Finally, the Strategic Operating Plan utilizes Inflation Reduction Act funding to modernize the agency’s technology infrastructure to protect taxpayer data. In the first five years of the 10-year plan, the IRS aims to eliminate paper backlogs that have delayed taxpayer refunds by digitizing forms and returns when they are received and transitioning to fully digital correspondence processes.

"This plan is only the beginning of our work," Werfel said. "This is a unique opportunity for the IRS and the nation, and we will continue to work closely with our partners as this effort moves forward. This investment in the IRS is already helping taxpayers this tax season, and this plan shows that historic changes are coming."

The American Institute of CPAs is calling on the Internal Revenue Service to issue guidance related to how digital asset losses affect tax obligations.

The American Institute of CPAs is calling on the Internal Revenue Service to issue guidance related to how digital asset losses affect tax obligations.

"With the complexities and recent bankruptcies involved with digitalasset exchanges, taxpayers and practitioners are facing many issues with the taxtreatment of losses of digitalassets and need guidance," Eileen Sherr, AICPA Director for Tax Policy & Advocacy, said in a statement. "Taxpayers and their advisors need clear guidance to accurately calculate their losses and properly meet their tax obligations and we urge the IRS to adopt our recommendations and provide this guidance."

In an April 14, 2023, letter to the agency, AICPA said it hopes the submission of the comments that the "IRS will provide additional guidance to clarify how digitalassetlosses are handled in various scenarios. Such guidance will provide greater certainty to taxpayers and their preparers in confidently and properly complying with their overall reporting requirements for digitalassets, and better ensure consistent application of the tax law among taxpayers."

The organization offers a range of recommendations on a number of topics related to the tax treatment of digital asset losses, with a focus on losses incurred by an individual investor rather than a trade or business.

One scenario highlighted by the AICPA is the determination of worthlessness of a digital asset. The organization notes that Chief Counsel Advice (CAA) 20230211 "states that ‘a loss may be sustained…if the cryptocurrency becomes worthless resulting in an identifiable event that occurs during the tax year for purposes of section 165(a),"’ adding that the advice notes that cryptocurrency can be valued at less than one cent but still greater than zero because it can still be traded and "that could potentially create future value."

AICPA wrote that if "the position of Treasury and the IRS s that a cryptocurrency is listed on an exchange and has liquidating value greater than absolute zero, we recommend that Treasury and IRS state this in binding guidance (published in the Internal Revenue Bulletin)."

Another topic covered by the comments was the question of when, if ever, might digital assets be securities for tax purposes.

"Authoritative guidance is needed on when, if ever, the section 156(g) worthless security capital losstreatment applies to cryptocurrency and other digitalassets," AICPA wrote. "Binding guidance should also be provided on basis determination for digitalassets (currently the special options are only in non-binding FAQs), as this is a matter relevant to measuring gains and losses."

AICPA also stated that guidance "is needed on the treatment of lending of virtual currency other digital asses under sections 162 such as if the taxpayer is in a business of ‘lending’ digitalassets), 165, 166, 469, 1001, and 1058, and possibly other provisions. This guidance should cover not only losses from ‘lending’ virtual currency and other digitalassets, but the categorization of the income generated (portfolio, business or other) and related expenses."

Other topics covered by the comment letter include:

• What facts indicate abandonment of a digital asset?
• In the case of theft of a digital asset, does the Ponzi loss guidance apply beyond Ponzi-losses to other fraudulent arrangements, including digital asset losses from certain digital asset exchange activities?
• When would section 1234A apply to termination of a digital asset?
• How should a taxpayer report digital asset activity if they are unable to access their records due to bankruptcy of an exchange?
• Is a digital asset considered disposed of by transferring the investor’s interest in a bankruptcy proceeding? Must there be proof of transfer of the underlying digital asset?

This and other tax policy and advocacy comment letters filed by the AICPA can be found here.

By Gregory Twachtman, Washington News Editor

An attractive benefit package is crucial to attract and retain talented workers. However, the expense of such packages can be cost-prohibitive to a small business. Establishing a tax-advantaged cafeteria plan can be an innovative way to provide employees with additional benefits without significantly adding to the cost of your overall benefit program.

An attractive benefit package is crucial to attract and retain talented workers. However, the expense of such packages can be cost-prohibitive to a small business. Establishing a tax-advantaged cafeteria plan can be an innovative way to provide employees with additional benefits without significantly adding to the cost of your overall benefit program.

Rising healthcare costs affect small businesses

If you are like most employers today, you have been dealing with the sting of rising prices for health benefits for some time. As a matter of economic survival, many small businesses have had to pass on at least some of the cost of providing health, dental and prescription benefits to their employees. As the prices continue to rise to fund these benefits, employees have been required to pay an increasing share of these costs. Establishing a cafeteria plan can be a way to make this problem more palatable for your employees at relatively little cost to your business.

Cafeteria plans defined

Technically, a cafeteria plan is a program through which you can offer your employees a choice between two or more "qualified benefits" and cash. The plan must be set forth in a written document and it can only be offered to employees. Depending on what you want to accomplish through a cafeteria plan, the plan can vary from being extremely simple (e.g., premium conversion plans) to being somewhat more complex as more features are added (e.g. flexible spending accounts).

Premium conversion plans: Popular and simple

A very simple type of cafeteria plan that is very popular among small to mid-size employers is sometimes referred to as a "premium conversion" plan. Establishment of a premium conversion plan would not require you to provide any significant additional funding for benefits other than what you are currently spending.

Here's how it works: through the structure of a cafeteria plan, you can offer your employees the ability to use pre-tax dollars to pay the portion of premiums you require them to contribute for their health, dental, and prescription benefits (including the cost of dependent benefits). Using pre-tax dollars to pay for their portion of health care premiums saves your employees money and will result in more net dollars in their paychecks. It may seem surprising, but your employees will appreciate even this small dollar-saving benefit.

With a premium conversion plan, the only costs to you as an employer is the expense of hiring an attorney or other benefits professional to draft a cafeteria plan document for you and the expense of making the small adjustment to your system of payroll deductions so that the employees' portion of the health benefit premiums is deducted from their gross pay rather than their after-tax pay.

Flexible spending accounts

Another benefit that can be made available under a cafeteria plan is a flexible spending account option. These accounts permit employees to have a specific amount withheld from each paycheck and set aside to be used for reimbursement of medical expenses not covered by the group health insurance plan or to be used to cover dependent care expenses. Keep in mind, however, that if you want to establish flexible spending accounts through a cafeteria plan, it will involve more ongoing administrative expense on your part than a simple premium conversion cafeteria plan.

Additional options

You also may want to offer your employees a cafeteria plan which provides them a set dollar value that each employee can take either as additional salary or choose to spend on a variety of benefits, e.g., health insurance, dental coverage, dependent care, or retirement plan contributions. With this type of plan, all benefits other than additional salary are not taxable to the employee. This type of plan can provide desirable flexibility to your employees, but will also cost more to establish and administer.

As you make the determination regarding what type of benefit program you would like to offer your employees, there are many other options that should be taken into consideration. If you require additional guidance, please contact the office for a consultation.

While one of the most important keys to financial success of any business is its ability to properly manage its cash flow, few businesses devote adequate attention to this process. By continually monitoring your business cycle, and making some basic decisions up-front, the amount of time you spend managing this part of your business can be significantly reduced.

While one of the most important keys to financial success of any business is its ability to properly manage its cash flow, few businesses devote adequate attention to this process. By continually monitoring your business cycle, and making some basic decisions up-front, the amount of time you spend managing this part of your business can be significantly reduced.

Manage your cash before it manages you

Why do you need to manage your cash flow? Is it needed to help manage the day-to-day operations, obtain financing for a new project, or to acquire new equipment? Do you plan on presenting it to your banker to secure better financing terms or provide for future solvency? Are you seeking additional investors to help you expand into new markets? While all of these can be valid reasons for keeping on top of your cash flow situation, one of the main reasons to manage it is so it does not manage you. You should know when your business would be cash poor so you can better plan for short term operating loans. Similarly, when it has excess cash, it can be invested temporarily to maximize your return. If you do not do this, your cash flow situation will dictate when you can afford to advertise, when you can expand your business, when you can take on more sales, etc. as opposed to you making those timing decisions.

Once you have determined why cash flow management is important to your business, the next step is to get into action. In order to effectively manage your cash flow situation, you need to forecast your cash flows and once done, develop and implement a cash flow plan.

Step 1: Forecast Your Cash Flows

Forecasting your cash flow is the first step in the process of effectively managing your cash flow. How often you will need to prepare cash flow projections and what intervals to use (i.e. annually with monthly intervals or monthly with daily intervals) will depend on the nature of your business.

Be realistic. A realistic approach to forecasting your cash flows will produce more dependable and effective results. Analyze your operations to know your historical results as well as your projected assumptions. All cash flow from operations, investing activities and financing activities should be considered.

Consider your cash inflows and outflows. Your business' cash inflows would include such items as accounts receivable collection, along with unusual and nonrecurring items such as tax refunds, proceeds from a sale of equipment, etc.… Normal cash outflows include recurring items such as purchasing and accounts payable, payroll, loan payments, etc. along with nonrecurring items such as estimated tax payments, bonuses, equipment purchases and others.

Project your cash flow. Once you have determined the appropriate interval for your business (let's assume monthly), you would take the cash at the beginning of the month, add the cash inflows and subtract the cash outflows. This will give you a projected end of month cash balance. Now repeat this for the next 11 months (if your forecast was based on an annual cycle). You now have a cash flow forecast. When you study this, you may notice some months with large cash balances and other months with little, or even negative, cash balances.

Step 2: Develop a Cash Flow Plan

The goal here is to alter the forecasted cash flows into planned cash flows. By doing this, you can smooth out the peaks and valleys and turn your forecast into a manageable plan.

Invest excess cash. For those months with excess cash, you should have automatic investment alternatives set up with your financial institution. Depending on the length of time you have an excess cash situation, you can have a nightly sweep whereby your funds are invested in government bonds or repurchase agreements. Longer periods of excess cash will require more sophisticated alternatives, such as certificates of deposit. The size of the business, along with its cycle, will determine the investment alternatives to choose.

Plan for cash shortages. For the months with little or negative cash, you can first try to adjust these shortages by reviewing your collection policies to find ways to accelerate cash inflows. You can also look at your vendors' terms to consider possible ways to defer your payables. You should always err on the side of conservatism when making these changes. After this exercise, if you are still in a cash poor situation, determine sources of additional financing. You will appear more organized to lending institutions if this can be arranged before the problem arises.

By first forecasting, and then planning your cash flows, you can take advantage of many unique business opportunities, and avoid the pitfalls of unplanned cash shortages. Taking a step towards controlling your cash flow will keep you from having your cash flow take control of you.

If you have any questions about how you can better manage your business' cash flow, please contact the office for a consultation.

If you are considering selling business property that has substantially appreciated in value, you owe it to your business to explore the possibility of a like-kind exchange. Done properly, a like-kind exchange will allow you to transfer your appreciated business property without incurring a current tax liability. However, since the related tax rules can be complex, careful planning is needed to properly structure the transaction.

If you are considering selling business property that has substantially appreciated in value, you owe it to your business to explore the possibility of a like-kind exchange. Done properly, a like-kind exchange will allow you to transfer your appreciated business property without incurring a current tax liability. However, since the related tax rules can be complex, careful planning is needed to properly structure the transaction.

Like-kind exchanges: The basics

The tax law permits you to exchange property that you use in your business or property that you hold for investment purposes with the same type of property held by another business or investor. These transactions are referred to as "like-kind" exchanges and, if done properly, can save your business from paying the taxes that normally would be due in the year of sale of the appreciated property.

Instead of an immediate tax on any appreciation in the year of sale, a like-kind exchange allows the appreciated value of the property you're transferring to be rolled into the working asset that you'll be receiving in the exchange. Mixed cash and property sales, multi-party exchanges, and time-delayed exchanges are all possible under this tax break.

What property qualifies?

In order to qualify as a tax-free like-kind exchange, the following conditions must be met:

• The property must be business or investment property. You must hold both the property you trade and the property you receive for productive use in your trade or business or for investment. Neither property may be property used for personal purposes, such as your home or family car.
• The property must not be held primarily for sale. The property you trade and the property you receive must not be property you sell to customers, such as merchandise.
• Most securities and instruments of indebtedness or interest are not eligible. The property must not be stocks, bonds, notes, chooses in action, certificates of trust or beneficial interest, or other securities or evidences of indebtedness or interest, including partnership interests. However, you can have a nontaxable exchange of corporate stocks in certain circumstances.
• There must be a trade of like property. The trade of real estate for real estate, or personal property for similar personal property is a trade of like property.

Examples:

Like property:

• An apartment house for a store building
• A panel truck for a pickup truck

Not like property:

• A piece of machinery for a store building
• Real estate in the U.S. for real estate outside the U.S.

• The property being received must be identified by a specified date. The property to be received must be identified within 45 days after the date you transfer the property given up in trade.
• The property being received must be received by a specified date.The property to be received must be received by the earlier of:
  1. The 180th day after the date on which you transfer the property given up in trade, or
  2. The due date, including extensions, for your tax return for the year in which the transfer of the property given up occurs.

Dealing with "boot" received

If you successfully make a straight asset-for-asset exchange, as discussed earlier, you will not pay any immediate tax with respect to the transaction. The property you acquire gets the same tax "basis" (your cost for tax purposes) as the property you gave up. In some circumstances, when you are attempting to make a like-kind exchange, the properties are not always going to be of precisely the same value. Many times, cash or other property is included in the deal. This cash or other property is referred to as "boot." If boot is present in an exchange, you will be required to recognize some of your taxable gain, but only up to the amount of boot you receive in the transaction.

Example:

XYZ Office Supply Co. exchanges its business real estate with a basis of $200,000 and valued at $240,000 for the ABC Restaurant's business real estate valued at $220,000. ABC also gives XYZ $35,000 in cash. XYZ receives property with a total value of $255,000 for an asset with a basis of $200,000. XYZ's gain on the exchange is $55,000, but it only has to report $35,000 on its tax return - the amount of cash or "boot" XYZ received. Note: If no cash changed hands, XYZ would not report any gain or loss on its tax return.

Using like-kind exchanges in your business

There are several different ways that like-kind exchanges can be used in your business and there are, likewise, a number of different ways these exchanges can be structured. Here are a couple of examples:

Multi-party exchanges. If you know another business owner or investor that has a piece of property that you would like to acquire, and he or she only wants to dispose of the property in a like-kind exchange, you can still make a deal even if you do not own a suitable property to exchange. The tax rules permit you to enter into a contract with another business owner that provides that you are going to receive the property that he or she has available in exchange for a property to be identified in the future. This type of multi-party transaction can also be arranged through a qualified intermediary with unknown third (or even fourth) parties.

Multiple property exchanges. Under the like-kind exchange rules, you are not limited in the number of properties that can be involved in an exchange. However, the recognized gain and basis of property is computed differently for multiple property exchanges than for single property-for-property exchanges.

Trade-ins. You could also structure a business to business trade-in of machinery, equipment, or vehicles as a like-kind exchange.

There are many ways that you can advantageously use the like-kind exchange rules when considering disposing of appreciated business assets. However, since the rules are complicated and careful planning is critical, please contact the office for assistance with structuring this type of transaction.

Incentive stock options (ISOs) give employees a "piece of the action" while allowing employers to attract workers at relatively inexpensive costs. However, before you accept that job offer, there are some intricate rules regarding the taxation of ISOs that you should understand.

ISOs give employees a "piece of the action" while allowing employers to attract workers at relatively inexpensive costs. However, before you accept that job offer, there are some intricate rules regarding the taxation of ISOs that you should understand.

How are ISOs taxed?

An incentive stock option is an option granted to you as an employee which gives you the right to purchase the stock of your employer without realizing income either when the option is granted or when it is exercised. You are first taxed when you sell or otherwise dispose of the option stock. You then have capital gain equal to the sale proceeds minus the option price, provided that the holding period requirement is met.

Note. The IRS has temporarily suspended collection of ISO alternative minimum tax (AMT) liabilities through September 30, 2008.

How long do I need to hold ISOs to get capital gain treatment?

To obtain favorable tax treatment, the stock acquired under an incentive stock option qualifies for favorable long-term capital gain tax treatment only if it is not disposed of before the later of two years from the date of the grant of the option, or one year from the date of the exercise of the option. If this holding period is not satisfied, the portion of the gain equal to the difference between the fair market value (FMV) of the stock at the time of exercise and the option price is taxed as compensation income rather than capital gain. In this case, you may be subject to the higher rate of income imposed on ordinary income.

For example, your employer granted you an incentive stock option on April 1, 2006, and you exercised the option on October 1, 2006, you must not sell the stock until April 1, 2008, to obtain favorable tax treatment (the later of two years from the date of the grant or one year from the date of exercise).

What key dates should I remember?

Because of the importance of receiving capital gain treatment, it is important that you keep in mind key dates such as the date of grant of the ISO and its date of exercise. These periods are measured from the date on which all acts necessary to grant the option or exercise the option have been completed. Therefore, the date of grant is treated as the date on which the board of directors or the stock option committee completes the corporate action which constitutes an offer of stock, rather than the date on which the option agreement is prepared. The date of exercise is the date on which the corporation receives notice of the exercise of the option and payment for the stock, rather than the date the shares of stock are actually transferred.

Will I be subject to alternative minimum tax?

The effect of the alternative minimum tax (AMT) on ISOs can amount to a potential trap for the unwary. This is because under the regular tax there is no tax until the stock is sold or otherwise disposed of. Under the AMT, however, the trap takes place when the ISO is exercised, since alternative minimum taxable income includes the difference between the FMV of the stock on the date the ISO is exercised and the price paid for the stock (the "ISO spread").

If you pay AMT, you are given a credit against regular income tax for the portion of the AMT attributable to ISOs and other tax preference items that result in deferral of income tax. The credit is taken in later years when no AMT is due, and may be taken to the extent that regular tax liability exceeds tentative minimum tax liability. The effect of this is that the AMT is a prepayment of tax, rather than an additional tax.

Since the AMT only applies if it is higher than your regular income tax, one strategy is to time the exercise of ISOs each year to come under the AMT exemption levels. Purely from a tax standpoint, the ideal situation is to exercise ISOs each year that would result in AMT equal to your regular tax. Of course, other factors, such as market conditions, financial needs, etc. may play a greater role in deciding when to exercise an option. If you pay high property tax or state income tax, you may find it more challenging to calculate the optimum exercise of ISOs in relation to the AMT, since both of these deductions are counted against their annual AMT exemption.

ISOs can be a nice additional employee benefit when considering a job offer. However, because the tax implications surrounding certain key trigger events related to ISOs can have a significant impact on your tax liability, we suggest that you contact the office for additional guidance.

Starting your own small business can be hectic - yet fun and personally fulfilling. As you work towards opening the doors, don't let the onerous task of keeping the books rain on your parade. With a little planning upfront and a promise to "keep it simple", you can get an effective system up and running in no time.

Starting your own small business can be hectic - but also personally fulfilling. As you work towards opening the doors, don't let the onerous task of keeping the books rain on your parade. With a little planning upfront, you can get an effective system up and running quickly.

The IRS requires all businesses to keep adequate books and records but accurate financial records can be used by the small business owner in many other ways. Good records can help you monitor the progress of your business, prepare financial statements, prepare your tax returns, and support items on your tax returns. The key to accurate and useful records is to implement a good bookkeeping system.

The most important thing that you as a busy business owner should remember when planning your bookkeeping system is that simple is better. Bookkeeping should not interfere with the daily operations of your business or impede the progress of your business' goals in any way.

Decisions, decisions....

Probably the hardest part about bookkeeping for any small business is getting started. There are so many decisions to make that the business owner may seem overwhelmed. Single or double entry? Manual or computerized system? Should I try to do it myself or hire a bookkeeper?

Here are some good questions to ask yourself as you are making some very important upfront decisions:

• • Single or double entry (manual bookkeeping systems). While a single entry system can be simple and straightforward (especially when you are just starting out a small business), a double entry system has built-in checks and balances that can help assure accuracy and control.

• • Manual or computerized. Will a manual system quickly become overwhelmed with the expected volume of transactions from your business? Will your efforts be less if a certain element of your transactions were automated? If you plan on doing your books yourself, do you have the time/patience to learn a new software program?

• • Self-prepare or outsource. How much time will you or your employees have to allocate to recordkeeping activities each day? Do you have any accounting experience or at least a good head for numbers? Does your budget allow for the additional expense of an outside bookkeeper? If outsourcing was an option, would it make sense to outsource some of it and do some yourself (e.g. use a payroll processing service but do your own daily transaction input and bank reconciliation)?

As you sit down to make these fundamental decisions regarding your bookkeeping system, here are a few things to keep in mind:

Be realistic. Be honest with yourself and realistic about the amount of time and energy you will be able to devote to the bookkeeping task. As a new small business owner, you will be pulled in a hundred different directions - make sure that you take on only as much of the bookkeeping task as you feel you can do without making yourself crazy.

Do your homework. Before you commit to any bookkeeping decision, it makes sense to find out what resources are available and at what cost. For example, you may find out that having your payroll processed by an outside company costs much less than you imagined or that a bookkeeping software package you thought was difficult is actually very straightforward. An informed decision is a good decision.

Ask for references and recommendations. Other successful small business owners have a wealth of knowledge surrounding all aspects of running a business, including bookkeeping. Ask them about their experiences with recordkeeping and find out what has (and what has not) worked for their companies. If they know of a good, reasonably priced bookkeeper or they've had a good experience with a software package, take notes.

See the forest for the trees. Translation: Give the minutia only as much attention as it needs and concentrate on the big picture of your business' finances. Implementing a bookkeeping system - on your own or with outside help - that is simple and reliable will give you the opportunity to step back and evaluate how effectively your business is operating.

There are many important decisions to make when you start your own business, including ones that seem mundane - such as recordkeeping - but that can have a significant impact on your ability to successfully operate your business. Before you make any of these decisions, we encourage you to contact the office for a consultation.

Once you have decided on the type of bookkeeping system to use for your new business, you will also be faced with several other accounting and tax related decisions. Whether to use the cash or accrual method of accounting, for example, although not always a matter of choice, is an important decision that must be carefully considered by the new business owner.

Generally, there are two methods of accounting used by small businesses - cash and accrual. The basic difference between the two methods is the timing of how income and expenses are recorded. Your method of accounting is chosen when you file your first tax return. If you ever wish to change your accounting method after that, you'll need to file for IRS approval, which can be a time-consuming process.

While no single accounting method is required of all taxpayers, you must use a system that clearly shows your income and expenses, and maintain records that will enable you to file a correct return. If you do not consistently use an accounting method that clearly shows your income, your income will be figured under the method that, in the opinion of the IRS, clearly shows your income.

Cash method

Most small businesses use the cash basis method of accounting, which is based on real time cash flow. Under the cash method, income is recorded when it is received, and expenses are reported when they are paid. For example, if you receive a check in the mail, it becomes a cash receipt (and is recorded as income). Likewise, when you pay a bill, you record the payment as an expense. The word "cash" is not meant literally - it also covers payments by check, credit card, etc.

Accrual method

Under the accrual method, you record income when it is earned, not necessarily when it is received. Likewise, you record your expenses when the obligation arises, not necessarily when you pay the bills. In short, the accrual method of accounting matches revenue and expenses when they occur whether or not any cash changes hands. For example, suppose you're hired as a consultant and complete a job on December 29^th, but you haven't been paid for it. You would still recognize all expenses you incurred in relation to that engagement regardless of whether you've been paid yet or not. Both the income and the expenses are recorded for that year, even if payment is received and bills are paid the following January.

Businesses are required to use the accrual method of accounting in several instances, including:

• If the business has inventory.
• If the business is a C corporation with gross annual sales exceeding $5 million (with certain exceptions for personal service companies, sole proprietorships, farming businesses, and a few others).

If you operate two or more separate and distinct businesses, you can use a different accounting method for each if the method clearly reflects the income of each business. The businesses are considered separate and distinct if books and records are maintained for each business. If you use the accounting methods to create or shift profits or losses between the businesses (for example, through inventory adjustments, sales, purchases, or expenses) so that income is not clearly reflected, the businesses will not be considered separate and distinct.

Other methods of accounting

In addition to the cash and accrual methods of accounting, there are other ways that your business can account for your income and expenses (e.g., hybrid, long-term contract). These methods are beyond the scope of this article but may be available for your business.

As stated previously, you choose your method of accounting when you file your first tax return. Because there are advantages and disadvantages to each of the accounting methods, it is important that you make the right decision. If you need assistance in determining the best accounting method for your business, please contact the office.

Business travel expenses are not created equal - some special rules apply to certain types of expenditures. Before you pack your bags for your next business trip, make sure that you have planned ahead to optimize your business travel deductions.

Business travel expenses are not created equal - some special rules apply to certain types of expenditures. Before you pack your bags for your next business trip, make sure that you have planned ahead to optimize your business travel deductions.

The basic rule for the deductibility of business travel is relatively simple--travel expenses incurred while you are away from home in pursuit of a trade or business are deductible so long as they are not lavish or extravagant. Business travel can take many different forms, however--conventions, educational seminars, cruise ship meetings and foreign travel, in addition to the run-of-the-mill business trip--and each has its own special rules which you should know about prior to departure so that optimum use is made of the business travel deduction.

The basic rules

Taxpayers who travel away from their tax home on business may deduct the expenses they incur, including fares, meals, lodging, and incidental expenses, if they are not lavish or extravagant. A business trip is considered travel away from home if you may reasonably need sleep or rest to complete a round trip. Your tax home is generally your principal place of business or your residence if you are temporarily employed away from the area of your residence.

To be deductible, traveling expenses must be incurred in pursuit of an existing trade or business. If the expenses are in connection with acquiring a new business, they are not deductible. Of course, there is no rule that prohibits you from enjoying yourself or from pursuing some recreational activities during your travel, but the primary purpose of the trip must be related to the taxpayer's trade or business.

Travel expenses of your spouse, dependents or other individuals are only deductible if the person accompanying you is an employee of the company, the travel is for a bona fide business purpose, and the expenses are otherwise deductible.

Special rules apply

Because special rules may apply, the following types of business travel may require some additional planning in advance in order to maximize your business travel deduction:

Foreign travel

Foreign travel expenses are subject to special rules that are not applicable if the business trip is within the United States. If your travel overseas takes longer than a week, or if less than 75 percent of the time is spent on business, expenses are allocated between business and leisure activities on a day-to-day basis. Each day is either entirely a business day, or it is considered to be a nonbusiness day. A day counts as entirely for business if your principal activity on that day was in pursuit of your trade or business. Travel days are counted as business days, as are days when events beyond your control prevent the conducting of business. Saturdays, Sunday, legal holidays, and other reasonably necessary stand-by days also count as business days.

Educational travel

Although the Tax Code prohibits deducting expenses for travel as a form of education, a recent Tax Court decision allowed a schoolteacher to deduct her travel and tuition costs for two university courses overseas. The court decided that the reason for taking the courses went beyond mere travel and helped the teacher maintain and improve skills needed in her employment.

Conventions and seminars

If there is a sufficient relationship of the convention to your trade or business, expenses for both self-employed persons and employees to attend a convention in the United States may be deducted. A special rule prohibits the deduction of costs of attending seminars or conventions for investment purposes.

Cruises

Although the IRS does not look favorably on cruise ship conventions, a limited deduction is available (to a maximum of $2,000 annually) if you can satisfy some rigorous reporting requirements, and the cruise ship is of US registry, all ports of call are in the US or its possessions, and the meeting is directly related to your trade or business. Reporting requirements include written statements by both you and the officer of the sponsoring organization, containing information as to the number of hours of each day of the trip devoted to scheduled business activities, and a program of the activities of each day of the meeting.

Foreign conventions

While the rule for stateside conventions (and those in Canada, Mexico, a US possession, or the Trust Territory of the Pacific Islands) merely require that your business be related to the agenda of the convention, you are held to a higher standard for conventions held overseas. You must show that the meeting is directly related to the active conduct of your business and that it is as reasonable to be held overseas as it would have been to hold it in the US.

Stayovers

Sometimes costs can be decreased if you stay over at the out-of-town location on Saturday night, even though business was wrapped up on Friday. This occurs when, due to airline pricing policies, the additional lodging expense is more than offset by lower airfare. When this is the case, the additional meal and lodging expenses will still be deductible.

If you have any questions regarding the deductibility of business travel expenses or the related reporting requirements, please contact the office for more information and guidance.

For homeowners, the exclusion of all or a portion of the gain on the sale of their principal residence is an important tax break.

For homeowners, the exclusion of all or a portion of the gain on the sale of their principal residence is an important tax break. The maximum amount of gain from the sale or exchange of a principal residence that may be excluded from income is generally $250,000 ($500,000 for joint filers).

Unfortunately, the $500,000/$250,000 exclusion has a few traps, including a "loophole" closer that reduces the homesale exclusion for periods of "nonqualifying use." Careful planning, however, can alleviate many of them. Here is a review of the more prominent problems that homeowners may experience with the homesale exclusion and some suggestions on how you might avoid them:

Reduced homesale exclusion. The Housing Assistance Tax Act of 2008 modifies the exclusion of gain from the sale of a principal residence, providing that gain from the sale of principal residence will no longer be excluded from income for periods that the home was not used as a principal residence. For example, if you used the residence as a vacation home prior to using it as a principal residence. These periods are referred to as "nonqualifying use." This income inclusion rule applies to home sales after December 31, 2008 and is based on nonqualified use periods beginning on or after January 1, 2009, under a generous transition rule. A specific formula is used to determine the amount of gain allocated to nonqualifying use periods.

Use and ownership. Moreover, in order to qualify for the $250,000/$500,000 exclusion, your home must be used and owned by you as your principal residence for at least 2 out of the last 5 years of ownership before sale. Moving into a new house early, or delaying the move, may cost you the right to exclude any and all gain on the home sale from tax.

Incapacitated taxpayers. If you become physically or mentally incapable of self-care, the rules provide that you are deemed to use a residence as a principal residence during the time in which you own the residence and reside in a licensed care facility (e.g., a nursing home), as long as at least a one-year period of use (under the regular rules) is already met. Moving in with an adult child, even if professional health care workers are hired, will not lower the use time period to one year since care is not in a "licensed care facility." In addition, some "assisted-living" arrangements may not qualify as well.

Pro-rata sales. Under an exception, a sale of a residence more frequently than once every two years is allowed, with a pro-rata allocation of the $500,000/$250,000 exclusion based on time, if the sale is by reason of a change in place of employment, health, or other unforeseen circumstances to be specified under pending IRS rules. Needless to say, it is very important that you make certain that you take steps to make sure that you qualify for this exception, because no tax break is otherwise allowed. For example, health in this circumstance does not require moving into a licensed care facility, but the extent of the health reason for moving must be substantiated.

Tax basis. Under the old rules, you were advised to keep receipts of any capital improvements made to your house so that the cost basis of your residence, for purposes of determining the amount of gain, may be computed properly. In a rapidly appreciating real estate market, you should continue to keep these receipts. Death or divorce may unexpectedly reduce the $500,000 exclusion of gain for joint returns to the $250,000 level reserved for single filers. Even if the $500,000 level is obtained, if you have held your home for years, you may find that the exclusion may fall short of covering all the gain realized unless receipts for improvements are added to provide for an increased basis when making this computation.

Some gain may be taxed. Even if you move into a new house that costs more than the selling price of the old home, a tax on gain will be due (usually 20%) to the extent the gain exceeds the $500,000/$250,000 exclusion. Under the old rules, no gain would have been due.

Home office deduction. The home office deduction may have a significant impact on your home sale exclusion. The gain on the portion of the home that has been written off for depreciation, utilities and other costs as an office at home may not be excluded upon the sale of the residence. One way around this trap is to cease home office use of the residence sufficiently before the sale to comply with the rule that all gain (except attributable to recaptured home office depreciation) is excluded to the extent the taxpayer has not used a home office for two out of the five years prior to sale.

Vacation homes. As mentioned, in order to qualify for the $250,000/$500,000 exclusion, the home must be used and owned by you or your spouse (in the case of a joint return) as your principal residence for at least 2 out of the last 5 years of ownership before sale. Because of this rule, some vacation homeowners who have seen their resort properties increase in value over the years are moving into these homes when they retire and living in them for the 2 years necessary before selling in order to take full advantage of the gain exclusion. For example, doing this on a vacation home that has increased $200,000 in value over the years can save you $40,000 in capital gains tax. However, keep in mind the reduced homesale exclusion for periods of nonqualifying use.

As you can see, there is more to the sale of residence gain exclusion than meets the eye. Before you make any decisions regarding buying or selling any real property, please consider contacting the office for additional information and guidance.

An important IRS ruling shows how the use of trusts to hold personal assets can sometimes backfire if all tax factors are not considered. This ruling also drives home the fact that tax rules may change after assets have already been locked into a trust for a long period of time, making trusts sometimes inflexible in dealing with changing tax opportunities.

An important IRS ruling shows how the use of trusts to hold personal assets can sometimes backfire if all tax factors are not considered. This ruling also drives home the fact that tax rules may change after assets have already been locked into a trust for a long period of time, making trusts sometimes inflexible in dealing with changing tax opportunities.

In the ruling, the IRS determined that the sale of a home, in which an individual resided for many years but to which title was legally held by a family trust, did not qualify for the Tax Code's new capital gains exclusion on the sale of the house. The exclusion permits those who sell their personal residence anytime after May 6, 1997, to exclude up to $250,000 in capital gains ($500,000 for those filing joint returns). The IRS concluded that the individual's inability to control the assets of the trust prevented her from being deemed an owner of the trust for tax purposes.

Family trusts: A common estate planning tool

As part of an estate plan, an individual may place assets, such as a home, into a trust and name an income beneficiary or beneficiaries. The income beneficiary has rights to any income from the trust and may even have use of the assets but has no control to sell, mortgage or dispose of the assets of the trust. Only the trust's designated trustees have the power to make decisions related to the encumbrance or disposal of the trust's assets. When the asset is a personal residence, this type of trust allows for preferential estate tax treatment while the income beneficiary has the ability to continue living in the home.

IRS: "No Capital Gain Exclusion"

The IRS's stance is that, even though an individual may have enjoyed the use of a house for many years, if the house was in a family trust, ownership of the house would always be vested in the trust. Under the federal tax rules, a beneficiary of a trust may be deemed an owner of the trust if he or she has the power to reach and to take all of the trust's assets for his or her use. When a beneficiary is treated as an owner, a sale by the trust is equivalent to a sale by the beneficiary. However, when an income beneficiary has no control over the fate of the assets of the trust, the IRS has found that the beneficiary is not the owner of the trust and therefore would not qualify for the Tax Code's capital gains exclusion upon the sale of a residence held in such trust.

Planning for the smooth transition of your assets to your family upon death can be complicated and can have serious tax ramifications. Please contact the office for additional guidance in this area.