Federal Income Taxation

<p>As July 4, 2025, the IRS is prohibited from allowing or issuing refunds related to ERC claims filed after January 31, 2024 that are related to the third and fourth quarters of 2021.&nbsp; The FAQ confirms that taxpayers who have already received ERC-related refunds will not be required to repay those amounts even if their claim was filed after January 31, 2024 (however, additional IRS compliance-related activities could result in an adjustment).&nbsp; Amended returns with non-ERC related&nbsp;issues will continue to be processed to resolve those non-ERC issues even if the amended return also claims the ERC for the third or fourth quarter of 2021, and the amended return was filed after the deadline.&nbsp; The same is true for amended returns that originally included now-prohibited ERC claims if the taxpayer later withdrew the prohibited ERC claim.&nbsp; For purposes of determining the deadline, a return is considered "filed" on or before January 31, 2024 if the claim was postmarked and properly mailed or submitted by that date. &nbsp;</p><p>The IRS has also reminded taxpayers that an appeals process exists via the IRS Independent Office of Appeals and taxpayers will receive Letter 105-C, Claim Disallowed,&nbsp;if their ERC claim is denied.Because many taxpayers do not realize the statute of limitations for filing a lawsuit is not paused during the administrative appeals process, the IRS announced a new streamlined online process for requesting deadline extensions.The IRS has now developed an online portal to allow taxpayers to submit Form 907 (the form used to request an extension).The online procedure is available only to taxpayers who have less than six months to file a lawsuit challenging a disallowed ERC claim.Qualifying taxpayers can request the extension using the IRS Document Upload Tool, by going to IRS.gov/DUTReply and selecting notice 'CP320B' from the drop-down menu.&nbsp; </p><p>By way of background, in September 2023, the IRS stopped processing new ERC claims. The IRS began processing ERC claims again on August 8, 2024. The IRS also announced a voluntary disclosure and repayment program (<em><em>see</em></em> heading below for details). </p><p> The IRS has repeatedly issued warnings about false or overstated ERC claims. The statute of limitations for IRS challenges to Forms 941 is three years. However, the three-year period does not start to run until April 15 of the calendar year following the year in which the form is filed (i.e., the statute of limitations for 2020 Forms 941 started to run on April 15, 2021 and expired April 15, 2024). However, there is a special limitations period for the third quarter of 2021. That statute of limitations does not expire until April 15, 2027. Further, proposals would apply the special, longer statute of limitations to any period in which the ERC was available. Taxpayers who received ERC refunds should also be aware that the IRS can challenge the payment in court within two years of the date the refund was paid (five years if the taxpayer obtained the refund based on fraud or misrepresentation). The IRS has also released proposed regulations providing that the IRS plans to assess and collect overpayment interest paid to taxpayers on erroneous COVID-related tax credit refunds. </p><p><hr></hr></p><p><strong>Planning Point:</strong> The IRS has provided new details about a withdrawal process for taxpayers who filed employee retention tax credit (ERC) claims that they now believe to be erroneous. Employers can use the withdrawal process if (1) they made the claim on an adjusted employment return (Forms 941-X, 943-X, 944-X, CT-1X), (2) they withdraw the entire amount of the claim, and (3) the IRS has not paid their claim or they have not cashed/deposited the IRS' refund check. Taxpayers who are not eligible to withdraw a claim can still file an amended return to reduce or eliminate the ERC claim. Taxpayers who filed their ERC claims themselves, have not received, cashed or deposited a refund check and have not been notified their claim is under audit can fax withdrawal requests to the IRS (a special fax line has been set up and details are available at IRS.gov/withdrawmyERC). Taxpayers who are under audit can send the withdrawal request to their examiner or in response to their audit notice. Claims that are properly withdrawn will be treated as though they were never filed, and no interest or penalties will apply. However, taxpayers who willfully filed fraudulent claims or assisted in fraudulent claims need to know that withdrawing the claim will not exempt them from criminal investigations. </p><p> Additionally, the agency is working on a program that will allow employers to repay improperly received ERC claims (it is unclear whether these repayments can be made without the threat of criminal investigation). </p><p><hr></hr></p><p> Under IRS final regulations released in 2023, erroneous refunds of COVID-19-related credits are treated as underpayments of tax under IRC Sections 3111(a) or (b). Both assessment and administrative collection procedures may apply. The regulations also clarify that if third-party payers claimed tax credits on behalf of common law employer clients, employers against which erroneous refunds of credits can be assessed include anyone treated as an employer under IRC Sections 3401(d), 3405 and 3511. The common law employer client of the third-party payor remains liable for the erroneous refunds of these tax credits. <br/><strong>Voluntary Repayment Program.</strong></p><p> The IRS created a voluntary disclosure program that allowed employers with erroneous employee retention credit claims to avoid potential penalties, interest and civil litigation. The deadline for participation in a second-round VDP was November 22, 2024 (December 31, 2024, for certain third-party payers who filed ERC claims on behalf of clients). </p><p> The program first settled the ERC claim for purposes of the employer's employment tax obligations via eliminating their ERC eligibility while allowing the employer to retain 20% of the claimed ERC amount. The disclosure also resolved the corresponding adjustment for income tax expense. Individuals were entitled to participate in the program if (1) they were not under criminal investigation and had not been notified by the IRS of a forthcoming criminal investigation, (2) the IRS had not received information from a third party about the employer's noncompliance, (3) the individual was not under employment tax examination for any tax period for which the individual was applying for the program and (4) the individual had not already received a notice and demand for repayment for all or a part of the claimed ERC. If the terms were satisfied, the employer was required to repay 80% of the amount claimed (including refundable and non-refundable portions) and was not be responsible for repaying overpayment interest received and was not charged underpayment interest. The individual was not deemed to receive taxable income by way of repaying only 80% of the claimed amount.<a href="#_ftn1">¹</a></p><p><i>Editor's Note:</i> The Infrastructure Investment and Jobs Act of 2021 retroactively ended the employee retention tax credit, so that wages paid after September 30, 2021, were not eligible for the credit. The law did exempt recovery startup businesses from the early termination. Originally, the credit was set to expire after 2021. </p><p>The IRS released guidance on the early termination of the employee retention tax credit, which expired after the third quarter of 2021. Employers who received advance payment of the ERC for fourth quarter wages could avoid penalties for failure-to-pay if they repaid the amount by the due date of their employment tax returns. Employers who reduced employment tax deposits on or before December 20, 2021 for fourth-quarter wages in reliance on the ERC were not subject to penalties for failure-to-deposit if (1) the employer reduced deposits in anticipation of receiving the ERC under the rules in Notice 2021-24, (2) the employer deposited the amounts retained on or before the due date for wages paid on December 31, 2021 (regardless of whether the employer actually paid the wages on that date), and (3) the employer reported tax liability resulting from the end of the ERC on the employment tax return or schedule including the period from October 1, 2021 through December 31, 2021. Failure to deposit penalties were not waived if the employer reduced deposits after December 20, 2021. Employers who did not qualify for relief under these rules can reply to any notice of a penalty with an explanation, and the IRS will consider whether to grant reasonable cause relief. </p><p>Early in 2022, the IRS provided penalty relief for taxpayers who owed additional income tax because their deduction for qualified wages was reduced by a retroactively-claimed ERTC if the taxpayer was unable to pay the additional tax because the ERTC refund had yet to be received. The IRS acknowledged that this often occurred because of its own backlog in processing Forms 941-X. Taxpayers in this situation were eligible for penalty relief for inability to pay their tax liability if they could show reasonable cause, rather than willful neglect, under Notice 2021-49 provisions.<a href="#_ftn3">³</a><br/><strong>ERTC Rules for 2020 and 2021</strong></p><p> IRS regulations allow the IRS to recapture any of the tax credits credited to an employer in excess of the amount that the employer was actually entitled to receive. That includes the ERTC, credits for qualified leave wages and credits for qualified health plan expenses under Sections 3131(d) and 3132(d). Those incorrect tax credits are treated as underpayments of taxes and may be administratively assessed and collected in the same manner as the taxes. The temporary regulations also provided that the calculation of any credits erroneously claimed must account for any amounts that were advanced to the employer under the processes established in 2020. </p><p> The Consolidated Appropriations Act of 2021 expanded the employee retention tax credit (ERTC), discussed below. Under the CAA, the applicable credit percentage increased from 50 percent to 70 percent of qualified wages. The limit on qualified wages per-employee increased from $10,000 per year to $10,000 per quarter. The "decline in gross receipts" threshold decreased from 50 percent to 20 percent, and a safe harbor rule allowed business owners to use the calendar quarter immediately preceding the current quarter to determine eligibility. </p><p><hr></hr></p><p><strong>Planning Point:</strong> IRS Revenue Procedure 2021-33 offered a safe harbor that allowed employers to exclude certain amounts from gross receipts for the sole purpose of determining eligibility for the ERTC. </p><p> Amounts that could be excluded include: (1) the amount of forgiveness for a PPP loan, (2) Shuttered Venue Operators Grants under the Economic Aid to Hard-Hit Small Businesses, Non-Profits, and Venues Act, and (3) Restaurant Revitalization Grants under the ARPA. </p><p> Employers elected to apply this safe harbor by excluding the amounts for purposes of determining whether it was an ERTC-eligible employer on an employment tax return. Employers were required to apply the safe harbor consistently in determining ERTC eligibility (meaning the employer had to exclude the amounts from gross receipts for each calendar quarter when gross receipts were relevant to determining ERTC eligibility). If the employer applied the safe harbor, it was also required to apply the safe harbor to all employers treated as a single employer under aggregation rules. </p><p><hr></hr></p><p> The rules discussed below that applied to "large employers" only applied to employers with more than 500 employees under the CAA (as opposed to 100 under the CARES Act). Further, employers that were not in existence for all or part of 2019 became eligible to claim the credit. Businesses with 500 or fewer employees had the option of advancing the credit at any point during the quarter, and the amount of the credit was estimated based on 70 percent of the average quarterly wages the employer paid in 2019. </p><p> As long as the wages were not paid with forgiven PPP loan proceeds, PPP loan recipients were entitled to claim the ERTC retroactive to the date of the CARES Act. </p><p><em>Editor's Note:</em> The ARPA made further changes the ERTC, which remained fixed at 70 percent of qualified wages (up to a $10,000 per-quarter cap) for employers who had experienced a 20 percent year-over-year decline in per-quarter gross receipts (or a qualifying suspension of business). Starting June 30, 2021, certain small businesses that began operations after February 15, 2020 became eligible for a maximum $50,000 per-quarter credit. </p><p> Qualifying "recovery startup businesses" were required to have average annual gross receipts for the three-taxable-year period ending with the taxable year that precedes the quarter that did not exceed $1 million. These businesses could qualify to claim the expanded ERTC even if they did not otherwise meet the eligibility requirements for claiming the credit. Beginning in the third quarter of 2021, employers who had suffered a decline of 90 percent or more in gross receipts compared to the same quarter in 2019 could treat all wages paid as qualified wages (up to the $10,000 cap) regardless of the number of employees the business had and regardless of whether the employees provided services (in other words, even employers with more than 500 employees qualified if they were under severe financial distress). Employers could continue to claim the credit even if they had received a PPP loan, but could not claim the credit with respect to wages paid with forgiven PPP funds. </p><p> The ERTC was allowed against the Medicare tax only in the third and fourth quarters of 2021. While this procedural shift did not impact the available value of the ERTC, it was often important for business owners who had relied upon taking the credit in advance. Because the Medicare tax is only 1.45 percent, more clients were required to file Form 7200 to receive advance payment of the credit. ARPA also extended the statute of limitations on assessments under the law to five years from the date the return claiming the credit was filed. <br/><strong>CARES Act ERTC</strong></p><p> The CARES Act created a refundable tax credit designed to help employers who retained employees during the COVID-19 health crisis. The credit was taken against employment taxes and was equal to 70 percent (originally 50 percent) of the first $10,000 of qualified wages paid to the employee. Wages paid between March 12, 2020 and September 30, 2021 counted in calculating the credit.<a href="#_ftn4">⁴</a> Wages included both cash payments and employer health care payments (<em><em>see</em></em> below for allocation rules). Because the credit was refundable, employers were eligible for a refund if the credit amount exceeded the employment taxes due. </p><p> Employers were eligible regardless of size if they were in business during 2020. </p><p> The credit was available for calendar quarters where either: <br/><blockquote> (1)&nbsp; operations were either fully or partially suspended because of a government-issued order relating to COVID-19 (<em><em>see</em></em> below), or </blockquote><br/> Eligible government issued orders included restrictions on travel, group gatherings or limitations on commerce (such as orders requiring certain businesses to close or limit operations). </p><p><hr></hr></p><p><strong>Planning Point:</strong> The IRS released a generic legal advice memorandum (GLAM) to clarify when and whether a business owner could have properly qualified for the employee retention tax credit (ERC) based on supply chain disruptions. The GLAM contained five different scenarios where supply chain disruptions did not qualify the business for the ERC. Under the guidance, some type of governmental order must have caused the supplier to suspend its operations during the pandemic. That suspension, in turn, must have caused the business claiming the ERC to suspend its own business operations. It is up to the business to provide documentation to prove that the governmental order applied, and to substantiate the link between that governmental order and the business owner's own suspension of operations. If the business cannot substantiate the governmental order, the business will also not be treated as having a partial suspension of operations. Importantly, business owners should be aware that even dramatic price increases or inability to offer some (but not all) of the business' goods and services does not equate to a partial suspension. Business owners who justified ERC claims based on supply chain disruptions should maintain careful documentation in anticipation of a future IRS challenge.<a href="#_ftn5">⁵</a></p><p><hr></hr></p><p> Qualification was calculated every quarter.<a href="#_ftn6">⁶</a><em> If the employer had no more than</em> 500 (originally 100) employees, the amount of qualified wages included wages paid during a quarter where COVID-19 impacted the business, including when the employees continued to provide services for payment during the relevant period and when employees were paid, but not working. </p><p> If the employer had more than 500 full-time employees, the wages counted toward the credit included only those paid while the employee was not working for the employer because of a government order or decline in gross receipts. In counting the number of employees, the employer used average employees during 2019. </p><p><hr></hr></p><p><strong>Planning Point:</strong> For purposes of determining whether a credit-eligible employer is a large eligible employer or a small eligible employer, employers were not required to include full-time equivalents when determining the average number of full-time employees. However, for purposes of identifying qualified wages, an employee's status as a full-time employee was irrelevant because wages paid to a part-time employee could be treated as qualified wages if all other requirements are satisfied.<a href="#_ftn7">⁷</a></p><p><hr></hr></p><p> Employers who paid wages with PPP loans that were forgiven could not claim the tax credit for the same wages. Further, the credit did not apply with respect to wages paid under the FFCRA paid sick leave laws (in other words, the employer could not "double dip"). </p><p><hr></hr></p><p><strong>Planning Point:</strong> Any cash tips treated as wages within the definition of IRC Section 3121(a) or compensation within the definition of IRC Section 3231(e)(3) were treated as qualified wages if all other requirements were satisfied. According to IRS reasoning, eligible employers were not prevented from receiving both the employee retention credit and the Section 45B credit (the FICA tip credit) for the same wages because the CARES Act and subsequent legislation did not reference Section 45B in areas where a "no double dipping" rule applied.<a href="#_ftn8">⁸</a></p><p><hr></hr></p><p> The amount of wages considered for purposes of the credit could not exceed the wages the employee would have received for working an equal amount of time in the 30-days preceding the applicable period when the credit was available. </p><p> Qualified wages also included the employer's health plan expenses allocated to the wages taken into account for the credit. The health plan expenses must be amounts paid or incurred by the employer to provide and maintain a group health plan, but only if the amounts were excluded from employees' income under IRC Section 106(a).<a href="#_ftn9">⁹</a></p><p><hr></hr></p><p><strong>Planning Point:</strong> IRS Notice 2021-49 addressed the issue of whether wages paid to majority owners and spouses of majority owners could be treated as "qualified wages." "Majority ownership," for these purposes, means more than 50% of the value in a corporation. According to the IRS, if the majority owner of a corporation had no brother or sister (whether by whole or half-blood), ancestor, or lineal descendant as defined in IRC Section 267(c)(4), then neither the majority owner nor the spouse was a related individual within the meaning of Section 51(i)(1) and the wages paid to the majority owner and the spouse were qualified wages for ERTC purposes, assuming the other requirements for qualified wages were satisfied. The notice contains multiple examples that provide guidance on various scenarios and various types of relationships. </p><p><hr></hr></p><p> Unless otherwise provided, allocating health expenses pro rata among employees and pro rata based on the periods of coverage (i.e., lining the payments up with the periods to which the wages relate) was sufficient. </p><p><hr align="left" size="1" width="33%"></hr></p><p><a href="#_ftnref1">1</a>. A-2024-03. </p><p><a href="#_ftnref2">2</a>. Notice 2021-65. </p><p><a href="#_ftnref3">3</a>. IR-2022-89. </p><p><a href="#_ftnref4">4</a>. IR-2020-62, Notice 2020-22. </p><p><a href="#_ftnref5">5</a>. GLAM 2023-005. </p><p><a href="#_ftnref6">6</a>. IR-2020-62. </p><p><a href="#_ftnref7">7</a>. Notice 2021-49. </p><p><a href="#_ftnref8">8</a>. Notice 2021-49. </p><p><a href="#_ftnref9">9</a>. <em><em>See generally</em></em> Pub. Law No. 116-136, § 2301. </p>

<p>The 2017 tax reform law modified the rules governing who is required to file a tax return for tax years beginning in 2018 through 2025. The 2025 OBBB made many of these changes permanent. Because of the suspension of the personal exemption, unmarried individuals whose gross income exceeds the applicable standard deduction (see Q <a href="javascript:void(0)">752</a>) are now required to file a tax return for the year. </p><p>Married individuals are required to file a tax return if the individual's gross income, when combined with his or her spouse's gross income, is more than the standard deduction that applies to a joint return and (1) the individual and his or her spouse at the close of the tax year shared the same household, (2) the individual's spouse does not file a separate return, and (3) neither the individual nor his or her spouse is a dependent of another taxpayer who has income (other than earned income) in excess of $500.<a href="#_ftn1">¹</a></p><p>A return must be filed by every individual whose gross income equals or exceeds the following limits in 2026:²</p><ol id="rte-06c35511-48ae-11f1-a6cb-4f0fe9b02c15" start="1"><li>Married persons filing jointly – $32,200 (if one spouse is 65 or older – $33,850; if both spouses are 65 or older – $35,500).</li><li>Surviving spouse (see&nbsp;Q 756) – $32,200 (if 65 or older – $33,850).</li><li>Head-of-household (see&nbsp;Q 757) – $24,150 (if 65 or older – $25,800).</li><li>Single persons – $16,100 (if 65 or older – $18,150).</li><li>Married persons filing separately – $16,100 (if 65 or older – $17,750).</li><li>Dependents – every individual who may be claimed as a dependent of another must file a return for 2026 if he has unearned income in excess of $1,350 (plus any additional standard deduction if the individual is blind or elderly) or total gross income that exceeds the sum of any additional standard deduction if the individual is blind or elderly plus the greater of (a) $1,350 or (b) the sum of (i) $450 plus earned income.</li></ol><p>Blind taxpayers may need to attach supporting documentation to a tax return to support a claim for the additional standard deduction. The additional standard deduction for taxpayers who are blind at the end of the tax year is not considered when determining a taxpayer's filing threshold amount. </p><p>The kiddie tax rules have changed in recent years. Before 2018 and after 2020, certain parents whose children are required to file a return may be permitted to include the child's income over $2,100 on their own return, thus avoiding the necessity of the child filing a return. See Q <a href="javascript:void(0)">679</a>. </p><p>The 2017 Tax Act provided new rules with respect to the unearned income of minors. That income was to be taxed at the rates applicable to trusts and estates, while the earned income of minors would be taxed at the ordinary income tax rates applicable to single filers. The SECURE Act repealed this rule for tax years beginning in 2020 and thereafter. For 2018 and 2019, taxpayers could choose which set of rules to apply. See Q <a href="javascript:void(0)">679</a>. </p><p>A taxpayer with self-employment income must file a return if <i>net</i> self-employment income is $400 or more. See Q <a href="javascript:void(0)">784</a>. </p><p><b>Planning Point:</b> A taxpayer must file a return if any of the following special taxes are due: </p><ol class="rte2-style-ol" id="rte-ccbd6301-aa98-11f0-8d02-3fec81b8680c" start="1"><li>Alternative minimum tax (see Q <a href="javascript:void(0)">779</a> for more information on the expanded AMT exemption that applies after 2017).</li><li>Additional tax on a qualified plan, including an individual retirement arrangement (IRA), or other tax-favored account. Taxpayers filing a return only because this tax is owed can file Form 5329 by itself.</li><li>Household employment taxes. Taxpayers can file Schedule H by itself if filing a return only because this tax is owed.</li><li>Social Security and Medicare tax on tips a taxpayer did not report to an employer or on wages received from an employer who did not withhold these taxes.</li><li>Recapture of first-time homebuyer credit.</li><li>Write-in taxes, including uncollected Social Security and Medicare or RRTA tax on tips that were reported to an employer or on group-term life insurance and additional taxes on health savings accounts.</li><li>Recapture taxes.</li><li>Additional tax on a health savings account (HSA), Archer MSA, or Medicare Advantage MSA distributions. If the taxpayer is filing a return only because he or she owes this tax, he or she can file Form 5329 by itself.</li><li>Wages of $108.28 or more from a church or qualified church-controlled organization that is exempt from employer Social Security and Medicare taxes.</li></ol><p>Even if not required to file a federal tax return, a taxpayer may want to file one if withholdings of tax have occurred, or he or she is eligible for a refundable credit, such as the Earned Income Credit. </p><p><hr align="left" size="1" width="33%"></hr></p><p><a href="#_ftnref1">1</a>. IRC § 6012(f). </p><p><a href="#_ftnref2">2</a>. IRC §§ 6012(a), 63(c), 151; P.L.115-97, Rev. Proc. 2025-32.</p>

<div class="Section1"><br /> <br /> Several refundable tax credits, such as the earned income credit and the refundable portion of the child tax credit, are allowed as an offset against AMT liability. Other personal nonrefundable credits also allowed as an offset include:<br /> <blockquote>Adoption tax credit<br /> <br /> Child and dependent care credit<br /> <br /> Nonrefundable portion of the child tax credit<br /> <br /> Certain learning credits<br /> <br /> Tax credit for IRAs and retirement plans<br /> <br /> Energy saving credits<a href="#_ftn1" name="_ftnref1">¹</a></blockquote><br /> </div><br /> <div class="refs"><br /> <br /> <hr align="left" size="1" width="33%" /><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>.  IRC § 26(a)(2).<br /> <br /> </div>

A deduction is permitted for all ordinary and necessary expenses paid or incurred during the taxable year in carrying on a trade or business. Examples of deductible business expenses include: (1) expenditures for reasonable salaries, (2) traveling expenses (within limits), and (3) certain rental expenses incurred for purposes of a trade or business. Illegal payments made in the course of business, such as bribes to government officials or illegal rebates, are not deductible. Under the 2017 Tax Act, certain expenses paid to (or at the direction of) a government or government entity in relation to the violation of any law, or investigation into potential violations of the law, are not deductible. Further, amounts paid in relation to sexual harassment suits that are subject to a nondisclosure agreement are not deductible.

<p><i>Editor's Note</i>: The 2025 OBBB did not change the tax rules governing Social Security, discussed below. <i>See</i> <a href="https://www.thinkadvisor.com/tax-facts/2025/08/28/85224--what-is-the-temporary-senior-deduction-deduction-for-taxpayers-age-65-and-over/">Q 8522.4</a> for the new deduction for taxpayers aged 65 and up.</p><p> Under certain circumstances, a portion of Social Security benefits and tier 1 railroad retirement benefits may be taxable. If a taxpayer's modified adjusted gross income plus one-half of the Social Security benefits (including tier I railroad retirement benefits) received during the taxable year <em>exceeds</em> certain base amounts, then a portion of the benefits are includible in gross income as ordinary income. "Modified adjusted gross income" is a taxpayer's adjusted gross income (disregarding foreign income, savings bonds, adoption assistance program exclusions, the deductions for education loan interest and for qualified tuition and related expenses) <em>plus</em> any tax-exempt interest income received or accrued during the taxable year.<a href="#_ftn1">¹</a>A taxpayer whose modified adjusted gross income plus one-half of his or her Social Security benefits exceed a base amount is required to include in gross income the <em>lesser</em> of (a) 50 percent of the excess of such combined income over the base amount, <em>or</em> (b) 50 percent of the Social Security benefits received during the taxable year.<a href="#_ftn2">²</a> The "base amount" is $32,000 for married taxpayers filing jointly, $25,000 for unmarried taxpayers, and zero ($0) for married taxpayers filing separately who have not lived apart for the entire taxable year.<a href="#_ftn3">³</a></p><p> In addition to the initial tier of taxation discussed above, a percentage of Social Security benefits that exceed an adjusted base amount will be includable in a taxpayer's gross income. The "adjusted base amount" is $44,000 for married taxpayers filing jointly, $34,000 for unmarried taxpayers, and zero ($0) for married individuals filing separately who did not live apart for the entire taxable year.<a href="#_ftn4">⁴</a> If a taxpayer's modified adjusted gross income plus one-half of his or her Social Security benefits exceed the adjusted base amount, his or her gross income will include the <em>lesser</em> of (a) 85 percent of the Social Security benefits received during the year, <em>or</em> (b) the sum of – (i) 85 percent of the excess over the adjusted base amount, plus (ii) the smaller of – (A) the amount that is includable under the initial tier of taxation, or (B) $4,500 (single taxpayers) or $6,000 (married taxpayers filing jointly).<a href="#_ftn5">⁵</a><br/><blockquote><em>Example 1.</em> A married couple files a joint return. During the taxable year, they received $12,000 in Social Security benefits and had a modified adjusted gross income of $35,000 ($28,000 plus $7,000 of tax-exempt interest income). Their modified adjusted gross income plus one-half of their Social Security benefits [$35,000 + (½ of $12,000) = $41,000] is greater than the applicable <em>base amount</em> of $32,000 but less than the applicable <em>adjusted base amount</em> of $44,000; therefore, $4,500 [the lesser of one-half of their benefits ($6,000) or one-half of the excess of $41,000 over the base amount (½ × ($41,000 – $32,000), or $4,500)] is included in gross income. </blockquote><br/> An election is available that permits a taxpayer to treat a lump sum payment of benefits as received in the year to which the benefits are attributable.<a href="#_ftn6">⁶</a><br/><strong>Reductions of Social Security Benefits that do not Reduce the</strong><br/> <strong>Amount Included in the Computation of Taxable Benefits</strong></p><p> Workers' compensation pay that reduced the amount of Social Security received and any amounts withheld from a taxpayer's Social Security benefits to pay Medicare insurance premiums do not reduce the amount that are included in the computation of taxable Social Security benefits.<a href="#_ftn7">⁷</a></p><p> In <em>Green v. Comm</em>.,<a href="#_ftn8">⁸</a> the taxpayer argued that his Social Security disability benefits were excludable from gross income<a href="#_ftn9">⁹</a> because they had been paid in lieu of workers' compensation. Thus, they should not be included in the computation of taxable Social Security benefits. The Tax Court determined, however, that Title II of the Social Security Act is <em>not</em> a form of workers' compensation. Instead, the Act allows for disability payments to individuals regardless of employment. Consequently, the taxpayer's Social Security disability benefits were includable in gross income. </p><p> Similarly, in a case of first impression, the Tax Court held that a taxpayer's Social Security disability insurance benefits (payable as a result of the taxpayer's disability due to lung cancer caused from exposure to Agent Orange during his Vietnam combat service) were includable in gross income under IRC Section 86 and not excludable under IRC Section 104(a)(4). The court reasoned that Social Security disability insurance benefits do not take into consideration the nature or cause of the individual's disability. Eligibility for purposes of Social Security disability benefits is determined on the basis of the individual's prior work record, not the cause of the disability. Moreover, the amount of Social Security disability payments is computed under a formula that does not consider the nature or extent of the injury. Consequently, because the taxpayer's Social Security disability insurance benefits were not paid for personal injury or sickness in military service within the meaning of IRC Section 104(a)(4), the benefits were not excluded from gross income under IRC Section 104(a)(4).<a href="#_ftn10">¹⁰</a></p><p> Railroad retirement benefits (other than Tier I benefits) are taxed in the same way as benefits received under a qualified pension or profit sharing plan. For this purpose, the Tier II portion of the taxes imposed on employees and employee representatives is treated as an employee contribution, while the Tier II portion of the taxes imposed on employers is treated as an employer contribution.<a href="#_ftn11">¹¹</a></p><p><hr align="left" size="1" width="33%"></hr></p><p> <a href="#_ftnref1">1</a>. IRC § 86(b)(2). </p><p> <a href="#_ftnref2">2</a>. IRC § 86(a)(1). </p><p> <a href="#_ftnref3">3</a>. IRC § 86(c)(1). In a Tax Court case, the term "live apart" means living in separate residences. In that case, the taxpayer lived in the same residence as his spouse for at least thirty days during the tax year in question (even though maintaining separate bedrooms). The Tax Court ruled that he did not "live apart" from his spouse at all times during the year; therefore, the taxpayer's base amount was zero. <em>McAdams v. Commissioner</em>, 118 TC 373 (2002). </p><p> <a href="#_ftnref4">4</a>. IRC § 86(c)(2). </p><p> <a href="#_ftnref5">5</a>. IRC § 86(a)(2). </p><p> <a href="#_ftnref6">6</a>. IRC § 86(e). </p><p> <a href="#_ftnref7">7</a>. Rev. Rul. 84-173, 1984-2 CB 16. </p><p> <a href="#_ftnref8">8</a>. TC Memo 2006-39. </p><p> <a href="#_ftnref9">9</a>. Under IRC § 104(a)(1). </p><p> <a href="#_ftnref10">10</a>. <em>Reimels v. Commissioner</em>, 123 TC 245 (2004), <em>aff'd</em>, 436 F.3d 344 (2d Cir. 2006); <em>Haar v. Commissioner</em>, 78 TC 864, 866 (1982), <em>aff'd</em>, 709 F.2d 1206 (8th Cir. 1983), followed. </p><p> <a href="#_ftnref11">11</a>. See IRC § 72(r)(1). </p>

<div class="Section1">Under the Inflation Reduction Act of 2022, the tax credit for new energy efficient homes under IRC Section 45L was extended through 2032 (and retroactively through 2022, although the pre-existing rules will continue to apply for 2022). The tax credit is designed to provide an incentive for builders of both residential homes and multi-family dwellings to use materials designed to reduce energy consumption.</div><br /> <div class="Section1"><br /> <br /> Beginning in 2023, the credit is also modified by increasing the maximum amount of the credit to either $2,500 or $5,000 (the prior maximum was $2,000 per unit). The new programs also eliminate the height restrictions, so that the previously-existing three-story or less requirement no longer applies beginning in 2023.<br /> <br /> Builders must satisfy certain energy-efficient criteria qualify for the $2,500 credit. Beginning in 2023, single-family homes must satisfy the requirements of the Department of Energy's "Energy Star Single Family New Homes Program," Version 3.1 for homes constructed before January 1, 2025 and Version 3.2 for later years. It is expected that additional details will be provided. Manufactured homes are required to satisfy the latest Energy Star Manufactured Home National Program requirements that are in effect on the later of (1) January 1, 2023 or January 1 of the year that is two calendar years prior to the date the dwelling is acquired.<br /> <br /> If the single-family or manufactured home is certified as a DOE Zero Energy Ready Home (ZERH) (or meets the requirements of a successor program implemented by the Department of Energy), a higher $5,000 credit is available.<br /> <br /> For multi-family dwellings, a $500 credit is available if the home satisfies the criteria of the Energy Star Single Family New Homes Program and a $1,000 credit is available if the building is ZERH certified.<a href="#_ftn1" name="_ftnref1">¹</a><br /> <br /> Builders must also satisfy prevailing wage standards beginning in 2023. To qualify, workers must be paid wages at rates not less than the prevailing rates for construction, alteration, or repair of a similar character in the locality in which such residence is located as most recently determined by the Secretary of Labor.<br /> <br /> To qualify for the tax credit, the taxpayer must obtain an audit that provides an estimate of the energy and cost savings of each energy-efficient home improvement. Beginning in 2024, that audit must be conducted by a Qualified Home Energy Auditor, which is an auditor who has been certified by one of the certification programs listed by the Department of Energy on its certification programs page for the energy efficient home improvement credit. For 2023, a transition rule applies so that the auditor need not be a Qualified Home Energy Auditor.<a href="#_ftn2" name="_ftnref2">²</a><br /> <br /> The IRS has also appropriated funds and authorized the Department of Energy to distribute funds to establish rebate programs for owners and occupants of residential property who engage in qualifying transactions under the law.  For tax purposes, a rebate paid to or on behalf of a purchaser pursuant to the DOE Home Energy Rebate Programs will be treated as a purchase price adjustment for the purchaser and is not taxable income.  For rebates provided at the time of sale, the amount of the rebate provided in connection with the DOE Home Energy Rebate Programs is not included in a purchaser's cost basis under IRC Section 1012.  For rebates provided at a later time, the amount of the rebate constitutes an adjustment to basis under IRC Section 1016.  Payments of rebate amounts to the purchaser that are treated as a purchase price adjustment are not subject to information reporting under IRC Section 6041.<a href="#_ftn3" name="_ftnref3">³</a><br /> <br /> </div><br /> <div class="refs"><br /> <br /> <hr align="left" size="1" width="33%" /><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>.  IRC § 45L(c), as modified by Inflation Reduction Act § 13304.<br /> <br /> <a href="#_ftnref2" name="_ftn2">2</a>.  Notice 2023-59.<br /> <br /> <a href="#_ftnref3" name="_ftn3">3</a>. A-24-19.<br /> <br /> </div>

<p>Entities that are taxed under the rules governing pass-through taxation are generally entitled to a 20 percent deduction for qualified business income (QBI, see Q ). This deduction is equal to the sum of: </p><ol class="rte2-style-ol" id="rte-7a9ba6d0-1736-11f1-9f19-33555e51c5b3" start="1"><li>the lesser of the combined qualified business income amount for the tax year or an amount equal to 20 percent of the excess of the taxpayer's taxable income over any net capital gain and cooperative dividends, plus</li><li>the lesser of 20 percent of qualified cooperative dividends or taxable income (reduced by net capital gain).<a href="#_ftn1">¹</a></li></ol><p>The sum discussed above may not exceed the taxpayer's taxable income for the tax year (reduced by net capital gain). Further, the 20 percent deduction with respect to qualified cooperative dividends is limited to taxable income (reduced by net capital gain). </p><p>The deductible amount for each qualified trade or business is the lesser of: </p><ol class="rte2-style-ol" id="rte-7a9ba6d1-1736-11f1-9f19-33555e51c5b3" start="1"><li>20 percent of the qualified business income with respect to the trade or business or</li><li>the greater of (x) 50 percent of W-2 wage income or (y) the sum of 25 percent of the W-2 wages of the business plus 2.5 percent of the unadjusted basis, immediately after acquisition, of all qualified property (see Q ).<a href="#_ftn2">²</a></li></ol><strong>Planning Point:</strong> The regulations provide guidance on how UBIA should be calculated in the case of a like-kind exchange or involuntary conversion. The regulations follow the Section 168 regulations in providing that property acquired in a like-kind exchange, or by conversion, is treated as MACRS property, so that the depreciation period is determined using the date the relinquished property was first placed into service unless an exception applies. The exception applies if the taxpayer elected not to apply Treasury Regulation § 1.168(i)-6. As a result, most property acquired in a like-kind exchange or involuntary conversion under the new rules will have two relevant placed in service dates. For calculating UBIA, the relevant date is the date the taxpayer places the property into service. For calculating its depreciable period, the relevant date is the date the taxpayer placed the original, relinquished property into service. </p><p>Concurrently with the regulations, the IRS released Notice 2018-64, which contains a proposed revenue procedure with guidance for calculating W-2 wages for purposes of the Section 199A deduction for qualified business income. This guidance was finalized in Revenue Procedure 2019-11. The guidance provides three methods for calculating W-2 wages, including the "unmodified box method", the "modified Box 1 method", and the "tracking wages method". The guidance further specifies that wages calculated under these methods are only taken into account in determining the W-2 wage limitations if properly allocable to QBI under Proposed Treasury Regulation § 1.199A-2(g). </p><p>The unmodified box method involves taking the lesser of (1) the total of Box 1 entries for all W-2 forms or (2) the total of Box 5 entries for all W-2 forms (in either case, those that were filed with the SSA by the taxpayer for the year). Under the modified Box 1 method, the taxpayer subtracts from its total Box 1 entries amounts that are not wages for federal income tax withholding purposes, and then adds back the total of Box 12 entries for certain employees. The tracking wages method requires the taxpayer to actually track employees' wages, and (1) total the wages subject to income tax withholding and (2) subtract the total of all Box 12 entries of certain employees. </p><p>Revenue Procedure 2019-11 clarifies that, in the case of short taxable years, the business owner is required to use the "tracking wages method" with certain modifications. The total amount of wages subject to income tax withholding and reported on Form W-2 can only include amounts that are actually or constructively paid to the employee during the short tax year and reported on a Form W-2 for the calendar year with or within that short tax year. With respect to the amounts reported in Box 12, only the portion of the total amount reported that was actually deferred or contributed during the short year can be included in W-2 wages. </p><p><b>Planning Point:</b> The Tax Court held that wages paid by two S corporations that were not deductible in computing taxable income under IRC Section 280E could not be included when calculating the QBI deduction. Section 280E limits the deductions and credits that can be taken by businesses that consist of trafficking in controlled substances under Schedules I and II. The S corporations at issue here operated cannabis businesses. While they did not dispute the fact that Section 280E prevented them from deducting the full W-2 wages they paid for the year in question, in calculating the QBI deduction, they included the full amount of the W-2 wages rather than only the W-2 wages they deducted on their Forms 1120-S. The court reasoned that W-2 wages that were not deductible in determining taxable income could not be properly allocable to W-2 wages for the purposes of the QBI deduction.<a href="#_ftn3">³</a></p><p>If the taxable income is below the applicable threshold levels (see Q ), the deduction is simply 20 percent.⁴</p><p>If the taxable income exceeds the relevant threshold amount, but not by more than $75,000 ($150,000 for joint returns), and the amount determined under (b), above, is less than the amount under (a), above, then the deductible amount is determined without regard to the calculation required under (b). However, the deductible amount allowed under (a) is reduced by the amount that bears the same ratio to the "excess amount" as (1) the amount by which taxable income exceeds the threshold amount bears to (2) $75,000 ($150,000 for joint returns). Prior to 2026, the phase-out range was $50,000 ($100,000 for joint returns).</p><p>The "excess amount" means the excess of amount determined under (a), above, over the amount determined under (b), above, without regard to the reduction described immediately above. </p><p>"Combined QBI" for the year is the sum of the deductible amounts for each qualified trade or business of the taxpayer and 20 percent of the taxpayer's qualified REIT dividends and qualified publicly traded partnership income.⁵</p><p>Qualified REIT dividends do not include any portion of a dividend received from a REIT that is a capital gain dividend or a qualified dividend.⁶</p><p>"Qualified cooperative dividends" includes a patronage dividend, per-unit retain allocation, qualified written notice of allocation, or any similar amount that is included in gross income and received from (a) a tax-exempt benevolent life insurance association, a mutual ditch or irrigation company, cooperative telephone company, like cooperative organization or a taxable or tax-exempt cooperative that is described in section 1381(a), or (2) a taxable cooperative governed by tax rules applicable to cooperatives before the enactment of subchapter T of the Code in 1962.⁷</p><p>"Qualified publicly traded partnership income" means the sum of: </p><ol class="rte2-style-ol" id="rte-7a9ba6d2-1736-11f1-9f19-33555e51c5b3" start="1"><li> the net amount of the taxpayer's allocable share of each qualified item of income, gain, deduction, and loss from a publicly-traded partnership that does not elect to be taxed as a corporation (so long as the item is connected with a U.S. trade or business and is included or allowed in determining taxable income for the year and is not excepted investment-type income, also not including the taxpayer's reasonable compensation, guaranteed payments for services or Section 707(a) payments for services), and</li><li>gain recognized by the taxpayer on disposing its interest in the partnership that is treated as ordinary income.⁸</li></ol><p>See Q <a href="javascript:void(0)">8581</a> - Q <a href="javascript:void(0)">8601</a> for a more detailed discussion of the Section 199A regulations. </p><p><hr align="left" size="1" width="33%"></hr></p><p> <a href="#_ftnref1">1</a>. IRC § 199A(a) </p><p> <a href="#_ftnref2">2</a>. IRC § 199A(b)(2). </p><p> <a href="#_ftnref3">3</a>. <i>Ayla A. Savage v. Commissioner</i>, 165 T.C. No. 5 (2025). </p><p>4. IRC § 199A(b)(3).</p><p>5. IRC § 199A(b)(1). </p><p>6. IRC § 199A(e)(3). </p><p>7. IRC § 199A(e)(4). </p><p>8. IRC § 199A(e)(5).</p>

<div class="Section1">Each year, an individual's basis is reduced by the amount of the depreciation deduction taken so that his adjusted basis in the property reflects accumulated depreciation deductions. If depreciation is not deducted, his basis must nonetheless be reduced by the amount of depreciation allowable, but the deduction may not be taken in a subsequent year.<a href="#_ftn1" name="_ftnref1">¹</a></div><br /> <div class="Section1"><br /> <p style="text-align: center;"><strong>Recapture</strong></p><br /> Upon disposition of property, the seller often realizes more than return of basis after it has been reduced for depreciation. Legislative policy is that on certain dispositions of depreciated property the seller realizes a gain that is, at least in part, attributable to depreciation. To prevent a double benefit, the IRC requires that some of the gain that would otherwise generally be capital gain must be treated as ordinary income. In effect, it requires the seller to "recapture" some of the ordinary income earlier offset by the depreciation.<a href="#_ftn2" name="_ftnref2">²</a> In addition, if depreciated property ceases to be used predominantly in a trade or business before the end of its recovery period, the owner must recapture in the tax year of cessation any benefit derived from expensing such property.<a href="#_ftn3" name="_ftnref3">³</a> This provision is effective for property placed in service in tax years ending after January 25, 1993.<a href="#_ftn4" name="_ftnref4">⁴</a><br /> <br /> </div><br /> <div class="refs"><br /> <br /> <hr align="left" size="1" width="33%" /><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>. IRC § 1016(a)(2).<br /> <br /> <a href="#_ftnref2" name="_ftn2">2</a>. IRC §§ 1245, 1250.<br /> <br /> <a href="#_ftnref3" name="_ftn3">3</a>. Treas. Reg. § 1.179-1(e)(1).<br /> <br /> <a href="#_ftnref4" name="_ftn4">4</a>. Treas. Reg. § 1.179-6.<br /> <br /> </div>

<div class="Section1">The bonus depreciation rules (see Q <a href="javascript:void(0)" class="accordion-cross-reference" id=""></a>) may be applied to used property if the property was not used by the taxpayer (or a predecessor) prior to the acquisition. The property is considered to have been used by the taxpayer or a predecessor prior to the acquisition if the taxpayer or predecessor had a depreciable interest in the property at any time prior to the acquisition, regardless of whether depreciation deductions were actually claimed.<a href="#_ftn1" name="_ftnref1">¹</a><div class="Section1"><br /> <br /> Under the 2019 final regulations, &ldquo;predecessor&rdquo; is defined to include (i) a transferor of an asset to a transferee in a transaction to which IRC Section 381(a) applies, (ii) a transferor of an asset to a transferee in a transaction in which the transferee&rsquo;s basis in the asset is determined, in whole or in part, by reference to the basis of the asset in the hands of the transferor, (iii) a partnership that is considered as continuing under IRC Section 708(b)(2), (iv) the decedent in the case of an asset acquired by an estate, or (v) a transferor of an asset to a trust.<a href="#_ftn2" name="_ftnref2">²</a><br /> <br /> Further, all of the following must be true:<br /> <p style="padding-left: 40px;">(1)the property was not acquired from certain related parties, including: (a) the taxpayer&rsquo;s spouse, ancestors and descendants, (b) an individual and a corporation more than 50 percent in value of the outstanding stock of which is owned, directly or indirectly, by or for the individual, (c) a grantor and a fiduciary of any trust, (d) a fiduciary of a trust and a fiduciary of another trust, if the same person is a grantor of both trusts, (e) a fiduciary and a beneficiary of a trust, (f) a fiduciary of a trust and a beneficiary of another trust, if the same person is a grantor of both trusts, (g) a fiduciary of a trust and a corporation more than 50 percent in value of the outstanding stock of which is owned, directly or indirectly, by or for the trust or by or for a person who is a grantor of the trust, (h) a person and an organization to which IRC Section 501 (relating to certain educational and charitable organizations which are exempt from tax) applies and which is controlled directly or indirectly by such person or (if such person is an individual) by members of the family of such individual, (i) a corporation and a partnership if the same person owns more than 50 percent of the outstanding stock in the corporation or capital interest or profits of the partnership, (j) an S corporation and another S corporation if the same person owns more than 50 percent of the outstanding stock of each corporation, (k) an S corporation and a C corporation, if the same persons own more than 50 percent in value of the outstanding stock of each corporation, (l) the executor and beneficiary of an estate, (m) two partnerships in which the same person owns more than 50 percent of the capital interests and profits or (n) a partnership and a person owning more than 50 percent of the capital interests and profits of the partnership.</p><br /> <br /> <br /> <hr><br /> <br /> <strong><strong>Planning Point:</strong></strong> The IRS regulations on the bonus depreciation rules contain a general anti-abuse rule that will apply to determine related party status. The rules provide that in a series of related transactions, the property is treated as though it was transferred directly from its original owner to its ultimate owner. The relationship between the original owner and the ultimate owner is tested immediately after the last transfer in the series of transactions. The 2019 final regulations provide for a five-year &ldquo;lookback&rdquo; period in making the determination as to whether the property was previously used by a prohibited party.<a href="#_ftn3" name="_ftnref3">³</a><br /> <br /> <hr><br /> <p style="padding-left: 40px;">(2)the property was not acquired by one member of a controlled group from another member of that group,</p><br /> <p style="padding-left: 40px;">(3)the property was acquired by purchase, within the meaning of IRC Section 179,</p><br /> <p style="padding-left: 40px;">(4)the basis of the property in the hands of the person acquiring it is not determined in whole or part by reference to the adjusted basis of the property in the hands of the person from whom it was acquired or under IRC Section 1014(a) (basis of property acquired from a decedent),</p><br /> <p style="padding-left: 40px;">(5)the cost of the property does not include the basis of the property as determined by reference to the basis of other property held by the taxpayer.<a href="#_ftn4" name="_ftnref4">⁴</a></p><br /> <br /> </div><div class="refs"><br /> <br /> <hr align="left" size="1" width="33%"><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>.&nbsp;Prop. Treas. Reg. &sect; 1.168(k)-2(b)(3)(iii)(B)(1).<br /> <br /> <a href="#_ftnref2" name="_ftn2">2</a>.&nbsp;Treas. Reg. &sect; 1.168(k)-2(a)(2)(iv).<br /> <br /> <a href="#_ftnref3" name="_ftn3">3</a>.&nbsp;Prop. Treas. Reg. &sect; 1.168(k)-2(b)(3)(iii)(C).<br /> <br /> <a href="#_ftnref4" name="_ftn4">4</a>.&nbsp;IRC &sect;&sect; 168(k)(2)(E)(ii), 267(b), 707(b).<br /> <br /> </div></div><br />

<div class="Section1">In order to claim bonus depreciation with respect to used property, the property must not be used by the taxpayer or a predecessor at any time before the taxpayer acquired the property (see Q <a href="javascript:void(0)" class="accordion-cross-reference" id=""></a>). This requirement raised questions as to whether bonus depreciation could be available with respect to property that the taxpayer previously leased, or in which the taxpayer previously held an interest but did not own entirely. See the heading below for a discussion of the short holding period exception proposed in the 2019 regulations.<div class="Section1"><br /> <br /> Under the regulations, bonus depreciation may now be available for property that a taxpayer previously leased and later acquired. In some situations, a taxpayer may make improvements to property that is leased and obtain a depreciable interest in the property as a result.&nbsp;If the taxpayer later acquires the property, bonus depreciation is unavailable with respect to the portion of the property in which the taxpayer held a depreciable interest during the lease period.<a href="#_ftn1" name="_ftnref1">¹</a><br /> <br /> Relatedly, if a taxpayer originally held a depreciable interest in property, and later acquires an additional depreciable interest in an additional portion of the same property, the additional depreciable interest is not treated as though it was used by the taxpayer prior to acquisition (i.e., it is eligible for bonus depreciation under the used property rules if all other requirements are satisfied). If the taxpayer previously had a depreciable interest in the subsequently acquired additional portion, bonus depreciation is not available. A different rule applies in situations where a taxpayer sells a partial interest in property and later buys a partial interest in the same property. If a taxpayer holds a depreciable interest in a portion of the property, sells that portion or a part of that portion, and later acquires a depreciable interest in another portion of the same property, the taxpayer is treated as previously having a depreciable interest in the property up to the amount of the portion for which the taxpayer held a depreciable interest in the property before the sale.<a href="#_ftn2" name="_ftnref2">²</a><br /> <br /> Under the 2019 regulations, the mere fact that a business leases property to a disqualified business (i.e., one that does not qualify to use bonus depreciation, such as certain businesses with floor plan financing interest) does not &ldquo;taint&rdquo; the property, meaning that such exclusion from the additional first year depreciation deduction does not apply to lessors of property to a trade or business described in IRC Section 168(k)(9) so long as the lessor is not described the section.<a href="#_ftn3" name="_ftnref3">³</a><br /> <p style="text-align: center;"><strong>Short Holding Period Exception</strong></p><br /> The 2019 regulations provide an exception to the depreciable interest rule in situations where the taxpayer disposes of the property within a short period of time after placing the property in service. If the following are true:<br /> <p style="padding-left: 40px;">(a)a taxpayer acquires and places in service property,</p><br /> <p style="padding-left: 40px;">(b)the taxpayer or a predecessor did not previously have a depreciable interest in the property,</p><br /> <p style="padding-left: 40px;">(c)the taxpayer disposes of the property to an unrelated party within 90 calendar days after the date the property was originally placed in service by the taxpayer (without taking into account the applicable convention), and</p><br /> <p style="padding-left: 40px;">(d)the taxpayer reacquires and again places in service the property, then</p><br /> the taxpayer&rsquo;s depreciable interest in the property during that 90-day period is not taken into account for determining whether the property was used by the taxpayer or a predecessor at any time prior to its reacquisition by the taxpayer.<a href="#_ftn4" name="_ftnref4">⁴</a> The proposed rule does not apply if the taxpayer reacquires and again places in service the property during the same taxable year the taxpayer disposed of the property.<br /> <br /> </div><div class="refs"><br /> <br /> <hr align="left" size="1" width="33%"><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>.&nbsp;Treas. Reg. &sect; 1.168(k)-2(b)(3)(iii)(B)(1).<br /> <br /> <a href="#_ftnref2" name="_ftn2">2</a>.&nbsp;Treas. Reg. &sect; 1.168(k)-2(b)(3)(iii)(B)(2).<br /> <br /> <a href="#_ftnref3" name="_ftn3">3</a>.&nbsp;Treas. Reg. &sect; 1.168(k)- 2(b)(2)(ii)(F).<br /> <br /> <a href="#_ftnref4" name="_ftn4">4</a>.&nbsp;Prop. Treas. Reg. &sect; 1.168(k)-2(b)(3)(iii)(B)(4).<br /> <br /> </div></div><br />