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Tuesday, February 13, 2024

Important Effective Date Item in Preamble to Digital Asset Broker Reporting Prop. Regs.

stacks of coins to represent bitcoin
The proposed regulations on broker reporting of digital assets released August 29, 2023 (REG-122793-19) included more than guidance under IRC section 6045. They also included related proposed regulations under section 1001 on amount realized and section 1012 on basis. I think that generally, the 1001 and 1012 proposed regulations are fairly straightforward and tie to the general rules at these provisions.  

One clarification they offer is that in a transaction where a taxpayer exchanges, for example, X coin for Y coin and pays a transaction fee, 50% of the transaction fee is treated as a reduction to the amount realized for the disposition of X coin and 50% is added to the basis of the Y coin acquired.

Unlike the virtual currency FAQs #39 - #41, Prop. Reg. 1.1012-1(j) provides that in applying the specific identification method to know which digital asset was disposed of (when the taxpayer has more than one unit or code representing their digital assets), the taxpayer must apply specific identification on a wallet by wallet or exchange by exchange system. In contrast, the FAQs allow (or at least do not disallow) use of a universal tracking approach where the taxpayer transferring, for example, 2 Xcoin out of wallet 1 to buy goods, could specifically identify to say they used the basis of 2 Xcoin in T's wallet 2. This would not be allowed under the proposed regulations. The long list of questions in the proposed regulations include though, whether there are alternatives to this approach (questions 44 & 45 at page 59616 in the Fed. Register).

Prop. Reg. 1.1001-7(c) and 1.1012-1(j)(6) provide that these proposed regulations are effective on the January 1 following when final regulations are published. However, page 59616 in the Fed. Register states that the 1001/1012 proposed regulations are reliance regulations. That is, per the preamble, taxpayers "may rely on these proposed regulations under sections 1001 and 1012 for dispositions in taxable years ending on or after August 29, 2023, provided the taxpayer consistently follows the proposed regulations under sections 1001 and 1012 in their entirety and in a consistent manner for all taxable years through the applicability date of the final regulations."

Since the broker reporting regs under section 6045 won't be effective for reporting of gross proceeds until sales on or after January 1, 2025 (basis reporting for sales on or after January 1, 2026), if a taxpayer follows the date of the proposed 1001/1012 regulations starting for 2023, they would also do so for 2024.

But, I don't think most taxpayers can follow the 1001/1012 proposed regulations until the 6045 regulations are effective because taxpayers might not be able to get the exchanges they use to help them with the specific identification called for in the proposed regulations.

But, practitioners need to present the effective date choice to clients because the decision is theirs to make. But before making it they should check if any exchange they use will allow them to specifically identify the digital asset they are transferring at the time of the transfer and document that for them (and apply FIFO if they do not give the exchange specific identification information at the time of a transfer). For unhosted wallets, the taxpayer handles that specific identification on their own, likely by sending themselves an email to document what they are doing and have the date verification from the email.

Also, would be a good idea to let your client know that the final regulations might have a different approach then tracking basis wallet by wallet and exchange by exchange. 

Not sure why the 1001/1012 proposed regulations were offered as reliance regs when there are reasons it is either impossible or unwise for taxpayers to start applying them for 2023 and 2024. Also, given the latitude in the virtual currency FAQs, if a taxpayer were tracking on a universal approach, they should be able to change going forward to wallet by wallet and exchange by exchange (with no need to get help from the exchange for that until the regs are finalized). The IRS notes in the preamble to the regs 
(page 59611 of the Federal Register) and at Prop. Reg. 1.1012-1(j)(4) that such a change is not a method of accounting as the method is still specific identification.

So, something to think about and find a way to present to your clients with digital assets so they can make the decision the IRS offers all taxpayers regarding the effective date of the 1001 and 1012 proposed regulations.

What do you think?

Sunday, January 28, 2024

EITC Awareness Day and Week Hopefully Also Can Focus on Needed Improvements

EITC reminder

The Earned Income Tax Credit (EITC) was added to the law in 1975 (Tax Reduction Act of 1975 (P.L. 94-12, SEC. 204; 3/29/75). So, the first note I'd like to make is that March 29, 2025 will be the 50th anniversary of the EITC. The Congressional Research Service has a nice report on the history of the EITC (4/28/22 version).

There is a federal annual EITC Awareness Day, which was January 26, 2024 (IR-2024-22).

Employers have federal (and perhaps state) obligations to tell employees about the EITC. Law changes in California in 2023 require employers to notify employees of the EITC (and a few other items such as CalFile and VITA) twice per year rather than only once per year (SB 131, Chapter 55 (7/10/23)). AB 1355 (Chapter 277 (9/30/23)) allows the notification to be emailed to employees, within specified parameters. The California EDD provides information on the notification and sample language.

On January 27, 2024, California Governor Newsom issued a proclamation that January 26 to February 2, 2024 is CalEITC Awareness Week. 

For many reasons, it seems that a week is certainly needed for EITC awareness and better yet, some way to more frequently help taxpayers be aware of the EITC and the benefits to eligible taxpayers and their communities of making sure it is claimed. Data from the IRS indicates that about 24% of eligible workers do not claim the EITC. The IRS tracks this data by state and you can find it here. CA R&T §19851 states that "hundreds of millions of federal dollars go unclaimed by the working poor in California."

How does this happen? The Tax Policy Center notes that about 5 million eligible individuals do not claim the credit leaving about $7 billion of benefits unclaimed!  These funds certainly could help low-income workers. The Center suggests that reasons for not claiming the EITC include its complexity causing some to not be sure if they qualify, and having income below the filing threshold so they do not file. For the non-filers, perhaps they did not have federal or state income tax withholding, so they are not filing to get those taxes refunded. 

A good portion of the EITC represents a refund of employments taxes withheld or paid by the employer for the employees wages. This illustrates a fundamental problem with the credit in that it is making taxpayers pay taxes they don't owe and then having to file to get the refund and perhaps, depending on earned income and family size, getting an additional amount via the EITC. Why not design the system to not have the EITC-eligible worker not pay the tax in the first place (and that would also provide the benefit per paycheck rather than when the return is filed).

I had the opportunity to suggest such a change back in 2001 in a paper included in the JCT's Study of the Overall State of the Federal Tax System and Recommendations for Simplification, as required by the Tax Reform Act of 1986 (summary at page 7 and full text at page 205). I think others have made similar suggestions over the years. 

Basically, federal income tax withholding could be changed to only start once an employee has earned a certain amount of income. All employees could have, say the first $15,000 of wages not subject to Social Security taxes with an increase in the wage base to address this. Or the change could only be made for workers paid at minimum wage or perhaps 1.10% of minimum wage. 

There used to be an advanced EITC system where the worker applied and the employer would not withhold certain taxes. It was repealed several years ago because there was almost no one using it. Perhaps there is a way to bring that back with better use of technology to help low-income workers get the funds for sure and get them more evenly throughout the year. For example, use of the IRS website to help with the calculations and any form to be completed for the employer (as part of the W-4 for example).

Here is an excerpt of what I wrote over 20 years ago (and I had a lot of background info and data on the EITC in the report too, and I had forgotten that something I've been suggesting in more recent years, I suggested back in this 2001 report - moving to a return-free tax system!).  

    "The EITC could be restructured to be an immediate offset of payroll taxes in more than one way. For example, all employees could have an exemption from Social Security (FICA) and Medicare taxes (referred to in this paper as “payroll taxes”) on a specified amount of wages. Of course, to offset the reduction in tax collections, the tax rates and maximum amount of earned income subject to payroll taxes would need to be adjusted. Another alternative would be to have payroll taxes computed on a graduated rate basis tied to the worker’s wage base (similar to how federal income tax withholding is computed). Because the current EITC structure can result in refunds greater than the worker’s payroll tax amount, additional changes would be needed to maintain the current level of benefit provided by the EITC to taxpayers with one or more qualifying children. These changes might be achieved through increased dependency exemptions or child credits for individuals with specified amounts of earned income. 

     Beyond simplification, an additional potential benefit of an alternative structure and simplification of qualifying status requirements would be that it might make it easier to move to a return-free tax system. Structural changes as described above would also serve to provide the EITC benefit to low-income taxpayers in each paycheck without a need for individuals to apply to receive an advance EITC.  In addition, these structural changes could be implemented in a manner so as to reduce the current high marginal tax rates that result from the phase-out provision of the EITC."

This proposal reminds me of a similar suggestion that I and two SJSU econ professors wrote about a few years ago. To better target sales tax exemptions such as on food and infant diapers and to more easily have the sales tax apply to more types of personal consumption, convert the sales tax to a formula calculation (personal consumption = income less savings), because one benefit is that instead of providing a food exemption that primarily benefits higher income individuals because they spend more on food, you could exempt low-income individuals from all sales tax by exempting them from the calculation if their income is below a specified level. And the benefit could continue for income levels by use of a graduated rate structure based on income. I just note this because it is another example where it might be easier to just not collect a tax in the first place rather than structure a tax credit or use inequitable exemptions to help lower-income taxpayers. This sales tax paper can be found here and there are additional benefits of it in that businesses would no longer pay or have to collect sales tax (there would need to be a transition phase-in as revenues adjusted).

But back to the EITC ... perhaps the upcoming 50th anniversary calls for efforts to examine how it can be simplified and all eligible individuals can readily obtain its benefits.

What do you think?

Monday, January 1, 2024

Fewer Clean Vehicles Qualify for Federal Tax Credit in 2024

The §30D Clean Vehicle Credit that was greatly modified for 2023 through 2032 by the Inflation Reduction Act of 2022 has increasingly strict qualifications each year. Per the IRS and Dept. of Energy list of qualifying vehicles, there is a drop for 2024. For clean vehicles purchased from April 18, 2023 through December 31, 2023, 27 vehicles qualified an eligible buyer for a $7,500 credit and 16 for a $3,750 credit.

As of today (1/1/24), the list for 2024 includes just 10 vehicles for the $7,500 credit and 9 for the $3,750 credit. The drop is due to a combination of no longer meeting the higher critical minerals or battery component requirement or involving parts of assembly by a "foreign entity of concern" such as China.

I suspect that more vehicles will be added during the year, but this drop will likely continue annually for the next several years.  If you're looking for a good deal on a clean vehicle, likely that happens the last week or so of the year when dealers are eager to sell eligible vehicles that won't be eligible the next year.

And new starting in 2024 is the ability of buyers to transfer their credit to the dealer (if registered) so the customer/taxpayer can get the value up front rather than waiting to when they file their return.

There is more information at:

  • IRS Clean Vehicle Tax Credits website
  • FAQs in Fact Sheet 2023-29 (12/26/23) (but always check for the latest fact sheet)
  • Pub 5866, New Clean Vehicle Tax Credit Checklist


Tuesday, December 26, 2023

170+ Tax Changes in 117th Congress - Too Many or Not Enough?

On December 21, 2023, the Joint Committee on Taxation released its Bluebook for Tax Legislation Enacted in the 117th Congress (we are currently half way through the 118th Congress). These reports provide helpful background and explanation for tax changes. Pulling from the table of contents for 8 pieces of legislation that had tax changes (with most in the Inflation Reduction Act of 2022 and the SECURE Act 2.0), I count the following 172 changes. 

How can anyone keep up with all of this? I spend a lot of time on tax updates - tracking them, making update presentations (and it is challenging in addition to tracking and reading the IRS guidance on all of these changes (not all of the changes have guidance)), but I can't explain all of these (and most tax practitioners don't need to know about all of them as they pertain to a wide range of taxpayers). 

The IRA 2022 includes some complex terminology and limitations for new and revised energy credits. SECURE Act 2.0 includes numerous changes mostly for retirement provisions but aren't going to help people most in need adequately save for retirement. Perhaps a better approach to enacting tax legislation is to focus on first closing loopholes (provisions that don't fully serve their purpose due to drafting problems or actions not contemplated when the provision was enacted - see my recent post on §280A(g)), and then improving equity and neutrality, and simplifying wherever possible.  Yes, some of these changes accomplish these objectives, but most do not.

What do you think?

Here is the list from the JCT Bluebook table of contents with my modification that I numbered the changes from 1 to 172 (unfortunately, Blogspot removes the numbering - but there are 172 provisions).

PART ONE: AMERICAN RESCUE PLAN ACT OF 2021 (PUBLIC LAW 117–2)

  1. Extension of limitation on excess business losses of noncorporate taxpayers (sec. 9041 of the Act and sec. 461(l) and (j) of the Code)
  2. Suspension of tax on portion of unemployment compensation (sec. 9042 of the Act and sec. 85 of the Code)
  3. Preserving health benefits for workers (sec. 9501 of the Act; sec. 4980B and new secs. 139I, 6432, and 6720C of the Code; and secs. 601 to 608 of ERISA)
  4. 2021 recovery rebates to individuals (sec. 9601 of the Act and secs. 6428, 6428A, and new sec. 6428B of the Code)
  5. 4. Child tax credit improvements for 2021 (sec. 9611 of the Act and sec. 24 and new sec. 7527A of the Code)
  6. 5. Application of child tax credit in possessions (sec. 9612 of the Act and sec. 24 and new sec. 7527A of the Code)
  7. Strengthening the earned income tax credit for individuals with no qualifying children (sec. 9621 of the Act and sec. 32 of the Code)
  8. Taxpayer eligible for childless earned income credit in case of qualifying children who fail to meet certain identification requirements (sec. 9622 of the Act and sec. 32 of the Code)
  9. Credit allowed in case of certain separated spouses (sec. 9623 of the Act and sec. 32 of the Code)
  10. Modification of disqualified investment income test (sec. 9624 of the Act and sec. 32 of the Code)
  11. Application of earned income tax credits in possessions of the United States (sec. 9625 of the Act and sec. 32 of the Code)
  12. Temporary special rule for determining earned income for purposes of earned income tax credit (sec. 9626 of the Act and sec. 32 of the Code)
  13. Refundability and enhancement of child and dependent care tax credit (sec. 9631 of the Act and sec. 21 of the Code)
  14. Increase in exclusion for employer-provided dependent care assistance (sec. 9632 of the Act and sec. 129 of the Code)
  15. Extension of credits and other modifications (secs. 9641 to 9643 of the Act)
  16. Extension of employee retention credit (sec. 9651 of the Act and new sec. 3134 of the Code)
  17. Improving affordability by expanding premium assistance for consumers (Sec. 9661 of the Act and sec. 36B of the Code)
  18. Temporary modification of limitations on reconciliation of tax credits for coverage under a qualified health plan with advance payments of such credit (sec. 9662 of the Act and sec. 36B of the Code)
  19. Application of premium tax credit in case of individuals receiving unemployment compensation during 2021 (sec. 9663 of the Act and sec. 36B of the Code)
  20. Repeal of worldwide allocation of interest election (sec. 9671 of the Act and sec. 864 of the Code)
  21. Clarification of tax treatment of targeted EIDL advances and restaurant revitalization grants (secs. 9672 and 9673 of the Act)
  22. Modification of exceptions for reporting of third party network transactions (sec. 9674 of the Act and sec. 6050W of the Code)
  23. Modification of treatment of student loan forgiveness (sec. 9675 of the Act and sec. 108 of the Code)
  24. Temporary delay of designation of multiemployer plans as in endangered, critical, or critical and declining status (sec. 9701 of the Act, sec. 432 of the Code, and sec. 305 of ERISA)
  25. Temporary extension of the funding improvement and rehabilitation periods for multiemployer pension plans in critical and endangered status for 2020 or 2021 (sec. 9702 of the Act, sec. 432 of the Code, and sec. 305 of ERISA)
  26. Adjustments to funding standard account rules (sec. 9703 of the Act, sec. 431 of the Code, and sec. 304 of ERISA)
  27. Special financial assistance program for financially troubled multiemployer plans (sec. 9704 of the Act, sec. 432 of the Code, and secs. 4005, 4006, and 4262 of ERISA)
  28. Extended amortization for single employer plans (sec. 9705 of the Act, sec. 430 of the Code, and sec. 303 of ERISA)
  29. 6. Extension of pension funding stabilization percentages for single employer plans (sec. 9706 of the Act, sec. 430 of the Code, and secs. 101 and 303 of ERISA)
  30. Modification of special rules for minimum funding standards for community newspaper plans (sec. 9707 of the Act, sec. 430 of the Code, and sec. 303 of ERISA)
  31. Expansion of limitation on excessive employee remuneration (sec. 9708 of the Act and sec. 162(m) of the Code).
PART TWO: SURFACE TRANSPORTATION EXTENSION ACT OF 2021 (PUBLIC LAW 117–44)
  1. Extension of expenditure authority for Highway Trust Fund, Sport Fish Restoration and Boating Trust Fund, and Leaking Underground Storage Tank Trust Fund (sec. 201 of the Act and secs. 9503, 9504, and 9508 of the Code)
PART THREE: FURTHER SURFACE TRANSPORTATION EXTENSION ACT OF 2021 (PUBLIC LAW 117–52)
  1. Extension of expenditure authority for Highway Trust Fund, Sport Fish Restoration and Boating Trust Fund, and Leaking Underground Storage Tank Trust Fund (sec. 4 of the Act and secs. 9503, 9504, and 9508 of the Code)
PART FOUR: INFRASTRUCTURE INVESTMENT AND JOBS ACT (PUBLIC LAW 117–58)
  1. Extension of Highway Trust Fund expenditure authority (sec. 80101 of the Act and secs. 9503, 9504, and 9508 of the Code)
  2. Extension of highway-related taxes (sec. 80102 of the Act and secs. 4041, 4051, 4071, 4081, 4221, 4481, 4483, and 6412 of the Code)
  3. Further additional transfers to the Highway Trust Fund (sec. 80103 of the Act and sec. 9503 of the Code)
  4. Extension and modification of certain Superfund excise taxes (sec. 80201 of the Act and secs. 4661, 4671, and 4672 of the Code)
  5. Private activity bonds for qualified broadband projects (sec. 80401 of the Act and secs. 141 and 142 of the Code)
  6. Carbon dioxide capture facilities (sec. 80402 of the Act and secs. 141 and 142 of the Code)
  7. Increase in national limitation amount for qualified highway or surface freight transportation facilities (sec. 80403 of the Act and secs. 141 and 142 of the Code)
  8. Modification of automatic extension of certain deadlines in the case of taxpayers affected by Federally declared disasters (sec. 80501 of the Act and sec. 7508A of the Code)
  9. Modification of rules for postponing certain acts by reason of service in combat zone or contingency operation (sec. 80502 of the Act and sec. 7508 of the Code)
  10. Tolling of time within which to file a Tax Court petition (sec. 80503 of Act and sec. 7451 of the Code)
  11. Authority to postpone certain tax deadlines by reason of significant fires (sec. 80504 of the Act and sec. 7508A of the Code)
  12. Modification of tax treatment of contributions to the capital of a corporation (sec. 80601 of the Act and sec. 118 of the Code)
  13. Extension of interest rate stabilization (sec. 80602 of the Act, sec. 430 of the Code, and secs. 101 and 303 of ERISA)
  14. Information reporting for brokers and digital assets (sec. 80603 of the Act and secs. 6045, 6045A, and 6050I of the Code)
  15. Termination of employee retention credit for employers subject to closure due to COVID–19 (sec. 80604 of the Act and sec. 3134 of the Code)
PART FIVE: CONSOLIDATED APPROPRIATIONS ACT, 2022 (PUBLIC LAW 117–103)
  1. Exemption for telehealth services (sec. 307 of Division P of the Act and sec. 223 of the Code)
PART SIX: CHIPS ACT OF 2022 (PUBLIC LAW 117–167, DIVISION A)
  1. Advanced manufacturing investment credit (sec. 107 of the Act and new sec. 48D of the Code)
PART SEVEN: AN ACT TO PROVIDE FOR RECONCILIATION PURSUANT TO TITLE II OF S. CON. RES. 14 (PUBLIC LAW 117–169)[IRA 2022]
  1. Corporate alternative minimum tax (secs. 10101 and 13904(a) of the Act; secs. 38, 55, and 6655; and new secs. 56A and 59(k) and (l) of the Code)
  2. Excise tax on repurchase of corporate stock (sec. 10201 of the Act and new sec. 4501 of the Code)
  3. Excise tax imposed on drug manufacturers during noncompliance periods (sec. 11003 of the Act and sec. 5000D of the Code)
  4. Safe harbor for absence of deductible for insulin (sec. 11408 of the Act and sec. 223 of the Code)
  5. Improve affordability and reduce premium costs of health insurance for consumers (sec. 12001 of the Act and sec. 36B of the Code)
  6. Extension and modification of credit for electricity produced from certain renewable resources (sec. 13101 of the Act and secs. 45 and 48 of the Code)
  7. Extension and modification of energy credit (sec. 13102 of the Act and sec. 48 of the Code)
  8. Increase in energy credit for solar and wind facilities placed in service in connection with low-income communities (sec. 13103 of the Act and sec. 48 of the Code)
  9. Extension and modification of credit for carbon oxide sequestration (sec. 13104 of the Act and sec. 45Q of the Code)
  10. Zero-emission nuclear power production credit (sec. 13105 of the Act and new sec. 45U of the Code)
  11. Extension of incentives for biodiesel, renewable diesel and alternative fuels (sec. 13201 of the Act and secs. 40A, 6426, and 6427 of the Code) ..... 225 7. Extension of second generation biofuel incentives (sec. 13202 of the Act and sec. 40(b)(6) of the Code)
  12. Sustainable aviation fuel credit (sec. 13203 of the Act and new sec. 40B of the Code)
  13. Clean hydrogen (sec. 13204 of the Act and new sec. 45V of the Code) ...... 232 10. Extension, increase, and modifications of nonbusiness energy property credit (sec. 13301 of the Act and sec. 25C of the Code)
  14. Residential clean energy credit (sec. 13302 of the Act and sec. 25D of the Code)
  15. Energy efficient commercial buildings deduction (sec. 13303 of the Act and sec. 179D of the Code)
  16. New energy efficient home credit (sec. 13304 of the Act and sec. 45L of the Code)
  17. Clean vehicle credit (sec. 13401 of the Act and sec. 30D of the Code)
  18. Credit for previously owned clean vehicles (sec. 13402 of the Act and new sec. 25E of the Code)
  19. Qualified commercial clean vehicles (sec. 13403 of the Act and new sec. 45W of the Code)
  20. Alternative fuel refueling property credit (sec. 13404 of the Act and sec. 30C of the Code)
  21. Extension of the advanced energy project credit (sec. 13501 of the Act and sec. 48C of the Code)
  22. Advanced manufacturing production credit (sec. 13502 of the Act and new sec. 45X of the Code)
  23. Reinstatement of Superfund (sec. 13601 of the Act and sec. 4611 of the Code)
  24. Clean electricity production credit (sec. 13701 of the Act and new sec. 45Y of the Code)
  25. Clean electricity investment credit (sec. 13702 of the Act and new sec. 48E of the Code)
  26. Cost recovery for qualified facilities, qualified property, and energy storage technology (sec. 13703 of the Act and sec. 168(e)(3)(B) of the Code)
  27. Clean fuel production credit (sec. 13704 of the Act and new sec. 45Z of the Code)
  28. Elective payment for energy property and electricity produced from certain renewable resources, etc. (sec. 13801 of the Act and sec. 39 and new secs. 6417 and 6418 of the Code)
  29. Permanent extension of tax rate to fund Black Lung Disability Trust Fund (sec. 13901 of the Act and sec. 4121 of the Code)
  30. Increase in research credit against payroll tax for small businesses (sec. 13902 of the Act and secs. 41(h) and 3111(f) of the Code)
  31. Extension of limitation on excess business losses of noncorporate taxpayers (sec. 13903(b) of the Act and sec. 461(l) and (j) of the Code)
  32. Removal of harmful small business taxes; extension of limitation on deduction for state and local, etc., taxes (secs. 13904 and 10101 of the Act and secs. 55 and 59 of the Code)
PART EIGHT: CONSOLIDATED APPROPRIATIONS ACT, 2023 (PUBLIC LAW 117–328) - DIVISION T—SECURE 2.0 ACT OF 2022
  1. Expanding automatic enrollment in retirement plans (sec. 101 of the Act and sec. 414 of the Code)
  2. Modification of credit for small employer pension plan start-up costs (sec. 102 of the Act and sec. 45E of the Code)
  3. Saver’s match (sec. 103 of the Act and new sec. 6433 of the Code)
  4. Promotion of saver’s match (sec. 104 of the Act)
  5. Pooled employer plans modification (sec. 105 of the Act and section 3(43) of ERISA)
  6. Multiple employer 403(b) plans (sec. 106 of the Act and secs. 403(b), 6057, and 6058 of the Code and secs. 3(43) and 3(44) of ERISA)
  7. Increase in age for required beginning date for mandatory distributions (sec. 107 of the Act and sec. 401(a)(9) of the Code)
  8. Indexing IRA catch-up limit (sec. 108 of the Act and sec. 219 of the Code)
  9. Higher catch-up limit to apply at age 60, 61, 62, and 63 (sec. 109 of the Act and sec. 414(v) of the Code)
  10. Treatment of student loan payments as elective deferrals for purposes of matching contributions (sec. 110 of the Act and secs. 401(m), 403(b), 408(p), and 457(b) of the Code)
  11. Application of credit for small employer pension plan start-up costs to employers which join an existing plan (sec. 111 of the Act and sec. 45E of the Code)
  12. Military spouse retirement plan eligibility credit for small employers (sec. 112 of the Act and new sec. 45AA of the Code)
  13. Small immediate financial incentives for contributing to a plan (sec. 113 of the Act and secs. 401(k), 403(b), and 4975 of the Code)
  14. Deferral of tax for certain sales of employer stock to employee stock ownership plan sponsored by S corporation (sec. 114 of the Act and sec. 1042 of the Code)
  15. Withdrawals for certain emergency expenses (sec. 115 of the Act and sec. 72(t) of the Code)
  16. Allow additional nonelective contributions to SIMPLE plans (sec. 116 of the Act and sec. 408(p) of the Code)
  17. Contribution limit for SIMPLE plans (sec. 117 of the Act and secs. 401(k), 408(p), and 414(v) of the Code)
  18. Tax treatment of certain non-trade or business SEP contributions (sec. 118 of the Act and sec. 4972 of the Code)
  19. Application of section 415 limit for certain employees of rural electric cooperatives (sec. 119 of the Act and sec. 415(b) of the Code)
  20. Exemption for certain automatic portability transactions (sec. 120 of the Act and sec. 4975 of the Code)
  21. Starter 401(k) plans for employers with no retirement plan (sec. 121 of the Act and new secs. 401(k)(16) and 403(b)(16) of the Code)
  22. Certain securities treated as publicly traded in case of employee stock ownership plans (sec. 123 of the Act and sec. 401 of the Code)
  23. Modification of age requirement for qualified ABLE programs (sec. 124 of the Act and sec. 529A of the Code)
  24. Improving coverage for part-time workers (sec. 125 of the Act, secs. 401(k) and 403(b) of the Code, and sec. 202 of ERISA)
  25. Special rules for certain distributions from long-term qualified tuition programs to Roth IRAs (sec. 126 of the Act and sec. 529 of the Code)
  26. Emergency savings accounts linked to individual account plans (sec. 127 of the Act, sec. 402A of the Code, and new secs. 801 to 804 of ERISA)
  27. Enhancement of 403(b) plans (sec. 128 of the Act and sec. 403(b) of the Code)
  28. Remove required minimum distribution barriers for life annuities (sec. 201 of the Act and sec. 401(a)(9) of the Code)
  29. Qualifying longevity annuity contracts (sec. 202 of the Act and sec. 401(a)(9))
  30. Insurance-dedicated exchange-traded funds (sec. 203 of the Act and sec. 817(h) of the Code)
  31. Eliminating a penalty on partial annuitization (sec. 204 of the Act and Treas. Reg. secs. 1.401(a)(9)–5 and –6)
  32. Recovery of retirement plan overpayments (sec. 301 of the Act, secs. 402 and 414 of the Code, and sec. 206 of ERISA)
  33. Reduction in excise tax on certain accumulations in qualified retirement plans (sec. 302 of the Act and sec. 4974 of the Code)
  34. Retirement savings lost and found (sec. 303 of the Act and new sec. 523 of ERISA)
  35. Updating the dollar limit for mandatory distributions (sec. 304 of the Act, sec. 401(a)(31) of the Code, and sec. 203(e)(1) of ERISA)
  36. Expansion of Employee Plans Compliance Resolution System (sec. 305 of the Act and secs. 401, 403, and 408 of the Code)
  37. Eliminate the ‘‘first day of the month’’ requirement for governmental section 457(b) plans (sec. 306 of the Act and sec. 457(b) of the Code)
  38. One-time election for qualified charitable distribution to split-interest entity; increase in qualified charitable distribution limitation (sec. 307 of the Act and sec. 408(d)(8) of the Code)
  39. Distributions to firefighters (sec. 308 of the Act and sec. 72(t) of the Code)
  40. Exclusion of certain disability-related first responder retirement payments (sec. 309 of the Act and new sec. 139C of the Code)
  41. Application of top-heavy rules to defined contribution plans covering excludable employees (sec. 310 of the Act and sec. 416 of the Code)
  42. Repayment of qualified birth or adoption distributions limited to three years (sec. 311 of the Act and sec. 72(t) of the Code)
  43. Employer may rely on employee certifying that deemed hardship distribution conditions are met (sec. 312 of the Act and secs. 401(k), 403(b), and 457(b) of the Code)
  44. Individual retirement plan statute of limitations for excise tax on excess contributions and certain accumulations (sec. 313 of the Act and sec. 6501 of the Code)
  45. Penalty-free withdrawals from retirement plans for individuals in case of domestic abuse (sec. 314 of the Act and sec. 72(t) of the Code)
  46. Reform of family attribution rule (sec. 315 of the Act and sec. 414 of the Code)
  47. Amendments to increase benefit accruals under plan for previous plan year allowed until employer tax return due date (sec. 316 of the Act and sec. 401(b) of the Code)
  48. Retroactive first year elective deferrals for sole proprietors (sec. 317 of the Act and sec. 401(b) of the Code)
  49. Performance benchmarks for asset allocation funds (sec. 318 of the Act and sec. 404 of ERISA)
  50. Review and report to Congress relating to reporting and disclosure requirements (sec. 319 of the Act)
  51. Eliminating unnecessary plan requirements related to unenrolled participants (sec. 320 of the Act and sec. 414 of the Code)
  52. Review of pension risk transfer interpretive bulletin (sec. 321 of the Act and sec. 404(a) of ERISA)
  53. Tax treatment of IRA involved in a prohibited transaction (sec. 322 of the Act and sec. 408 of the Code)
  54. Clarification of substantially equal periodic payment rule (sec. 323 of the Act and sec. 72(t) and (q) of the Code)
  55. Treasury guidance on rollovers (sec. 324 of the Act and secs. 402(c) and 408(d) of the Code)
  56. Roth plan distribution rules (sec. 325 of the Act and sec. 402A(d) of the Code)
  57. Exception to penalty on early distributions from qualified plans for individuals with a terminal illness (sec. 326 of the Act and sec. 72(t) of the Code)
  58. Surviving spouse election to be treated as employee (sec. 327 of the Act and sec. 401(a)(9) of the Code)
  59. Repeal of direct payment requirement on exclusion from gross income of distributions from governmental plans for health and long-term care insurance (sec. 328 of the Act and sec. 402(l)(5)(A) of the Code)
  60. Modification of eligible age for exemption from early withdrawal penalty (sec. 329 of the Act and sec. 72(t) of the Code)
  61. Exemption from early withdrawal penalty for certain State and local government corrections employees (sec. 330 of the Act and sec. 72(t) of the Code)
  62. Special rules for use of retirement funds in connection with qualified Federally declared disasters (sec. 331 of the Act and sec. 72 of the Code)
  63. Employers allowed to replace SIMPLE retirement accounts with safe harbor 401(k) plans during a year (sec. 332 of the Act and secs. 72(t) and 408(p) of the Code)
  64. Elimination of additional tax on corrective distributions of excess contributions (sec. 333 of the Act and sec. 72(t) of the Code)
  65. Long-term care contracts purchased with retirement plan distributions (sec. 334 of the Act and sec. 6724(d) and new secs. 72(t)(2)(N), 401(a)(39), 403(a)(6), and 6050Z of the Code)
  66. Corrections of mortality tables (sec. 335 of the Act and sec. 430(h) of the Code)
  67. Report to Congress on section 402(f) notices (sec. 336 of the Act)
  68. Modification of required minimum distribution rules for special needs trusts (sec. 337 of the Act and sec. 401(a)(9) of the Code)
  69. Requirement to provide paper statements in certain cases (sec. 338 of the Act and sec. 105 of ERISA)
  70. Recognition of tribal government domestic relations orders (sec. 339 of the Act, sec. 414 of the Code, and sec. 206 of ERISA)
  71. Defined contribution plan fee disclosure improvements (sec. 340 of the Act and sec. 404 of ERISA)
  72. Consolidation of defined contribution plan notices (sec. 341 of the Act, secs. 401(k) and 414(w) of the Code, and secs. 404(c) and 514(e) of ERISA)
  73. Information needed for financial options risk mitigation (sec. 342 of the Act and new sec. 113 of ERISA)
  74. Defined
  75. Report on pooled employer plans (sec. 344 of the Act and sec. 3(43) of ERISA)
  76. Annual audits for groups of plans (sec. 345 of the Act)
  77. Cash balance (sec. 348 of the Act, sec. 411(b) of the Code, and sec. 204(b) of ERISA)
  78. Termination of variable rate premium indexing (sec. 349 of the Act and sec. 4006(a) of ERISA)
  79. Safe harbor for corrections of employee elective deferral failures (sec. 350 of the Act and sec. 414 of the Code)
  80. Amendments relating to Setting Every Community Up for Retirement Enhancement Act of 2019 (sec. 401 of the Act and secs. 401(k), 401(m), and 4973 of the Code)
  81. Provisions relating to plan amendments (sec. 501 of the Act)
  82. SIMPLE and SEP Roth IRAs (sec. 601 of the Act and secs. 408(k) and 408(p) of the Code)
  83. Hardship withdrawal rules for 403(b) plans (sec. 602 of the Act and sec. 403(b) of the Code)
  84. Elective deferrals generally limited to regular contribution limit (sec. 603 of the Act and sec. 414(v) of the Code)
  85. Optional treatment of employer matching and nonelective contributions as Roth contributions (sec. 604 of the Act and sec. 402A of the Code)
  86. Charitable conservation easements (sec. 605 of the Act and secs. 170, 6662, and 6664 of the Code)
  87. Enhancing retiree health benefits in pension plans (sec. 606 of the Act and sec. 420 of the Code)
  88. Provisions relating to judges of the Tax Court (sec. 701 of the Act and secs. 7447 and 7448 of the Code)
  89. Provisions relating to special trial judges of the Tax Court (sec. 702 of the Act and new sec. 7447A of the Code)
  90. Extension of safe harbor for absence of deductible for telehealth (sec. 4151 of Division FF of the Act and sec. 223(c) of the Code)

End of Tax Changes of the 117th Congress


Sunday, December 3, 2023

Odd Exclusion for Home Rental Is Overdue for Repeal

home with red bow tied around it

IRC Section 280A was enacted in 1976 (P.L. 94-455). This provision deals with office in the home and rental of a residence. It has a few provisions that either are no longer needed (rental of a residence can be governed by the passive activity loss limitation added in 1986) or clarified (the home office rules are not easy to get through). And ... subsection (g) should be repealed as inequitable and unnecessary.

Section 280A(g) provides that if a "dwelling unit" is used as a residence and rented for less than 15 days during the year, the rental revenue is tax-free! 

There is no logic to this exclusion. Anything else rented for 14 days or less during the year doesn't produce tax-free income. Perhaps it was to address small amounts of income someone might generate such as when a movie studio uses all or part of a home for 14 days or less. This rule is referred to by some as the "US Open tax break" because if your home (main home or vacation home) is near a venue where a major event will take place such as the US Open, the Super Bowl, a political convention, or other event where someone would love to rent your home, you are the winner. You can charge a lot of revenue and it's tax free. If you incur extra insurance or cleaning expenses, they are not deductible, but this is still a significant tax break.

In a recent case, Sinopoli, TC Memo 2023-105, the IRS and Tax Court allowed its use where shareholders of an S corporation held monthly meetings in each shareholders' homes resulting in each renting their "dwelling unit" for under 15 days. Now, they were charging way beyond what fair rent was (they charged $3,000 per use) but the IRS and court agreed on $500 although the court found this IRS figure to be "generous." 

The tax benefit to these shareholders is that they get to reduce their S corp income by this rental expense the corporation incurred and they get to treat the rent paid to them as tax-free. 

Oddities of this exclusion:

  • There was no information in Senate Report 94-1192 for P.L. 94-455 as to why the exclusion was included in a provision intended to clarify the rules for when someone could claim a deduction for an office in their home.
  • In the Sinopoli case, why should a deduction result in no income to the other party who provided the property? The Tax Court referred to the shareholder and S corp plan as a "tax savings scheme to distribute" the S corp's earnings to shareholders tax free. Why does our tax system have such a scheme?
  • When a business rents property from someone and pays $600 or more, they are required to issue a From 1099-MISC to the lessor making it easy to track and report as income (Section 6041).
  • When the lessee is not a business, the lessor can still identify that they collected rental income. After all, that lessor figured out how to advertise their home for rent, they can make a note in their tax files to pick up the rental income.
  • It has been known for years that this exclusion is used by people of means collecting significant rentals, such as during the US Open or Super Bowl, tax free. This is exclusion is not based on fairness, ability to pay, or any need to encourage such tax-free activity.
I'm not aware of any reason to justify keeping this exclusion. What do you think?