The Treasury and IRS have issued final regulations excepting certain partnership-related items from the centralized partnership audit regime created by the Bipartisan Budget Act of 2015 (BBA), providing alternative examination rules for the excepted items, conforming the existing centralized audit regime regulations to Internal Revenue Code changes, and clarifying the existing audit regime rules.

The Treasury and IRS have issued final regulations excepting certain partnership-related items from the centralized partnership audit regime created by the Bipartisan Budget Act of 2015 (BBA), providing alternative examination rules for the excepted items, conforming the existing centralized audit regime regulations to Internal Revenue Code changes, and clarifying the existing audit regime rules. The regulations finalize with revisions 2020 proposed regulations ( REG-123652-18).

Centralized Partnership Audit Regime

The Bipartisan Budget Act of 2015 (BBA, P.L. 114-74) replaced the Tax Equity and Fiscal Responsibility Act (TEFRA, P.L. 97-248) partnership procedures with a centralized partnership audit regime for making partnership adjustments and tax determinations, assessments, and collections at the partnership level. These changes were further amended by the Protecting Americans from Tax Hikes Act of 2015 (PATH Act, P.L. 114-113) and the Tax Technical Corrections Act of 2018 (TTCA, P.L. 115-141). The centralized audit regime, as amended, generally applies to returns filed for partnership tax years beginning after December 31, 2017. A partnership with no more than 100 partners may generally elect out of the centralized audit regime if all the partners are eligible partners.

Under the post-2017 centralized partnership audit regime, the IRS examines “partnership-related items” of all domestic and foreign partnerships and their partners. A "partnership-related item" is any item relevant to the determination of the income tax liability of any person. However, Code Sec. 6241(11), added by the BBA, authorizes Treasury to except “special enforcement matters” from the centralized partnership audit regime and to issue regulations providing alternative assessment and collection rules for those matters. The 2020 proposed regulations and these final regulations implement Code Sec. 6241(11) and make changes to previously issued final regulations pertaining to the centralized partnership audit regime.

Special Enforcement Matters

Code Sec. 6241(11) sets forth six categories of "special enforcement matters":

• (1) failures to comply with the requirements for a partnership partner or S corporation partner to furnish statements or compute and pay an imputed underpayment;
• (2) assessments relating to termination assessments of income tax or jeopardy assessments of income, estate, gift, and certain excise taxes;
• (3) criminal investigations;
• (4) indirect methods of proof of income;
• (5) foreign partners or partnerships; and
• (6) other matters identified in IRS regulations.

The final regulations add three new types of special enforcement matters:

• partnership-related items underlying non-partnership-related items;
• relationship of a partner to the partnership under the Code Sec. 267(b) or Code Sec. 707(b) related-party rules and extensions of the partner’s period of limitations; and
• penalties and taxes imposed on the partnership under chapter 1.

The final regulations also require the IRS to provide written notice of most special enforcement matters to taxpayers to whom the adjustments are being made.

In addition, the final regulations clarify that the IRS may adjust partnership-level items for a partner or indirect partner without regard to the centralized audit regime if the adjustment relates to termination and jeopardy assessments, the partner is under criminal investigation, or the adjustment is based on an indirect method of proof of income.

However, the final regulations provide that a determination about partnership-related items made outside of the centralized partnership regime is not binding on any person who is not a party to that proceeding. The final regulations clarify that neither the partnership nor the other partners are bound by a determination regarding a partnership-related item from a partner-level examination and that neither the partnership nor the other partners need to adjust their returns.

In addition, the special-enforcement-matter rules do not apply to the extent a partner can demonstrate that adjustments to partnership-related items in the deficiency or an adjustment by the IRS were (i) previously taken into account under the centralized audit regime by the person being examined or (ii) included in an imputed underpayment paid by a partnership (or pass-through partner) for any tax year in which the partner was a reviewed-year partner (but only if the amount exceeds the amount reported by the partnership to the partner that was either reported by the partner or included in the deficiency or adjustment).

Imputed Underpayments

The IRS and Treasury believe that a mechanism must exist for including adjustments from a centralized-regime audit in the partnership’s imputed underpayment, even if the partnership elects to “push out” the adjustment to its partners.

Under existing regulations for calculating imputed underpayments, an adjustment to a non-income item (that is, an item that is not an item of income, gain, loss, deduction, or credit) that is related to, or results from, an adjustment to an item of income, gain, loss, deduction, or credit is generally treated as zero. The final regulations require a partnership to take into account an adjustment to a non-income item on its adjustment-year return by adjusting the item to be consistent with the adjustment, but only to the extent the item would appear on that return without regard to the adjustment. If the item already appeared on the partnership’s adjustment-year return as a non-income item or the item appeared as a non-income item on any return of the partnership for a tax year between the reviewed year and the adjustment year, the partnership does not create a new item on the partnership’s adjustment-year return.

The final regulations provide that if the partnership is required to adjust its basis in an asset, the partnership does so in the adjustment year; however, the partnership only recognizes income and gain as a result of the basis adjustment in situations in which income or gain would be recognized. The final regulations also demonstrate how adjustments to liabilities are taken into account when they do not result in an imputed underpayment, and how an amended return should reflect adjustments to non-income items.

The final regulations follow the proposed regulations in allowing either the IRS or the partnership to treat an adjustment to a non-income item as zero. The final regulations also permit a partnership to treat such an adjustment as zero if the adjustment is related to, or results from, another adjustment to a non-income item. The partnership may not, however, treat such an adjustment as zero if one adjustment is positive and the other is negative.

Partnership Ceasing to Exist

Code Sec. 6241 states that if a partnership ceases to exist before any partnership adjustments take effect, the former partners of the partnership must take the adjustments into account in the manner prescribed in regulations. The final regulations clarify that even if a partnership has ceased to exist, it may make the election to push out the adjustments, request modification of the imputed underpayment, or pay the imputed underpayment within ten days of notice and demand for payment.

A section of the proposed regulations that would define "former partners" is not included in the final regulations and remains proposed.

Effective and Applicability Dates

The final regulations, which are effective December 8, 2022, apply to tax years ending on or after November 20, 2020 (except that final Reg. § 301.6241-7(b) applies to tax years beginning after December 20, 2018).

An IRS Notice provides guidance on the prevailing wage and apprenticeship requirements that the Inflation Reduction Act of 2022 ( P.L. 117-169) added to several new and amended tax credits and deductions.

An IRS Notice provides guidance on the prevailing wage and apprenticeship requirements that the Inflation Reduction Act of 2022 ( P.L. 117-169) added to several new and amended tax credits and deductions. The IRS also anticipates issuing proposed regulations and other guidance with respect to the prevailing wage and apprenticeship requirements.

These requirements generally apply if construction of a qualified facility, or installation of qualified property in an energy efficient commercial building, begins on or after the date that is 60 days after the IRS publishes guidance. This notice serves as the guidance that starts the 60-day clock. Thus, these rules apply when a qualified facility begins construction or the installation of qualified property begins on or after January 29, 2023.

The notice also provides guidance for determining the beginning of construction of a facility for certain credits, and the beginning of installation of certain property with respect to the energy efficient commercial buildings deduction.

The notice includes examples to illustrate these rules.

Prevailing Wage Requirements

For purposes of the credits, a taxpayer must satisfy the prevailing wage requirements with respect to any laborer or mechanic employed in the construction, alteration, or repair of a facility, property, project, or equipment by the taxpayer and the taxpayer’s contractors and subcontractors. The taxpayer must also maintain and preserve sufficient records to establish compliance, including books of account or records for work performed by contractors or subcontractors.

The prevailing wage rate is generally the one published by the Secretary of Labor on www.sam.gov for the geographic area and type of construction applicable to the facility, including all labor classifications for the construction, alteration, or repair work that will be done on the facility by laborers or mechanics.

If the Secretary has not published a prevailing wage rate for the geographic area or the particular type of work, the taxpayer may request a wage determination or wage rate from the Wage and Hour Division. The taxpayer must follow prescribed procedures in order to rely on the provided wage or rate.

Similarly, for purposes of the deduction for energy efficient commercial buildings, the prevailing wage rate for installation of energy efficient commercial building property, energy efficient building retrofit property, or property installed pursuant to a qualified retrofit plan, is determined with respect to the prevailing wage rate for construction, alteration, or repair of a similar character in the locality in which the property is located, as most recently determined by the Secretary of Labor.

Apprenticeship Requirements

A taxpayer satisfies the apprenticeship requirements if:

1. The taxpayer satisfies the Apprenticeship Labor Hour Requirements, subject to any applicable Apprenticeship Ratio Requirements;
2. The taxpayer satisfies the Apprenticeship Participation Requirements; and
3. The taxpayer maintains sufficient records.

Under the Good Faith Effort Exception, the taxpayer will be considered to have made a good faith effort in requesting qualified apprentices if the taxpayer requests qualified apprentices from a registered apprenticeship program in accordance with usual and customary business practices for registered apprenticeship programs in a particular industry.

Beginning of Construction or Installation

The beginning of construction is determined under the Physical Work Test and the Five-Percent Safe Harbor established in Notice 2013-29. The Continuity Safe Harbor established by Notice 2016-31 also applies.

The IRS has notified taxpayers, above the age of 72 years, that they can delay the withdrawal of the required minimum distributions (RMD) from their retirement plans and Individual Retirement Accounts (IRA), until April 1, following the later of the calendar year that the taxpayer reaches age 72 or, in a workplace retirement plan, retires.

The IRS has notified taxpayers, above the age of 72 years, that they can delay the withdrawal of the required minimum distributions (RMD) from their retirement plans and Individual Retirement Accounts (IRA), until April 1, following the later of the calendar year that the taxpayer reaches age 72 or, in a workplace retirement plan, retires. The Service also reminded taxpayers that they must meet the deadlines to avoid penalties and that such RMDs may not be rolled over to another IRA or retirement plan. The Service also informed taxpayers that not taking a required distribution, or not withdrawing enough, could mean a 50% excise tax on the amount not distributed.

The deadlines for the different RMDs are as follows:

• Taxpayers holding traditional IRAs , and SEP, SARSEP, and SIMPLE IRA should take their first RMD, even if they’re still working, by April 1, 2023, and the second RMD by Dec. 31, 2023, and each year thereafter.
• For taxpayers with retirement plans, the first RMD is due by April 1 of the later of the year they reach age 72, or the participant is no longer employed. A 5% owner of the employer must begin taking RMDs at age 72.
• An IRA trustee, or plan administrator, must either report the amount of the RMD to the IRA owner or offer to calculate it. They may be able to withdraw the total amount from one or more of the IRAs. However, RMDs from workplace retirement plans must be taken separately from each plan.

An RMD may be required for an IRA, retirement plan account or Roth IRA inherited from the original owner. A 2020 RMD that qualified as a coronavirus-related distribution may be repaid over a 3-year period or the taxes due on the distribution may be spread over three years. A 2020 withdrawal from an inherited IRA could not be repaid to the inherited IRA but may be spread over three years for income inclusion.

The Financial Crimes Enforcement Network (FinCEN) has issued a Notice of Proposed Rulemaking (NPRM) that would implement the beneficial ownership information provisions of the Corporate Transparency Act (CTA) that govern access to and protection of beneficial ownership information.

The Financial Crimes Enforcement Network (FinCEN) has issued a Notice of Proposed Rulemaking (NPRM) that would implement the beneficial ownership information provisions of the Corporate Transparency Act (CTA) that govern access to and protection of beneficial ownership information. The proposed regulations address the circumstances under which beneficial ownership information may be disclosed to certain governmental authorities and financial institutions, and how that information must be protected.

The proposed regulations would—

• specify how government officials would access beneficial ownership information in support of law enforcement, national security, and intelligence activities;
• describe how certain financial institutions and their regulators would access that information to fulfill customer due diligence requirements and conduct supervision; and
• set high standards for protecting this sensitive information, consistent with CTA goals and requirements.

The NPRM also proposes amendments to the final reporting rule issued on September 30, 2022, effective January 1, 2024, to specify when reporting companies may report FinCEN identifiers associated with entities.

Limiting Access to Beneficial Ownership Information

The NPRM follows the final reporting rule which requires most corporations, limited liability companies, and other similar entities created in or registered to do business in the United States, to report information about their beneficial owners to FinCEN. Per CTA requirements, the proposed regulations limit access to beneficial ownership information to—

• federal agencies engaged in national security, intelligence, or law enforcement activities;
• state, local, and Tribal law enforcement agencies, if authorized by a court of competent jurisdiction;
• financial institutions with customer due diligence requirements, and federal regulators supervising them for compliance with those requirements;
• foreign law enforcement agencies, judges, prosecutors, central authorities, and other agencies that meet specific criteria, and whose requests are made under an international treaty, agreement, or convention, or via law enforcement, judicial, or prosecutorial authorities in a trusted foreign country; and
• U.S. Treasury officers and employees whose official duties require beneficial ownership information inspection or disclosure, or for tax administration.

The proposed regulation would subject each authorized recipient category to unique security and confidentiality protocols that align with the scope of the access and use provisions.

Proposed Effective Date

FinCEN is proposing an effective date of January 1, 2024, to align with the date when the final beneficial ownership information reporting rule becomes effective.

Request for Comments

Interested parties can submit written comments on the NPRM by or before February 14, 2023 (60 days following publication in the Federal Register). Comments may be submitted by the Federal E-rulemaking Portal ( regulations.gov), or by mail to Policy Division, Financial Crimes Enforcement Network, P.O. Box 39, Vienna, VA 22183. Refer to Docket Number FINCEN-2021-0005 and RIN 1506-AB49/AB59.

The IRS and the Treasury Department have released final regulations that provide some clarity and relief with regards to certain provisions of the Affordable Care Act ( P.L. 111-148), including the definition of minimum essential coverage under Code Sec. 5000A and reporting requirements for health insurance issuers and employers under Code Secs. 6055 and 6056. The final regulations finalize 2021 proposed regulations with some clarifications ( REG-109128-21).

The IRS and the Treasury Department have released final regulations that provide some clarity and relief with regards to certain provisions of the Affordable Care Act ( P.L. 111-148), including the definition of minimum essential coverage under Code Sec. 5000A and reporting requirements for health insurance issuers and employers under Code Secs. 6055 and 6056. The final regulations finalize 2021 proposed regulations with some clarifications ( REG-109128-21).

The final regulations provide that the term "minimum essential coverage" does not include Medicaid coverage limited to COVID-19 testing and diagnostic services provided under the Families First Coronavirus Response Act ( P.L. 116-127). If an individual qualifies solely for this coverage, then it does not prevent them from claiming the premium tax credit under Code Sec. 36B. This amendment to Reg.§ 1.5000A-2 applies for months beginning after September 28, 2020.

The final regulations also provide:

• An automatic 30-day extension of time under Code Sec. 6056 for "applicable large employers" (generally employers with 50 or more full-time employees, including full-time equivalent employees) to furnish statements relating to health insurance that the applicable large employers offer to their full-time employees; ·
• An automatic 30-day extension of time under Code Sec. 6055 for providers of minimum essential coverage (such as health insurance issuers) that would provide an automatic extension of time for furnishing statements to responsible individuals; and
• An alternative method for reporting entities to furnish statements to their insured members when their shared responsibility payment is zero. The regulations under Reg.§1.6055-1(g)(4)(ii)(B) provide sample language for furnishing these statements.

The regulations under Reg. §§1.6055-1 and 301.6056-1 apply for years beginning after December 31, 2021.

The final regulations affect some taxpayers who claim the premium tax credit; health insurance issuers, self-insured employers, government agencies, and other persons that provide minimum essential coverage to individuals; and applicable large employers.

A theme running through the recent Internal Revenue Service Independent Office of Appeals Focus Guide for fiscal year 2023 is moving on past the issues created by the COVID-19 pandemic and getting back to helping taxpayers through the appeals process.

A theme running through the recent Internal Revenue Service Independent Office of Appeals Focus Guide for fiscal year 2023 is moving on past the issues created by the COVID-19 pandemic and getting back to helping taxpayers through the appeals process.

"It's time, as we leave some of those pandemic issues behind us, to focus more on our core mission in appeals, which is the quality resolution of taxpayer cases," Independent Office of Appeals Chief Andy Keyso said in a recent interview with Federal Tax Daily. "I think that's the theme you see throughout the focus guide," which was issued November 4, 2022.

To that end, Keyso highlighted two key areas that will enable the office to meet that core mission – staffing and technology upgrades.

Rebuilding Staff

On the staffing side, Keyso noted that 10 years ago, the Appeals staff was at 2,100 employees, but in that window dropped to a low of about 1,100.

"We have made a big push to restack, using any kind of approval we could get here internally, and we currently are sitting at about 1,500 employees," he said, adding that the office currently has about 1,500 employees, with a goal in 2023 to get up to 1,725.

Keyso noted that the office is different from other parts of the IRS that have an exam or a collections function.

"If you don’t have the number of people you’d like to have, you just do fewer collection actions or you do fewer audits," Keyso said. "In Appeals, we have unique challenges. We’ve got to work every case that comes in the door. We can’t say, ‘We don’t have enough people, so we are not going to work your case.’ So for us, hiring is particularly an acute issue and recruiting and hiring will be one of our focus areas for this year."

He added that the staffing targets are based on the IRS’ set budget for 2023 and do not include potential increases that could come with the additional funding provided by the Inflation Reduction Act.

Improving Technology

Like the rest of the agency, the Office of Appeals is working through its own technology issues and is in need of upgrades.

In particular, Keyso highlighted the need to get away from paper.

"I think we learned during the pandemic a few things about technology and how paper can really be our Achilles heel when you have to move paper case files," he said. "That was a particular issue during the pandemic when you didn’t have all of your people in the office to ship case files around."

Moving to a more paperless environment is a "continuing challenge," Keyso said, not only for communicating between Appeals employees, but between staff and taxpayers. "Should we really be mailing things back and forth through the U.S. Postal Service? Or is there a better way to communicate with taxpayers that’s faster and maybe preferable to taxpayers?"

As part of the technology challenges, the Independent Office of Appeals also is looking to continue to use video conferencing, something that gained traction during the pandemic.

"With the service wide return to the office, we are again offering in person conferences, which is something Appeals is very excited about," Amy Giuliano, senior advisor to the Chief and Deputy Chief in the Office of Appeal, said. "But we want video conferences to remain a permanent option to alongside in person. We requested comments in August … for people to submit input on experiences they had with video conferences with appeals that should inform our longer term guidelines. And we've received a lot of positive feedback that video conferences, when they're managed effectively, are a great way for a taxpayer to present their case to appeals."

She applauded the fact that video conferences have the benefits of a face-to-face conference in that one can see the IRS agent they are dealing with, but they avoid the logistical issues with traveling to an IRS office to conduct the meeting. It makes things more accessible, especially if the taxpayer has medical or other mobility issues.

"That's why it's so important that it remain an option going forward alongside in person and alongside telephone," she said.

Improving Overall Access

Keyso also noted that a key area of focus going forward is improving the overall access to the Independent Office of Appeals now that access has been codified into law through the Taxpayer First Act of 2019. Treasury is currently working on regulations that will implement the law.

"Our position in the Appeals Office is, you know, we want the broadest access to appeals possible for us to hear controversies or disputes between IRS and taxpayer," Keyso said. "So we will continue to push for broad access to taxpayers to appeals."

Giuliano added that "enhancing the taxpayer experience is really what sort of animates and informs everything else that we're doing."

Keyso also mentioned that Appeals is planning on continuing convening practitioner panels, during which the office invites practitioners to talk about issues they are facing as they deal with the appeals process. He noted that it was through these panels that the office made changes to letters that went out to taxpayers and their representatives that included more contact information on managers so taxpayers and their representatives have it handy if they need to escalate a situation.

Audits by the Internal Revenue Service in 2017 and 2019 were not conducted to target specific individuals, according to a new report by the Treasury Inspector General for Tax Administration.

Audits by the Internal Revenue Service in 2017 and 2019 were not conducted to target specific individuals, according to a new report by the Treasury Inspector General for Tax Administration.

The report, dated November 29, 2022, but released December 1, found that "key decisions and information related to the tax return selection process for Tax Years 2017 and 2019 were determined prior to the start of each year’s respective filing season and prior to the selection of any returns," the Treasury watchdog said in a statement. "TIGTA also confirmed that the computer program used to select tax returns worked as designed and di not included any malicious code that would force the selection of specific taxpayers for an NRP [National Research Program] audit."

TIGTA conducted the analysis of the audit selection process following a July 2022 media report that suggested the selection for those tax years may not have been random. To answer the allegations, TIGTA hired a contractor that, according to the report, "replicated the process. Specifically, the contractor replicated each week’s original sample selection file through April 2018 and July 2020 for TYs 2017 and 2019, respectively."

Once replicated, a return-by-return comparison of the replicated files and the original sample selection was conducted to verify the files matched.

"They concluded that the tax returns in the original samples were the same tax returns selected when the process was replicated using the respective seed numbers," the report states. "TIGTA also compared the contractor’s replicated weekly output files to the original weekly output files, and same as the IRS, TIGTA determined they matched."

The report noted that a line-by-line review of the original source code was conducted "to determine whether information (i.e., TIN) was improperly coded in the program that would result in a specific taxpayer being selected for an NRP audit. The contractor concluded that no specific taxpayer information was included in the original source code."

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.

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.

Q. A large portion of my portfolio is invested in Internet stocks and with the recent market downturn, I've accumulated some substantial losses on certain stocks. Although I think these stocks will eventually turn around, I'd love to use some of those losses to offset gains from other stocks I'd like to sell. From a tax standpoint, can I sell stock at a loss and then turn around and immediately buy it back?

Q. A large portion of my portfolio is invested in Internet stocks and with the recent market downturn, I've accumulated some substantial losses on certain stocks. Although I think these stocks will eventually turn around, I'd love to use some of those losses to offset gains from other stocks I'd like to sell. From a tax standpoint, can I sell stock at a loss and then turn around and immediately buy it back?

A. If only it were that simple. The transaction you are proposing is considered a "wash sale" in the eyes of the IRS. A wash sale is the sale of a security (e.g., stock or bond) at a loss where the taxpayer turns around and buys back substantially the same security within 30 days. With the wash sale rules, the IRS seeks to eliminate the ability to deduct current losses on these types of transactions, and instead allows a basis adjustment to the new security purchased, in effect deferring the recognition of the earlier loss.

Example: You sell 1,000 shares of Dotcom Co. stock at a loss of $2,000. Next week, you buy another 1,000 shares of the same company's stock for $5,000. Instead of allowing the deduction of the $2,000 on your return, the wash sale rules say you must instead adjust the basis of your newest purchase to $7,000. When you go to sell the stock later at say $10,000, instead of having a $5,000 gain ($10,000 sales price minus $5,000 purchase price), your gain would only be $3,000 ($10,000 sales price minus $7,000 adjusted basis).

So how do you avoid the wash sale rules? Keep good track of the purchase and sale dates of your securities. If you do feel the need to reinvest in a similar investment vehicle, make sure that some element of the new security is different enough to avoid the "substantially similar" rule (e.g., if you sell a stock mutual fund, you can purchase another type of stock mutual fund.) As always, please contact the office if you need further clarification of the wash sale rules.

Q. The recent upturn in home values has left me with quite a bit of equity in my home. I would like to tap into this equity to pay off my credit cards and make some major home improvements. If I get a home equity loan, will the interest I pay be fully deductible on my tax return?

Q. The recent upturn in home values has left me with quite a bit of equity in my home. I would like to tap into this equity to pay off my credit cards and make some major home improvements. If I get a home equity loan, will the interest I pay be fully deductible on my tax return?

A. For most people, all interest paid on a home equity loan would be fully deductible as an itemized deduction on their personal tax returns. However, due to changes made to tax laws governing home mortgage interest deduction in 1987, there are limitations and special circumstances that must be considered when determining how much of your home mortgage interest expense is deductible.

Mortgages secured by your qualified home generally fall under one of three classifications for purposes of determining the home mortgage interest deduction: grandfathered debt, home acquisition debt, and home equity debt. Grandfathered debt is simply home mortgage debt taken out prior to October 14, 1987 (including subsequent refinancing of that debt). The other two types of mortgage debt are discussed below. A "qualified home" is your main or second home and, in addition to a house or condominium, can include any property with sleeping, cooking and toilet facilities (e.g., boat, trailer).

Home Acquisition Debt

Home acquisition debt is a mortgage (including a refinanced loan) taken out after October 13, 1987 that is secured by a qualified home and where the proceeds were used to buy, build, or substantially improve that qualified home. "Substantial improvements" are home improvements that add to the value of your home, prolong the useful life of your home, or adapt your home to new uses.

In general, interest expense on home acquisition debt of up to $1 million ($500,000 if married filing separately) is fully deductible. Keep in mind, though, that to the extent that the mortgage debt exceeds the cost of the home plus any substantial improvements, your mortgage interest will be limited. Mortgage interest expense on this excess debt may be deductible as home equity debt (see below).

Example: You have a home worth $400,000 with a first mortgage of $200,000. If you get a home equity loan of $125,000 to build a new addition to your home, your mortgage interest would be fully deductible.

Home Equity Debt

Home equity debt is debt that is secured by your qualified home and that does not qualify as home acquisition debt. There are generally no limits on the use of the proceeds of this type of loan to retain interest deductibility.

The amount of mortgage debt that can be treated as home equity debt for purposes of the mortgage interest deduction is the smaller of a) $100,000 ($50,000 if married filing separately) or b) the total of each qualified home's fair market value (FMV) reduced by home acquisition debt & debt secured prior to October 14, 1987. Mortgage debt in excess of these limits would be treated as non-deductible personal interest.

Example: You have a home worth $400,000 with a first mortgage of $200,000. If you get a home equity loan of $125,000 to pay off your credit cards (you really like to shop!), your mortgage interest deduction would be limited to the amount paid on only $100,000 of the home equity debt.

In addition to the above limitations, there are other circumstances that, if present, can affect your home equity debt interest expense deduction. Here are a few examples:

As illustrated above, determining your deduction for mortgage interest paid can be more complex than it appears. Before you obtain a home equity loan, please feel free to contact the office for advice on how it may affect your potential home mortgage interest deduction.

As a new business owner, you probably expect to incur many expenses before you even open the doors. What you might not know is how these starting up costs are handled for tax purposes. A little knowledge about how these costs will affect your (or your business') tax return can reduce any unexpected surprises when tax time comes around.

As a new business owner, you probably expect to incur many expenses before you even open the doors. What you might not know is how these starting up costs are handled for tax purposes. A little knowledge about how these costs will affect your (or your business') tax return can reduce any unexpected surprises when tax time comes around.

Starting a new business can be an exciting, although expensive, event that finds you, the small business owner, with a constantly open wallet. In most cases, all costs that you incur on behalf of your new company before you open the doors are capital expenses that increase the basis of your business. However, some of these pre-opening expenditures may be amortizable over a period of time if you choose. Pre-opening expenditures that are eligible for amortization will fall into one of two categories: start-up costs or organizational costs.

Start-up Costs

Start-up costs are certain costs associated with creating an active trade or business, investigating the creation or acquisition of an active trade or business, or purchasing an existing trade or business. If, before your business commences, you incur any cost that would normally be deductible as a business expense during the normal course of business, this would qualify as a start-up cost. Examples of typical start-up costs include attorney's fees, pre-opening advertising, fees paid for consultants, and travel costs. However, deductible interest taxes, and research and development (R&D) expenses are treated differently.

Start-up costs are amortized as a group on the business' tax return (or your own return on Schedule C, if you are a sole proprietor) over a period of no less than 60 months. The amortization period would begin in the month that your business began operations. In order to be able to claim the deduction for amortization related to start-up costs, a statement must be filed with the return for the first tax year you are in business by the due date for that return (plus extensions). However, both early (pre-opening) and late (not more than 6 months) submissions of the statement will be accepted by the IRS.

Organizational Costs

Organizational costs are those costs incurred associated with the organization of a corporation or partnership. If a cost is incurred before the commencement of business that is related to the creation of the entity, is chargeable to a capital account, and could be amortized over the life of the entity (if the entity had a fixed life), it would qualify as an organizational cost. Examples of organizational costs include attorney's fees, state incorporation fees, and accounting fees.

Organizational costs are amortized using the same method as start-up costs (see above), although it is not necessary to use the same amortization period for both. A similar statement must be completed and filed with the company's business tax return for the business' first tax year.

Before you decide which, if any, pre-opening expenditures related to your new business you'd like to treat as start-up or organizational costs, please contact our office for additional guidance.

Q. My wife and I are both retired and are what you might call "social gamblers". We like to play bingo and buy lottery tickets, and take an occasional trip to Las Vegas to play the slot machines. Are we required to report all of our winnings on our tax return? Can we deduct our losses?

Q. My wife and I are both retired and are what you might call "social gamblers." We like to play bingo and buy lottery tickets, and take an occasional trip to Las Vegas to play the slot machines. Are we required to report all of our winnings on our tax return? Can we deduct our losses?

A. The technical answers to your questions are "yes" and "maybe," respectively. However, does it make much practical sense to report your $50 jackpot from the Sunday afternoon bingo game at the church? Probably not. In most circumstances, the taxpayer's cumulative gambling losses far exceed any winnings he may have had.

Here are the technical rules regarding reporting gambling winnings and losses:

Gambling winnings are taxable income and should be reported on your income tax return. In addition to cash winnings, you are required to report the fair market value (FMV) of all non-cash prizes you receive. For the most part, you are on the honor system when it comes to reporting small winnings to the IRS. Large payouts, on the other hand, will most likely be accompanied by IRS Form W-2G and a substantial amount will be deducted for withholding. Gambling winnings should be reported as "Other income" on the front page of Form 1040.

Gambling losses may only be included on your tax return if you itemize your deductions and then they are only deductible up to the amount of your gambling winnings. If you do itemize, those losses would be included as a miscellaneous itemized deduction not subject to the 2% of adjusted gross income (AGI) limit on Form 1040, Schedule A. However, keep in mind that if your AGI exceeds a certain amount, your total itemized deductions may be limited, reducing the likelihood of a direct offset of gambling income and losses.

Once you've tallied up your winnings and losses and reported them on your tax return, how do you substantiate your gambling income and deductions to the IRS? Here are some guidelines offered by the IRS that will help you in the event that your gambling claims are ever questioned:

Keep a log or a journal. The IRS suggests entering all of your gambling activities in a small diary or journal - you may want to consider one that can be carried with you when you frequent gambling establishments. Here is the information you should keep track of:

Retain documentation. As with any item of income or deduction claimed on your return, the IRS requires adequate documentation be kept to substantiate the amount claimed. Acceptable documentation to substantiate gambling winnings and losses can come in many different forms, depending on what type of activity you are engaging in. Examples include lottery tickets, canceled checks, wagering tickets, credit records, bank withdrawals and statements of actual winnings or payment slips provided by the gaming establishment.

Although it may seem difficult to keep track of your gambling activity at the time, it is obvious that keeping good records can benefit you if you ever "hit the jackpot". If you have any further questions on this matter, please contact the office for assistance.

Probably one of the more difficult decisions you will have to make as a consumer is whether to buy or lease your auto. Knowing the advantages and disadvantages of buying vs. leasing a new car or truck before you get to the car dealership can ease the decision-making process and may alleviate unpleasant surprises later.

Probably one of the more difficult decisions you will have to make as a consumer is whether to buy or lease your auto. Knowing the advantages and disadvantages of buying vs. leasing a new car or truck before you get to the car dealership can ease the decision-making process and may alleviate unpleasant surprises later.

Nearly one-third of all new vehicles (and up to 75% of all new luxury cars) are leased rather than purchased. But the decision to lease or buy must ultimately be made on an individual level, taking into consideration each person's facts and circumstances.

Buying

Advantages.

• You own the car at the end of the loan term.
• Lower insurance premiums.
• No mileage limitations.

Disadvantages.

• Higher upfront costs.
• Higher monthly payments.
• Buyer bears risk of future value decrease.

Leasing

Advantages.

• Lower upfront costs.
• Lower monthly payments.
• Lessor assumes risk of future value decrease.
• Greater purchasing power.
• Potential additional income tax benefits.
• Ease of disposition.

Disadvantages.

• You do not own the car at the end of the lease term, although you may have the option to purchase at that time.
• Higher insurance premiums.
• Potential early lease termination charges.
• Possible additional costs for abnormal wear & tear (determined by lessor).
• Extra charges for mileage in excess of mileage specified in your lease contract.

Before you make the decision whether to lease or buy your next vehicle, it makes sense to ask yourself the following questions:

How long do I plan to keep the vehicle? If you want to keep the car or truck longer than the term of the lease, you may be better off purchasing the vehicle as purchase contracts usually result in a lower overall cost of ownership.

How much am I going to drive the vehicle? If you are an outside salesperson and you drive 30,000 miles per year, any benefits you may have gained upfront by leasing will surely be lost in the end to excess mileage charges. Most lease contracts include mileage of between 12,000-15,000 per year - any miles driven in excess of the limit are subject to some pretty hefty charges.

How expensive of a vehicle do I want? If you can really only afford monthly payments on a Honda Civic but you've got your eye on a Lexus, you may want to consider leasing. Leasing usually results in lower upfront fees in the form of lower down payments and deferred sales tax, in addition to lower monthly payments. This combination can make it easier for you to get into the car of your dreams.

If you have any questions about the tax ramifications regarding buying vs. leasing an automobile or would like some additional information when making your decision, please contact the office.