The bipartisan infrastructure bill passed the House of Representatives in a late night vote on November 5 by a 228-206 vote with 13 Republicans crossing the aisle to get the bill across the finish line after 6 Democrats voted the bill down.

The bipartisan infrastructure bill passed the House of Representatives in a late night vote on November 5 by a 228-206 vote with 13 Republicans crossing the aisle to get the bill across the finish line after 6 Democrats voted the bill down. President Biden signed the infrastructure bill into law on November 15 after Congress came back from a week-long recess.

The $1.2 trillion Infrastructure Investment and Jobs Act ( P.L. No. 117-58), includes a few tax provisions mixed in with the spending on to repair and rebuild the nation’s bridges, climate issues and other items. It passed the Senate with a 69-30 vote in August.

Cryptocurrency Reporting And Other Tax Provisions
Among the tax provisions in the bill is an expansion of the reporting requirements available to cryptocurrency, which is one of the revenue generators to help offset the new spending in the bill. It is believed that a significant amount of cryptocurrency gains escape taxation due to underreporting.

The bill also includes a few other tax changes meant to spur private infrastructure investment, raise revenue, and expand the scope and applicability of disaster declarations, in addition to typical extension of highway funding provisions. These other changes include

• An extension of highway taxes to 2028 and highway trust fund expenditure authority to 2026;
• Inclusion of qualified broadband projects and carbon dioxide capture facilities among the other types of projects for which private activity bonds can be issued;
• A return of the exception for water and sewage disposal utilities from the rule requiring a corporation to recognize contributions in aid of construction (removed by the Tax Cuts and Jobs Act of 2017);
• A return of Superfund excise taxes on certain chemicals, last effective in the mid-1990s;
• Termination of the employee retention credit for employers closed due to COVID-19 after September 30, 2021; and
• Changes to the extension of tax deadlines due to declared disasters and service in a combat area, as well as expansion of extension authority to taxpayers impacted by wildfires.

The IRS has released the annual inflation adjustments for 2022 for the income tax rate tables, plus more than 56 other tax provisions.

The IRS has released the annual inflation adjustments for 2022 for the income tax rate tables, plus more than 56 other tax provisions. The IRS makes these cost-of-living adjustments (COLAs) each year to reflect inflation.

2022 Income Tax Brackets
For 2022, the highest income tax bracket of 37 percent applies when taxable income hits:

• $647,850 for married individuals filing jointly and surviving spouses,
• $539,900 for single individuals and heads of households,
• $323,925 for married individuals filing separately, and
• $13,450 for estates and trusts.

2022 Standard Deduction
The standard deduction for 2022 is:

• $25,900 for married individuals filing jointly and surviving spouses,
• $19,400 for heads of households, and
• $12,950 for single individuals and married individuals filing separately.

The standard deduction for a dependent is limited to the greater of:

• $1,150 or
• the sum of $400, plus the dependent’s earned income.

Individuals who are blind or at least 65 years old get an additional standard deduction of:

• $1,400 for married taxpayers and surviving spouses, or
• $1,750 for other taxpayers.

Alternative Minimum Tax (AMT) Exemption for 2022
The AMT exemption for 2022 is:

• $118,100 for married individuals filing jointly and surviving spouses,
• $75,900 for single individuals and heads of households,
• $59,050 for married individuals filing separately, and
• $26,500 for estates and trusts.

The exemption amounts phase out in 2022 when AMTI exceeds:

• $1,079,800 for married individuals filing jointly and surviving spouses,
• $539,900 for single individuals, heads of households, and married individuals filing separately, and
• $88,300 for estates and trusts.

Expensing Code Sec. 179 Property in 2022
For tax years beginning in 2022, taxpayers can expense up to $1,080,000 in section 179 property. However, this dollar limit is reduced when the cost of section 179 property placed in service during the year exceeds $2,700,000.

Estate and Gift Tax Adjustments for 2022
The following inflation adjustments apply to federal estate and gift taxes in 2022:

• the gift tax exclusion is $16,000 per donee, or $164,000 for gifts to spouses who are not U.S. citizens;
• the federal estate tax exclusion is $12,060,000; and
• the maximum reduction for real property under the special valuation method is $1,230,000.

2022 Inflation Adjustments for Other Tax Items
The maximum foreign earned income exclusion amount in 2022 is $112,000.

The IRS also provided inflation-adjusted amounts for the:

• adoption credit,
• lifetime learning credit,
• earned income credit,
• excludable interest on U.S. savings bonds used for education,
• various penalties, and
• many other provisions.

Effective Date of 2022 Adjustments
These inflation adjustments generally apply to tax years beginning in 2022, so they affect most returns that will be filed in 2023. However, some specified figures apply to transactions or events in calendar year 2022.

The 2022 cost-of-living adjustments (COLAs) that affect pension plan dollar limitations and other retirement-related provisions have been released by the IRS.

The 2022 cost-of-living adjustments (COLAs) that affect pension plan dollar limitations and other retirement-related provisions have been released by the IRS. In general, many of the pension plan limitations will change for 2022 because the increase in the cost-of-living index due to inflation met the statutory thresholds that trigger their adjustment. However, other limitations will remain unchanged.

The 2022 cost-of-living adjustments (COLAs) were released for:

• pension plan dollar limitations, and
• other retirement-related provisions.

Highlights of Changes for 2022
The contribution limit has increased from $19,500 to $20,500 for employees who take part in:

• 401(k),
• 403(b),
• most 457 plans, and
• the federal government’s Thrift Savings Plan.

The catch-up contribution limit for employees aged 50 and over in the plans above remains $6,500.

The annual limit on contributions to an IRA remains unchanged at $6,000. The $1,000 IRA catch-up contribution amount is not subject to inflation adjustments.

The income ranges increased for determining eligibility to make deductible contributions to:

• IRAs,
• Roth IRAs, and
• to claim the Saver's Credit.

Phase-Out Ranges
Taxpayers can deduct contributions to a traditional IRA if they meet certain conditions. The deduction phases out if the taxpayer or their spouse takes part in a retirement plan at work. The phase out depends on the taxpayer's filing status and income.

• Single taxpayers covered by a workplace retirement plan, the phase-out range is $68,000 and $78,000, increased from between $66,000 and $76,000.
• Joint filers, when the spouse making the contribution takes part in a workplace retirement plan, the phase-out range is $109,000 and $129,000, increased from between $105,000 and $125,000.
• An IRA contributor, who is not covered by a workplace retirement plan but their spouse is, the phase out is between $204,000 and $214,000, increased from between $198,000 and $208,000.
• For a married individual filing a separate return who is covered by a workplace plan, the phase-out range remains $0 to $10,000.
• The phase-out ranges for Roth IRA contributions are:
• $129,000 to $144,000, for singles and heads of household,
• $204,000 to $214,000, for joint filers, and
• $0 to $10,000 for married separate filers.

Finally, the income limit for the Saver' Credit is:

• $68,000 for joint filers,
• $51,000 for heads of household, and
• $34,000 for singles and married filing separately.

The IRS has released additional Paycheck Protection Program (PPP) loan forgiveness guidance.

The IRS has released additional Paycheck Protection Program (PPP) loan forgiveness guidance. The guidance addresses (1) timing issues; (2) partner and consolidated group member basis adjustments; and (3) filing of amended partnership returns and information statements.

Timing of Tax-exempt Income
A taxpayer that received a PPP loan may treat tax-exempt income resulting from the partial or complete forgiveness of the PPP loan as received or accrued as follows:

• As the taxpayer pays or incurs eligible expenses. Under the safe harbor that allows certain taxpayers who relied on prior guidance and did not deduct certain PPP-related expenses on a tax return filed before the COVID Tax Relief Act was enacted, to deduct the expenses in the next tax year. A taxpayer that has elected to use the safe harbor will be treated as paying or incurring the eligible expenses during the taxpayer’s immediately subsequent tax year following the taxpayer’s 2020 tax year in which the expenses were actually paid or incurred, as described in Rev. Proc. 2021-20;
• When the taxpayer files an application for forgiveness of the PPP loan; or;
• When the PPP loan forgiveness is granted.

The timing treatment also applies to the extent tax-exempt income resulting from the partial or complete forgiveness of a PPP loan is treated as gross receipts under a federal tax provision.

If a taxpayer received PPP loan forgiveness of less than the amount that the taxpayer previously treated as tax-exempt income, the taxpayer must file an amended return, information return, or administrative adjustment request as applicable.

Partnership Allocations and Basis Adjustments
If covered partnerships meet certain requirements, the IRS will treat the covered taxpayer’s allocation of amounts treated as tax exempt income and allocation of deductions as determined in accordance with Code Sec. 704(b). A partner's basis in its interest is increased by the partner’s distributive share of tax exempt income and is decreased by the partner’s distributive share of deductions. If certain conditions are met, the treatment generally applies in connection with:

• deductions and amounts treated as tax exempt income arising in connection with the forgiveness of a PPP loan;
• deductions and amounts treated as tax exempt income arising in connection with payments made by the SBA on behalf of the taxpayer with respect to a covered loan under § 1112(c) of the CARES Act; and
• the allocation of deductions and amounts treated as tax exempt income arising in connection with the taxpayer receiving a Supplemental Targeted EIDL Advance or a Restaurant Revitalization Grant.

Consolidated Group Members
For consolidated group members, the IRS will treat any amount excluded from gross income under § 7A(i) of the Small Business Act, § 276(b) of the COVID Tax Relief Act, or § 278(a)(1) of the COVID Tax Relief Act, as applicable, as tax exempt income for purposes of Reg. §1.1502-32(b)(2)(ii) investment adjustments. For the treatment to apply, the consolidated group must attach a signed statement to its consolidated tax return.

Amended Returns
Eligible partnerships subject to the centralized partnership audit regime (BBA partnerships) that filed a Form 1065 and furnished all required Schedules K-1 for tax years ending after March 27, 2020 and before Rev. Proc. 2021-50 was issued may file amended partnership returns and furnish amended Schedules K-1 on or before December 31, 2021. The amended returns must take into account tax changes under Rev. Proc. 2021-48 or Rev. Proc. 2021-49, but eligible BBA partnerships may make any additional changes on their amended returns.

The amended return applies to any partnership tax year ending after March 27, 2020 and before the issuance of Rev. Proc. 2021-48 and Rev. Proc. 2021-49. The BBA partnership must clearly indicate the application of this revenue procedure on the amended return and write "FILED PURSUANT TO REV PROC 2021-50" at the top of the amended return and attach a statement with each amended Schedule K-1 furnished to its partners with the same notation.

Special rules apply to pass-through partners. A partnership under examination that wishes to use this amended return procedure must notify the revenue agent coordinating the partnership’s examination.

The IRS issued guidance related to the application of the per diem rules under Rev. Proc. 2019-48 to the temporary 100-percent deduction for business meals provided by a restaurant.

The IRS issued guidance related to the application of the per diem rules under Rev. Proc. 2019-48 to the temporary 100-percent deduction for business meals provided by a restaurant. The Taxpayer Certainty and Disaster Tax Relief Act of 2020 ( P.L. 116-260) temporarily increased the deduction from 50 percent to 100 percent for a business’s restaurant food and beverage expenses for 2021 and 2022.

Application of Per Diem Rules
Under Rev. Proc. 2019-48, taxpayers using the per diem rules to substantiate deductible food and beverage expenses must still apply the 50-percent limitation. According to the IRS guidance, taxpayers that follow Rev. Proc. 2019-48 may treat the entire meal portion of a the per diem or allowance as being attributable to food or beverages provided by a restaurant.

Effective Date
This IRS guidance is effective for the meal portion of per diem allowances for lodging and M&IE, or for M&IE only that are paid or incurred by an employer after December 31, 2020, and before January 1, 2023.

The IRS has released guidance which addresses the federal income tax treatment and information reporting requirements for payments made to or on behalf of financially distressed individual homeowners by a state with funds allocated from the Homeowner Assistance Fund (HAF).

The IRS has released guidance which addresses the federal income tax treatment and information reporting requirements for payments made to or on behalf of financially distressed individual homeowners by a state with funds allocated from the Homeowner Assistance Fund (HAF). The fund was established under section 3206 of the American Rescue Plan Act of 2021, P.L. No. 117-2, in response to the coronavirus disease (COVID-19) pandemic. This guidance is effective on November 8, 2021, and would apply to qualified expenses paid after January 21, 2020.

Disaster Relief Payments
The IRS guidance provides that any HAF payment made to or on behalf of a homeowner is qualified disaster relief payment within the meaning of Code Sec. 139(b)(4) since COVID-19 is a qualified disaster. As a result, such payments are not included in the homeowner’s gross income. However, a homeowner that receives a HAF payment, or on whose behalf a HAF payment is made, for qualified expenses cannot take a deduction or credit with respect to such expenses. Qualified expenses under the HAF program include assistance payments for mortgage payments, utilities, and insurance.

Safe Harbor for Tax Deductions
For tax years beginning in 2021 through 2025, a homeowner may deduct as qualified mortgage interest expenses or qualified real property tax expenses on the homeowner’s federal income tax return for the lesser of:

• the sum of all payments the homeowner actually makes from the homeowner’s own sources during the taxable year to the mortgage servicer; or
• the sum of amounts shown on Form 1098, for qualified housing payment expenses.

A homeowner may first allocate the HAF payments to qualified expenses that are not qualified housing payment expenses before allocating the remaining portion of the HAF payments to qualified housing payment expenses. A qualified housing payment a payment for a mortgage or taxes that would be eligible to be deducted on the taxpayer’s return.

Eligible Homeowners
A homeowner is eligible to claim relief under the IRS guidance if:

• the homeowner receives a payment from, or a payment is made on the homeowner’s behalf by, a State;
• the payment is made with funds from the HAF;
• the payment is used to pay qualified expenses of the homeowner, and at least one of the expenses is a qualified housing payment expense;
• the homeowner has also paid a portion of the qualified housing payment expense from their own sources;
• the homeowner itemizes deductions on their federal income tax return;
• the homeowner would meet the requirements of Code Sec. 163(h)(3) to deduct qualified mortgage interest expenses, if they paid the qualified mortgage interest expenses from the homeowner’s own sources; and
• the homeowner would meet the requirements of Code Sec. 164(a)(1) to deduct qualified real property tax expenses if the homeowner paid the qualified real property tax expenses from the Homeowner’s own sources.

Reporting Requirements
Since HAF payments made to or on behalf of homeowners are excluded from the gross income of the homeowners, they are not fixed or determinable income under Code Sec. 6041 and information reporting for such payments is not required. HAF payments that are made directly to third parties on behalf of homeowners, such as payments made to insurance companies and homeowners associations, are generally reportable to those third parties if they constitute fixed or determinable income to the third party and the aggregate payments meet the $600 reporting threshold. Moreover, the interest received from a governmental unit or an agency or instrumentality of a governmental unit is not interest received on a mortgage. Lenders who receive a homeowner’s mortgage payments directly from a State should not report the interest received from the State on Form 1098 as interest received on the homeowner’s mortgage.

If a lender files and furnishes a Form 1098 that includes mortgage interest received directly from the State, thereby reporting an incorrect amount of interest on the information return, the lender will not be subject to penalties under Code Secs. 6721 and 6722 so long as the lender notifies the homeowner that the amounts reported on the Form 1098 are overstated because they include payments from a governmental unit or an agency or instrumentality of a governmental unit, and sets forth the amount of the overstatement. Such notification to the homeowner should be made at the time the Form 1098 is furnished or within 30 days thereafter, and can be provided in a separate statement (written or electronic), or included on Form 1098 in Box 10 labeled "Other".

The IRS has urged taxpayers, including ones who received stimulus payments or advance Child Tax Credit payments, to follow some easy steps for accurate federal tax returns filing in 2022.

The IRS has urged taxpayers, including ones who received stimulus payments or advance Child Tax Credit payments, to follow some easy steps for accurate federal tax returns filing in 2022.

Organized tax records
Taxpayers can easily prepare complete and accurate tax returns with the help of organized tax records. Organized tax records also help avoid errors that lead to processing and refund delays. Taxpayers must have all tax information available before filing their tax returns. Taxpayers must inform the IRS of any address changes and the Social Security Administration of a legal name change.

Recordkeeping for individuals includes the following:

• Forms W-2 from employer(s),
• Forms 1099 from banks, issuing agencies and other payers, including unemployment compensation, dividends, distributions from a pension, annuity or retirement plan,
• Form 1099-K, 1099-MISC, W-2 or other income statement for workers in the gig economy,
• Form 1099-INT for interest received, and
• other income documents and records of virtual currency transactions.

Individuals can determine if they are eligible for deductions or credits with the help of income documents. Further, taxpayers will need their related 2021 information to reconcile their advance payments of the Child Tax Credit and Premium Tax Credit. People will also need their stimulus payment and plus-up amounts to figure and claim the 2021 Recovery Rebate Credit if they received third Economic Impact Payments and think they qualify for an additional amount.

Further, taxpayers must secure the end of year documents, including the following:

• Letter 6419, 2021 Total Advance Child Tax Credit Payments, to reconcile advance Child Tax Credit payments,
• Letter 6475, Your 2021 Economic Impact Payment, to determine eligibility to claim the Recovery Rebate Credit, and
• Form 1095-A, Health Insurance Marketplace Statement, to reconcile advance Premium Tax Credits for Marketplace coverage.

Online Account
Taxpayers can securely gain entry to the Child Tax Credit Update Portal to see their payment dates and amounts through their Online Account. This information will be required to reconcile taxpayers’ advance Child Tax Credit payments with the Child Tax Credit they can claim when filing their 2021 tax returns.

Eligible individuals claiming a 2021 Recovery Rebate Credit can view their Economic Impact Payment amounts in their online account to accurately claim the credit when they file.

Those who have an Online Account may:

• see the amounts of their Economic Impact Payments,
• access Child Tax Credit Update Portal for information regarding their advance Child Tax Credit payments,
• approve or reject authorization requests from their tax professional, and
• update their email address and opt-out/in for selected paper notice preferences.

Tax Withholding
The IRS has informed that individuals may want to consider adjusting their withholding if they owed taxes or received a large refund the previous year. Individuals can help avoid a tax bill or let individuals keep more money every payday by changing withholding. Some reasons for adjusting withholding might be marriage or divorce, childbirth or taking on a second job. Taxpayers may complete a new Form W-4, Employee’s Withholding Certificate, every year and when personal or financial situations change.

Further, individuals should make quarterly estimated tax payments if they receive a substantial amount of non-wage income like self-employment income, investment income, taxable Social Security benefits and in some instances, pension and annuity income. The due date for 2021 is January 18, 2022.

ITINs
An Individual Taxpayer Identification Number (ITIN) will expire on December 31, 2021 if it was not included on a U.S. federal tax return at least once for tax years 2018, 2019 and 2020. The IRS has reminded taxpayers that ITINs with middle digits 70 through 88 have expired. Further, ITINs with middle digits 90 through 99, IF assigned before 2013, have expired. Individuals are not required to renew again if they previously submitted a renewal application that was approved.

Direct Deposit
Individuals can access their refund faster than a paper check with the help of direct deposit. Taxpayers without a bank account can learn how to open an account at an FDIC-Insured bank or through the National Credit Union Locator Tool. Veterans can visit the Veterans Benefits Banking Program to access financial services at participating banks.

IRS Certified Volunteers
The IRS has encouraged people to join the Volunteer Income Tax Assistance and Tax Counseling for the Elderly programs to prepare a free tax return for eligible taxpayers.

All members of the G20 on October 30 endorsed a global corporate minimum tax rate of 15 percent in an effort to eliminate countries slashing corporate tax rates and creating tax shelters to attract large multinational corporations.

All members of the G20 on October 30 endorsed a global corporate minimum tax rate of 15 percent in an effort to eliminate countries slashing corporate tax rates and creating tax shelters to attract large multinational corporations.

The agreement comes on the heels of an international agreement in October among 136 of the 140 Organization for Economic Cooperation and Development (OECD) members, that featured two pillars. Under Pillar One, taxing rights will be reallocated to market jurisdictions to ensure that market economies receive tax revenue even in locations where large multinational enterprises (MNEs) lack a physical presence. MNEs with global sales above 20 billion euro and profitability above 10 percent will be covered by the new rules, with 25 percent of profit above the 10 percent threshold to be reallocated to market jurisdictions.

Pillar Two introduces the global minimum corporate tax rate set at 15 percent, which applies to companies with revenue above 750 million euro.

Each country will need to ratify the tax within its own governing structure.
"The final political agreement as set out in the Statement on a Two-Pillar Solution to Address the Tax Challenges Arising from the Digitalisation of the Economy and in the Detailed Implementation Plan, released by the OECD/G20 Inclusive Framework on Base Erosion and Profit Shifting (BEPS) on October 8, is a historic achievement through which we will establish a more stable and fairer international tax system," the final Rome Declaration states. "We call on the OECD/G20 Inclusive Framework on BEPS to swiftly develop the model rules and multilateral instruments as agreed in the Detailed Implementation Plan, with a view to ensure that the new rules will come into effect at global level in 2023."

Tax To Generate $60 Billion Annually for U.S.
A White House spokesperson said October 29 ahead of the formal G20 endorsement that the 15 percent global corporate minimum tax would generate at least $60 billion annually. The tax has been proposed as part of the current version of the Build Back Better Act ( H.R. 5376) as a key revenue generator that will help offset the $1.75 trillion in new spending that is included in the legislation. The House Rules Committee is in the process of reviewing that legislation as the last stop before the bill advances to the lower chamber of Congress for consideration, something that could happen as early as the week of November 1.

Treasury Secretary Janet Yellen said at a November 1 press conference that while the agreed upon global corporate minimum tax rate was set at 15 percent, it could conceivably go higher, although she does not expect it to.

Individual countries "may choose themselves to establish a higher tax, but I expect many countries to adopt a 15 percent tax," Yellen said, adding that there is nothing that makes 15 percent represents a fixed percentage, a minimum or even a ceiling. " I don't think that there's broad agreement on that. It works for many countries, and I don't think that that's something that is going to be reconsidered as a as a global minimum."

In a case of first impression, the Tax Court retained jurisdiction over a petition for redetermination with respect to a whistleblower's claim for an award after the petitioner’s death.

In a case of first impression, the Tax Court retained jurisdiction over a petition for redetermination with respect to a whistleblower's claim for an award after the petitioner’s death. The informant filed a claim for an award with the IRS Whistleblower Office (WBO) for naming multiple target taxpayers. The WBO denied the claim and the informant appealed the determination to the Tax Court under Code Sec. 7623(b)(4). The informant died after filing the petition, but before the trial. Moreover, the informant's claim with respect to two of the target taxpayers was pending before the Tax Court prior to the petitioner’s death.

Litigation Post-Death of Informant
The counsel for the informant filed a motion to substitute the informant's estate in order to continue to prosecute the informant's claim after his death. At trial, the Tax Court stated that its jurisdiction over a petition filed under Code Sec. 7623(b)(4) was not extinguished by the death of the informant because the WBO reached a final determination and a petition was filed. Further, the informant's claim survived his death and his estate had standing to be substituted as the petitioner.

An S corporation’s disposition of a major league baseball team was a disguised sale to a newly formed partnership.

An S corporation’s disposition of a major league baseball team was a disguised sale to a newly formed partnership. The taxpayer had formed the partnership, with a renowned family, where the taxpayer contributed the major league baseball team and related assets and the family contributed cash. Subsequently, the partnership then distributed cash to the taxpayer (the transaction) which represented a "disguised sale" which was taxable under Code Sec. 707. Further, the IRS had issued a notice of deficiency to the taxpayer and a notice of final partnership administrative adjustment (FPAA) as to the partnership for the tax year at issue. The IRS claimed that since the debt funded by the family was not bona fide debt, it was supposed to be disregarded for purposes of the debt-financed distribution rule. The taxpayer argued that the transaction was a disguised sale but that the distribution to the taxpayer was not taxable because it was a debt-financed distribution. Moreover, the taxpayer contended that it should be allocated to the debt because it bore the economic risk of loss on account of its guaranties. However, the IRS contended that the possibility of the taxpayer being called on to fulfill the guaranties was so remote it they should be disregarded.

Whether the Sub Debt was Bona Fide Debt or Equity
The parties disputed whether the amount of sub debt which the partnership borrowed from a finance company was bona fide debt and therefore a partnership liability. The factors which determined the same (the Dixie Dairies factors), such as: 1) presence or absence of a fixed maturity date; (2) names given to the certificates evidencing the indebtedness; (3) source of payments; (4) right to enforce payments; (5) participation rights; (6) status of the advances in relation to regular corporate creditors; (7) intent of the parties weighs strongly toward equity; (8) identity of interest between creditor and stockholder; (9) ‘thinness’ of capital structure in relation to debt; (10) ability of the corporation to obtain credit from outside sources; (11) use to which the advances were put; (12) failure of the debtor to repay; and (13) risk, all strongly favored that the sub-debt was equity. Because the sub debt was equity, it was not allowed to be allocated to the taxpayer as recourse debt.

Allocation of Partnership Liabilities
The economic substance of the transaction was a disguised sale with a debt-financed distribution, a structure contemplated by both the statute and the regulations. Moreover, under the constructive liquidation test, the taxpayer bore the risk of economic loss for the senior debt. According to the terms of the taxpayer’s guaranty of the senior debt, the taxpayer was obligated to pay when the partnership failed to make a payment and the debt was accelerated, the creditors had exhausted their remedies, and the creditors had failed to collect the full amount of the debt. Therefore, the senior debt guaranty was a nontaxable debt-financed distribution. Finally, the amount of expenses, in the form of legal expenses, paid by the taxpayer to a group of potential buyers, was required to be capitalized.

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.