Proposed Regulations Would Limit Deductibility of Covered Employee Compensation Over $1 Million: The IRS has issued Prop. Reg. 1.162-33, which would amend guidance under IRC Sec. 162(m) on the definition of “covered employees” to include the five highest paid employees in a publicly held corporation for the tax year. Effective 12/31/2026, the American Rescue Plan Act of 2021 (ARPA, P.L. 117-2) expands the definition of “covered employees” [whose compensation over $1 million could not be deducted under IRC Sec. 162(m)] to include not only the principal executive officer, principal financial officer, and three highest compensated officers, but also the five highest paid employees of any kind in a publicly held corporation during the tax year. The proposed regulations would provide guidance on determining these employees and addressing compensation from affiliated groups, including foreign corporations. The proposed regulations would generally apply to compensation that is otherwise deductible for tax years beginning after the later of 12/31/2026 or the date the regulations are adopted as final. REG-118988-22.
Item for Wednesday, January 22, 2025
IRS Clarifies Worker Classification Safe Harbor: The IRS has issued guidance for service recipients (employers) seeking safe harbor relief for employment taxes under Section 530 of the Revenue Act of 1978 (Rev Proc 2025-10). Under Section 530, service recipients are entitled to safe harbor relief for service providers (employees or independent contractors) who the service recipient misclassified as independent contractors, but that the IRS asserts are employees, if the service recipient consistently treated the service providers as non-employees and had a reasonable basis for doing so. The revenue procedure clarifies a number of the provisions contained in Section 530, including the definition of “employee”; which employees may be included in safe harbor relief; the rules requiring the service recipient to file tax returns consistently with the service providers being non-employees; how an employer could be considered to have treated a worker as an employee by including payment or other information certain employment tax returns and other activities; and whether an employer meets the consistency and reasonable basis requirements. The updated guidance modifies and supersedes Rev. Proc. 85-18 .
Item for Tuesday, January 21, 2025
IRS Provides Relief to LA Fire Victims: The IRS has announced relief measures for individuals and businesses affected by the wildfires and straight-line winds that will allow taxpayers in Los Angeles County (along with any future areas designated by the Federal Emergency Management Agency) to complete payments and file federal individual and business tax returns by 10/15/25. Tax preparers in disaster zones can use the Bulk Requests for Disaster Relief option to assist clients outside the affected area. Taxpayers in federally declared disaster areas can claim uninsured or unreimbursed disaster-related losses on their 2024 or 2025 tax returns. Disaster relief payments are excluded from gross income, covering personal, family, and funeral expenses, as well as home repairs. Meanwhile, affected taxpayers participating in retirement plans or individual retirement arrangements (IRA) may also access special disaster distributions without the 10% early withdrawal penalty and can spread the income over three years. For more details about the postponement period, taxpayers can go to https://www.irs.gov/businesses/small-businesses-self-employed/disaster-assistance-and-emergency-relief-for-individuals-and-businesses . News Release IR 2025-10 .
Item for Friday, January 17, 2025
Pilot Programs Announced for Alternative Dispute Resolution. The IRS released Announcement 2025-6 with details on three pilot programs that will test changes to existing Alternative Dispute Resolution (ADR) programs. A related IRS News Release (IR 2025-14) explains that the pilot programs focus on Fast Track Settlement (FTS) and Post-Appeals Mediation (PAM). The pilots align the Large Business and International (LB&I), Small Business and Self-Employed (SB/SE), and Tax Exempt and Government Entities (TE/GE) divisions in offering FTS on an issue-by-issue basis; providing that requests to participate in FTS and PAM will not be denied without the approval of a first-line executive; and clarifying that when requests for FTS or PAM are denied, taxpayers will receive an explanation. Another pilot, named “Last Chance FTS,” is a limited scope SB/SE pilot that will inform taxpayers of FTS options before their cases move to Appeals. The last pilot removes the limitation that participation in FTS would preclude eligibility for PAM. The pilots will be evaluated after a two-year test period. Comments will be accepted throughout the pilot period.
Item for Thursday, January 16, 2025
Final Rule on Gifts and Bequests from Covered Expatriates. Treasury and the IRS published final regulations on the taxation of covered gifts and bequests from former US citizens and permanent residents (TD 10027). The rule finalizes proposed regulations issued in September 2015 (REG-112997-10) and applies to direct and indirect gifts and bequests to US citizens and residents from individuals who expatriated on or after 1/17/08. Form 708 (United States Return of Tax for Gifts and Bequests Received from Covered Expatriates) should be used to compute and report the tax. For gifts and bequests that exceed the gift tax annual exclusion, the tax is computed by multiplying the excess by the highest estate tax rate that was in effect when the gift was received, and by subtracting any gift or estate taxes paid to a foreign country. The final rule updates filing and payment due dates, returns, extension requests, penalties and recordkeeping requirements to reflect the additions to IRC Sec. 2801. The rule applies to covered gifts and bequests received on or after 1/1/25.
Item for Wednesday, January 15, 2025
Abusive Micro-Captive Transactions Must be Disclosed to IRS. Treasury and the IRS published final regulations identifying transactions that are the same as, or substantially similar to, certain micro-captive transactions as listed transactions, a reportable transaction, and certain other micro-captive transactions as transactions of interest, also a reportable transaction (TD 10029). Material advisors and certain participants in these listed transactions and transactions of interest are required to file disclosures with the IRS and are subject to penalties for failure to disclose. In certain transactions, a taxpayer either reduces its aggregate taxable income, that of related persons, or both, using contracts that the parties treat as insurance contracts and a related company that the parties treat as a captive insurance company. Each insured entity claims deductions for premiums for insurance coverage. The related captive insurance company elects to be taxed only on investment income and excludes payments received under the contracts from its taxable income. The final regulations are effective on 1/14/25.
Item for Tuesday, January 14, 2025
Certain Disregarded Payments and Dual Consolidated Loss Rules for Foreign Tax. Treasury and the IRS released final regulations on certain disregarded payments giving rise to deductions for foreign tax purposes that avoid application of the dual consolidated loss (DCL) rules (TD 10026). These regulations apply to items giving rise to deductions of a disregarded entity under foreign tax law. New rules on disregarded payment losses (DPL) track whether certain payments involving a disregarded entity and its owner give rise to potential double deductions and would require an income inclusion. The DPL rules operate independently of the DCL rules. The U.S. corporation should disclose the DPL of its foreign disregarded entity on an initial certification statement and file annual certifications for a 60-month period certifying that there is no foreign use of the DPL. Failure to provide certification will trigger the U.S. owner to include the DPL in gross income in the same year the triggering event occurred. The final regulations are effective on 1/10/25 for payments made in tax years beginning on or after 1/1/26.
Item for Monday, January 13, 2025
Final Regulations Issued on Related Party ‘Basis Shifting’ Partnership Transactions: The IRS has released final regulations (TD 10028), making several important changes to the June 2024 proposed regulations (REG-124593-23) identifying certain related party basis shifting partnership transactions by related parties as transactions of interests (TOIs). Generally, TOIs include either 1) a tax-free distribution of partnership property to a partner that is related to one or more partners of the partnership or, 2) a tax-free transfer of a partnership interest by a related partner to a related transferee. Changes include increasing the reporting threshold for a TOI basis increase from $5 million to $25 million for tax years before 2025 and $10 million for tax years thereafter; limiting reporting to open tax years that fall within a six-year lookback window; providing taxpayers and material advisors with more time to file disclosure statements; and excluding many owners of publicly traded partnerships (PTPs) from the disclosure rules. Affected taxpayers and their material advisors are subject to the disclosure requirements for reportable transactions. The regulations are effective on 1/14/25.
Friday, January 10, 2025
Final Regulations Issued on Clean Electricity Low-Income Communities Bonus Credit: The IRS has released final regulations (TD 10025) on the IRC Sec. 48E(h) Clean Electricity Low-Income Communities Bonus Credit Amount Program. This credit is an additional incentive to the IRC Sec. 45Y Clean Electricity Investment Credit that allows a 10% increase to the credit if the facility is in a low-income community or a 20% increase if the facility is located on Indian land pursuant to the Energy Policy Act of 1992. A 20% increase also applies to a qualified facility that is part of a qualified low-income residential building project or a qualified low-income economic benefit project. The regulations finalized, with changes, proposed rules (REG-108920-24) issued in September 2024, and are effective 1/13/25, applying to qualified facilities placed in service after 12/31/24. Rev. Proc. 2025-04 was also released with the final regulations and provides details on the application process and how the program’s annual allocation of 1.8 gigawatts will be distributed.
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