Category: Guest Article of the Month

Part 2

In this second part of our two-part series on the One Big Beautiful Bill Act (OBBBA), we examine the legislation’s impact on businesses, trusts, and estates. In addition, we will look at its overall economic impact.

Estate Tax Changes

The federal estate tax exemption receives a significant boost under OBBBA. Previously set to go back to pre-TCJA levels at the end of 2025, the exemption is now permanent. For 2026, the exclusion is $15 million per person, adjusted for inflation annually. This represents a substantial increase from the 2025 exemption of $13.99 million per person.

Business Tax Benefits

OBBBA extends several key business tax provisions that were set to expire, ensuring continued tax relief for various business structures.

Pass-Through Entities benefit significantly from the permanent extension of the Section 199A deduction. This 20 percent deduction on business income that applies to LLCs, S corporations, and sole proprietorships was scheduled to expire at the end of 2025. The House’s proposed increase to 23 percent didn’t make the final cut.

Depreciation rules become more favorable permanently. The 100 percent bonus depreciation provision, which was phasing out, is now permanent. Additionally, the Section 179 expensing limit jumps to $2.5 million and begins to get phased out at $4 million.

Research and Development expenses can now be fully expensed for domestic R&D activities, replacing the previous requirement to amortize costs.

Employee Retention Credit Reforms

The pandemic-era Employee Retention Credit faces significant restrictions. Unpaid claims submitted after Jan. 31, 2024, are prohibited from receiving refunds. The legislation also introduces penalties for ERC mill promoters and extends the statute of limitations to six years.

Conclusion

This legislation represents a significant commitment to extending business-friendly tax policies while substantially increasing the federal debt burden. For businesses and high net-worth individuals, OBBBA provides long-term tax planning certainty by making temporary provisions permanent.

The Trump Administration announced it will no longer apply the beneficial ownership information (BOI) requirements of the Corporate Transparency Act (CTA) to domestic companies. This declaration came first via social media, marking a significant shift in policy.

Under this new directive, U.S. businesses are exempt from the BOI reporting requirements of the CTA. The Treasury Department made the initial announcement on social media, followed by an official press release and a Truth Social post from President Donald Trump, who described the requirement as “outrageous and invasive.”

The bipartisan CTA was originally designed to combat illegal activities like drug trafficking and money laundering by limiting the use of anonymous shell companies. While the ownership information would have been available to law enforcement agencies, it would not have been publicly accessible.

In its March 3 website statement, the Treasury Department clarified that it will not enforce penalties or fines related to the BOI reporting rule under current regulatory deadlines established during the Biden Administration. Furthermore, it will not impose penalties against U.S. citizens, domestic reporting companies or their beneficial owners after new rule changes are implemented.

Treasury’s proposed rules will limit required reporting to foreign companies only, though the precise scope remains unclear – whether this applies exclusively to foreign companies registered in the United States or extends to U.S. companies with foreign ownership.

Previously, reporting requirements covered all businesses formed in the United States and foreign companies registered to operate in any U.S. state or tribal territory.

The Financial Crimes Enforcement Network (FinCEN), which oversees CTA enforcement, appears to have been surprised by this policy change. Days earlier, following court decisions that permitted BOI reporting requirements to proceed, FinCEN had announced plans to extend reporting deadlines to March 21. As of the most recent update, FinCEN’s website has not reflected the Treasury’s announcement, and requests for comment went unanswered.

What Happens Now?

This unexpected announcement has created uncertainty for businesses, particularly regarding already-submitted data.

The law required detailed information from “beneficial owners,” including names, birthdates, addresses, and identification documents. Similar information was required from company applicants – typically individuals who helped establish the company.

Millions of companies had already complied before this announcement, raising questions about the handling of submitted information. Inquiries to FinCEN about the fate of this data have not received responses.

The status of pending legal cases also remains uncertain. Cases continue through at least four federal appellate courts, and additional litigation may emerge to compel administration compliance with the law.

Crucially, the Corporate Transparency Act itself remains valid legislation. Despite the Treasury’s position, the executive branch cannot overturn the laws passed by Congress. It can, however, choose selective enforcement – similar to approaches seen with cannabis legislation. This creates potential complications, as future administrations could reinstate full enforcement.

The Social Security Fairness Act of 2023, formally known as H.R. 82, aimed at ending two provisions in the Social Security system that affect public sector employees who have earned pensions from jobs not covered by Social Security. These provisions are the Windfall Elimination Provision and the Government Pension Offset, both of which reduce or eliminate Social Security benefits for workers who have worked in both public-sector and private-sector jobs.

The Problem: WEP and GPO

The Windfall Elimination Provision and the Government Pension Offset were originally designed to prevent public sector workers from receiving larger Social Security benefits than they would have been entitled to had they worked in jobs covered by Social Security for their entire careers. However, critics argue that these provisions disproportionately harm workers who have spent a significant portion of their careers in public service, such as teachers, police officers, firefighters, and other state and local government employees.

Windfall Elimination Provision (WEP):

The WEP reduces the Social Security benefits of individuals who have worked in both the private sector (where they paid into Social Security) and the public sector (where they often did not contribute to Social Security). Typically, Social Security benefits are based on an individual’s 35 highest-earning years. The WEP alters the formula used to calculate benefits for individuals with fewer than 30 years of substantial earnings in Social Security-covered employment, leading to a lower Social Security benefit than they would otherwise be entitled to. For many, this results in a significant reduction in the monthly payment they would have received under the standard Social Security formula.

Government Pension Offset (GPO):

The GPO affects spouses and widows/widowers of Social Security beneficiaries. Under this provision, individuals who receive a government pension from work that was not covered by Social Security (such as state or local government employees) see a reduction in their spousal or survivor benefits from Social Security. The offset is calculated by reducing the spousal or survivor benefit by an amount equal to two-thirds of the government pension. This can leave many public employees with little to no spousal or survivor benefits despite their spouse having paid into Social Security.

What H.R. 82 Seeks to Accomplish

By eliminating both the WEP and GPO, the bill aims to ensure that public sector workers who have earned Social Security benefits through their work in the private sector are not penalized by reductions in those benefits. It also seeks to provide fairer treatment for the spouses and survivors of government employees who may otherwise see their Social Security benefits reduced or eliminated entirely.

The bill has garnered bipartisan support, as lawmakers from both sides of the aisle recognize the fairness of eliminating these provisions, which many see as an unjust penalty against those who have dedicated their careers to public service. H.R. 82, if passed, would provide much-needed relief to millions of retirees, many of who are struggling with the financial impacts of these provisions.

Conclusion:

The introduction of H.R. 82, the Social Security Fairness Act of 2023, marks a crucial point in the ongoing debate over Social Security benefits for public sector workers. By eliminating the Windfall Elimination Provision and the Government Pension Offset, the bill would restore fairness and equity for millions of public employees who have spent their careers in service to their communities. As this bill progresses, it will likely remain a significant issue in discussions surrounding Social Security reform and the treatment of public sector employees.

President Joe Biden signed H.R. 82, the Social Security Fairness Act, into law on Sunday, January 5, 2025, at 3:00 p.m. Central Time Zone.

The coming shakeup of the executive branch, along with Republican control of both houses of Congress, means tax changes are highly likely in 2025 and beyond. Positioning for new and amended tax provisions is already off to the races.

Regardless of the political landscape, on rare occasions, some measures have broad bipartisan support. One such bill is called the Methane Reduction and Economic Growth Act. It proposes adding a new credit for sequestering “qualified” methane from mining activities.

Looking Ahead To 2025

Proponents of the Methane Reduction and Economic Growth Act hope the tax credit will have a beneficial economic impact and create jobs. The idea is to capture and utilize the methane for productive industrial uses or as an alternative for heating buildings. The methane emitted by mines that qualify have long lifespans, with some abandoned mines emitting methane for up to 100 years. The long lifespan of the methane source is hoped to support the significant capital investment required to get the process up and running.

There is also significant potential for job creation in areas most impacted by the shutdown of coal-fired power plants, which in turn devastated the coal mining industry. The concept of using mine methane as an energy source could support rural American jobs.

Landscape and Potential for the Credit

There is a lot of mine methane to capture, with most not currently being captured. The U.S. government estimates abandoned coal mines produce about 237,000 metric tons annually. This methane has many potential uses, including hydrogen production.

Details on the New Subsection

The new section of 45Q credits would be based on the quantity of qualified methane that is sequestered. The captured methane must then be sent to the pipeline and used for producing heat or electricity. To be considered “qualified methane,” it must be captured from certain types of mines, including closed, abandoned, and surface mines. Finally, the methane captured must have otherwise been sent into the atmosphere if it had not been for the capture equipment activity.

Only qualified facilities may obtain the credit. Among other factors, the taxpayer needs to capture a minimum of 2,500 metric tons of methane each year to qualify. There are a lot more technical regulatory requirements related to the specific nature of methane capture, but those are beyond the scope of this article.

Conclusion

Typically, tax bills are split down the aisle based on political partisanship. This makes the passage of tax legislation difficult at best due to competing interests and a divided government. The tax credits related to methane capture, however, appear to be unusually bipartisan in nature. This is due to the unique intersection of democratic support from an environmental and climate perspective, meeting with Republican interest to support economic development in rural coal mining areas where the industry has been devastated. Put these two interests together, and you have the makings for a widely supported bipartisan bill that is very likely to pass.

Every year, the IRS announces annual inflation adjustments related to tax rate schedules, deductions, cost-of-living adjustments, etc. What many taxpayers do not realize is that they also adjust the cost of fines and penalties as well. This means that the penalties for late filings and missing tax forms are getting more expensive. In this article, we will look at the penalties for failing to file various types of tax returns as well as failing to file certain types of forms.

Failure to File Penalties

There is simply no way around it: skipping out on filing a tax return is going to cost you. Each type of return has its own penalty associated with it. For returns to be filed in 2024, the failure to file penalties is as follows.

Income Tax Returns

Failure to file within 60 days of the due date, the minimum penalty is $510 (up from $485 in 2023) and can increase depending on the circumstances – up to 100 percent of the taxes on the return.

Partnership Return

Failure to file a partnership tax return incurs a $245 penalty (up from $235 in 2023).

S-Corporation Return

Failure to file an S-Corporation return incurs a $245 penalty (up from $235 in 2023).

Beyond these simple financial penalties, things can get serious depending on the length of time a return has not been filed and the amount of past due taxes. This includes liens, levies, and passport restrictions.

Passport Revocation or Denial

In cases of serious tax delinquency, defined as a tax debt of $62,000 or more in 2024, your application for a new passport can be revoked or denied renewal.

Liens

If a taxpayer fails to pay a properly assessed tax bill, the IRS can file a Notice of Federal Tax Lien. This type of lien puts creditors on notice that the federal government has a legitimate claim over your property. This means that when you sell any of your property or assets, you can be forced to send the proceeds to the IRS.

Levies

Levies are the legal seizure of your property. Typically, any property can be levied to fulfill a tax obligation. There are exceptions for certain small amounts of personal property, such as provisions, furniture, and other household personal effects, and business property needed to carry on a trade or business, but these are negligible thresholds (less than $12,000). Further, wages can be levied and are subject to a formula that calculates a maximum weekly amount.

In any case, a levy is the last resort of the IRS but is obviously something you want to avoid.

Conclusion

Paying penalties is no fun, and no one wants to pay them. You may feel overwhelmed due to personal or business circumstances or other reasons, but the absolute worst thing you can do is to ignore your tax filing obligations. Even if you are late, the sooner you file versus burying your head like an ostrich, the better – as it’s “better late than never” when it comes to the IRS.

The main lesson is that ignoring things won’t make them better.

The IRS recently issued an important ruling on the taxability of cryptocurrency staking rewards, determining that staking rewards are essentially “income” and, therefore, taxable upon receipt and not deferrable until sale or swapping. Below, we will look at the ruling in more detail and what it means for taxpayers. But first, let us revisit the concept of cryptocurrency staking as a refresher.

Crypto Staking 101: What Is Staking?

Staking, at its most basic form, is a way for holders of cryptocurrencies to earn rewards or passive income on their digital assets without needing to sell.

One way to think of staking is like a high-yield savings account. When you stake digital assets, you deposit and lock up your coins. This helps run and maintain security on different blockchains (depending on the asset staked). In return, you typically receive more of the digital asset staked. 

Rates of return on digital asset staking can be lucrative; however, staking is not without risks.

Staking risks include:

The inherent volatility of cryptocurrencies, where the rewards earned can be less than the change in the underlying digital asset price (causing an overall loss).

Minimum lock-up periods, where staked assets cannot be unstaked and sold or swapped and therefore are illiquid for a period.

Counterparty risk if operating as part of a staking pool, where rewards can be negated as a bad actor and therefore never paid out.

The staking pool or underlying digital asset can be hacked, leading to a loss of funds (remember, there is such a thing as FDIC insurance to protect depositors in the cryptocurrency realm).

Taxability of Staking Rewards

The tax treatment of buying and selling cryptocurrencies is clear. In IRS Notice 2014-21, the government declares that crypto trades should be treated as property, resulting in capital gains treatment like other property bought and sold. Staking, however, is different than trading.

To clarify, given the vague mechanisms of crypto staking, the IRS recently issued a ruling declaring that crypto staking rewards need to be included when received in a taxpayer’s gross income. This ruling formalizes the position taken by the IRS in the Jarrett case.

The argument in the Jarrett case was that the coins received as staking rewards are new property that was created and not the same as income, interest, etc. Essentially, this means the staking rewards are zero-basis assets that would be taxed when sold and not upon receipt. They made the argument that staking rewards were like the products of a baker, where each new cake, although from the same recipe, is a newly created product/asset and, therefore, taxable upon sale.

The court determined that staking rewards, due to their proof-of-stake creation mechanism, are not a new asset, but compensation for helping to maintain and provide validation of the underlying blockchain, with the staked assets used as collateral.

Conclusion

As a result, staking rewards are income when “received.” The taxable amount is the fair market value of the coins when the taxpayer receives the staking reward in an “unlocked” manner. In other words, once the taxpayer controls the staking rewards, the taxpayer is capable (regardless of exercising this capability) of selling them.

This article is not for those of you who prepare your own tax returns. Let us face it, when you prepare your own return, you are responsible for what is or is not included on the forms. What if you have a CPA or other tax practitioner prepare your annual state and federal income tax returns? Who is responsible for the numbers on your Form 1040, then?

Who’s Responsible – You or your Tax Preparer 

Many people have the misconception that once you turn over your tax information to a preparer, all you must do is sign the result and mail it in (or electronically file it). Nothing can be farther from the truth. That is not to say the tax preparer has no responsibility for the numbers included in the return. In fact, in Internal Revenue Service Circular 230, the government specifically states that a practitioner must exercise due diligence in preparing a tax filing, including determining the veracity of oral or written client representations. This does not mean a tax preparer must verify everything you tell him, but he or she must be satisfied that the amounts included on a tax return make sense. 

The real problem in a case like this is not that additional tax was due, though that was bad enough. The real problem is that the understatement of taxes opens a taxpayer up to both penalties and interest. At a minimum, interest would be due because the IRS cannot, by law, forgive or abate interest. Add to that the potential for penalties on the late payment of income taxes, negligence, or filing of fraudulent returns – and it doesn’t take long for your tax bill to double.

Many times, taxpayers sign their returns and put them in the mail (snail or electronic) without reviewing the numbers. Either they trust the preparer implicitly (even if the numbers look wrong) or they are happy to have the tax return chore out of the way for another year. Whatever the reason, many taxpayers fail to double-check the preparer’s numbers.

Reviewing Your Return 

Wait a minute – did you notice the error in that last paragraph? The error is in characterizing amounts on a tax return as the “preparer’s numbers.” Sure, the calculations may come from your CPA’s computer, but those numbers had better be the amounts you provided to your tax accountant. Any good preparer will welcome a second or third set of eyes checking the numbers to make sure the amounts are correct. That is because he or she knows that the taxpayer is ultimately responsible for the amounts included in the return. The preparer makes sure they are in the right place on the return.

Without naming names, there have been many recent cases where taxpayers were held liable for understated taxes plus penalties and interest. Simply put, ignorance of the law, or the numbers, is not considered an excuse for filing false and misleading returns. 

An Army of New Agents?

Now that you know your role and responsibility in filing your tax return, the thought of the IRA hiring 87,000 new agents is keeping you up at night. This figure, which is being bandied about in the news, comes from the projected hiring of new agents from the almost $80 billion in new IRS funding over the next decade as part of the Inflation Reduction Act passed this past summer. 

The truth is, yes, many new IRS agents will be hired. No, there will not be anywhere near 87,000 of them. The 87,000 figure comes from a Department of Treasury report from May 2021, which estimated the number of new hires.

However, many of the 87,000 figures include new hires to replace retiring agents over the next decade. Replacement hires are likely to be the bulk of the new hires, with more than 50% of the agency’s current employees becoming eligible for retirement over the next decade. Furthermore, the funds will not just be for IRS agents but also for IT technicians, taxpayer services support staff, and experienced auditors.

All-in-all, the IRS will be beefing up the number of employees with the new funding; but it will net somewhere between 20,000 – 30,000 new employees of all types. This would bring staffing levels back to where they were a little over a decade ago. 

How Many Agents Will Really Be Armed

Related to the rumor of 87,000 new agents is that they will be armed and coming to bust down the doors of millions of Americans as part of stepped-up tax enforcement. Again, reality and news headlines are not lining up.

Collecting taxes can be a dangerous business. It is not just scouring checkbooks and bank records when it comes to tackling drug dealers, terrorists, and money launderers. In addition to forensic accounting, IRS Criminal Investigation Special Agents also work undercover inside criminal organizations.

In fact, they have been doing this for over one hundred years since the Criminal Investigation division (previously called the Intelligence Unit) was created in 1919 with just six agents. Think of taking down Mobsters like Al Capone based on tax fraud in the 1930s.

So, to put it in perspective, the IRS Criminal Investigation (CI) unit only has about 3,000 employees, of which about 2,100 are special agents. Only special agent carries guns.

Even with the new funding previously mentioned, the CI unit is looking to hire around 300-350 new Special Agents in 2022, with about half of that replacing retirees and those who leave the department. In the end, the IRS is only going to gain about 150 or so new gun-wielding agents. 

What’s Your Best Defense 

Now that you know you will not have an army of armed IRS agents busting down your door, what is your best defense against getting an unexpected bill from the IRS? First, make sure you are dealing with a reputable preparer. Ask for a copy of the practitioner’s license to do business as a tax preparer. Ask your friends for references of reputable CPAs or other tax practitioners.

Finally, review your tax return and ask questions about anything that you do not understand. Reputable preparers take pride in their work and are honest enough to admit when a mistake has been made. Do not be afraid to ask questions for fear of offending your preparer.

Conclusion 

Returning to our original question, just who is responsible for your tax return? The simple answer is you are. Good tax preparers realize this and make every attempt to provide you with an accurate return because protecting you is their job. We congratulate you on your wisdom if you have just such a professional. If you are looking for someone who fits that bill, please consider giving us a call.

The US tax system is progressive, meaning that the more you earn the more you pay. For the years 2020-2022 there are seven different brackets for each year. Which bracket you are in depends on your taxable income; however, your bracket does not equal your tax rate.

Tax brackets work so that you pay part of your income at each level bracket as you move-up in income. In other words, someone in the 24% marginal rate bracket will pay 10% on part of their income, 12% on another part, 22% on yet another and finally 24% on everything else. In other words, moving into a higher tax bracket does NOT mean you pay higher taxes on all your income.

Below we will present comparative tables, so you change see the changes across the years, but before we do let’s look at how the rates and brackets have changes over the periods.

Evolution of Tax Rates and Brackets

The tax rates over the period are the same. There are seven brackets with progressive rates ranging from 10% up to 37% and they are the same over all three years.

Federal income tax rate brackets are indexed for inflation.  The brackets are adjusted using the chained Consumer Price Index (CPI). There were no structural changes to the tax brackets in any of the periods, so the only impact are increases year-over-year due to the inflation indexing.

The inflation adjustment factor for 2022 was 3.1% for example. This caused the 22% rate bracket for single filer to increase from $81,051 up to $83,551.

Tax Rates and Brackets

Below are the 2020-2022 tables for personal income tax rates. Note, that the 2020 figures below are the amounts applicable to the income earned during 2020 and paid in 2021 when you file your taxes.

Tax Brackets & Rates

Sales and trading of nonfungible tokens (NFTs) are soaring recently. With the emergence of major marketplace platforms such as Opensea, NFTs are no longer an obscure segment of the blockchain technology world. Even old guard auction houses such as Sotheby’s are getting in on the action. In early September, the auction house facilitated the sale of a set of “Bored Apes” NFTs that sold for more than $24.4 million.

While the emerging space of NFTs is full of excitement, risk and opportunity, there’s the boring tax side of the equation. Unlike most other forms of assets or income, creating, trading and investing in NFTs can trigger a tax event.  

Creators

NFTs are classified as “self-created intangibles” like other works of art. The IRS allows the artist to deduct the expenses of creating the NFT immediately – even if the artwork is not sold. As a result, the creator typically has zero “basis” in their work. This means when they do sell their work, they’ll have no deductions, so a $100,000 sale means $100,000 of taxable income.

There is little formal guidance, but general principles indicate that NFTs are their creator’s inventory instead of a capital asset. This means that this income is treated as ordinary income and not capital gains – and it is subject to self-employment taxes as well.

Lastly, with certain NFTs, while the NFT itself is a unique blockchain token, the creator might retain copyright to whatever underlying artwork was used to make the NFT. Here, the creator may sell multiple NFTs based on the same original artwork as limited-edition, signed reprints. When the copyright is retained and copies are sold, the income is considered a royalty.

Traders and Investors

Trading NFTs is not as simple as trading stocks.

NFTs are purchased with cryptocurrency (most commonly Ethereum). Since the IRS treats cryptocurrency as property instead of currency, the purchase itself creates a taxable event. Swapping your Ethereum for an NFT means you’ll have to pay tax on any gain you have in your Ethereum position between its value at acquisition and the moment of using it to acquire the NFT.

Second, taxpayers will trigger a taxable event when they sell the NFT, thereby subject to capital gains taxes on the sale of the NFT at the 28 percent collectibles rate.

Conclusion

NFTs offer fantastic opportunities at tremendous risk. As a result, there will be winners and losers, but one thing is certain: the IRS should love NFTs for the taxes.

Senate rules and procedures have a major impact on how tax laws are drafted and amended, especially when it comes to those related to the budget reconciliation process.

Budget reconciliation is a separate Senate procedure established by the Congressional Budget Act (CBA) of 1974. The main differentiator is that the reconciliation process changes the vote threshold to a simple majority of 50 instead of 60, essentially negating the filibuster.

Not every bill can be taken up under this process, though – including tax provisions. There are guidelines that govern what tax provisions can be included in laws passed using the budget reconciliation process in the form of both rules and precedent.

Impact of the Act

The CBA may help expedite passing new tax legislation, but there are drawbacks and limitations. For example, administrative provisions are often a very important aspect of the policy objective behind tax laws, but using the reconciliation process strips out these measures since it prohibits “extraneous matters.” All an opposing senator needs to do is make a point of order; if it is sustained by the committee chair, then the material deemed extraneous is removed from the bill.

In addition to the removal of extraneous material, there is a prohibition on out-year deficit effects. This means that tax provisions that pass as part of a reconciliation package are often temporary and given expiration dates.

The Role of Precedent

The precedents of the Senate are often just as important as the rules themselves. Senate rules are often vague, but the practices of the Senate regarding these rules are well developed, effectively becoming the rules themselves.

The most important procedural rules can be found in a publication called Riddick’s Senate Procedure. These Senate rules and precedents are not automatic, however. The system relies on senators to raise a point of order to challenge a possible violation of the rules.

Conclusion

The budget reconciliation process makes passage of the bill more efficient for the majority party, but it comes with certain drawbacks by design. The intent is to make sure that the powers are not too broad and cannot be abused by the majority party.