The IRS issued proposed regulations (REG-118988-22) providing comprehensive guidance on Section 162(m)(3)(C), as amended by the American Rescue Plan Act of 2021 (ARPA), P.L. 117-2. These regulations expand the annual deduction limitation on employee remuneration exceeding $1 million, incorporating additional categories of employees into the scope of covered individuals.  Key provisions contained in the proposed regulations include:

Expanded Definition of Covered Employee

Effective for tax years beginning after December 31, 2026, Section 162(m)(3)(C) broadens the definition of "covered employee.”  A covered employee is defined as employee of the taxpayer who meets one of the following criteria:

• Principal Executive Officer (PEO) or Principal Financial Officer (PFO) at any time during the taxable year, or acted in such a capacity, they are considered a covered employee. This includes interim or acting executives who serve in these roles temporarily.

• Any employee whose total compensation for the taxable year ranks among the three highest compensated officers, excluding the PEO and PFO. The total compensation is determined under the rules requiring disclosure to shareholders as per the Securities Exchange Act.

• If an individual was a covered employee in any preceding taxable year starting after December 31, 2026, they remain a covered employee indefinitely, even if they no longer meet the PEO, PFO, or top-three compensation criteria.

Definition of Employee and Compensation

"Employee" is defined under Section 3401(c), encompassing common law employees and corporate officers.  "Compensation" includes amounts that would be deductible but for the Section 162(m) limitation.

Affiliated Group Provisions

The proposed rules detail methods for identifying the five highest-compensated employees within publicly held corporations that are part of an affiliated group.  Compensation paid across the group is aggregated to ensure consistent application of the deduction limitation.

Application of Third-Party Arrangements

Employees providing services through third-party arrangements, such as professional employer organizations, will be treated as employees of the publicly held corporation for Section 162(m) purposes.

Effective Date and Comments

The regulations are proposed to apply to compensation deductible for tax years starting after the later of December 31, 2026, or the publication date of the final regulations in the Federal Register.  Public comments are encouraged and must be submitted by March 17, 2025.

Publicly held corporations must prepare for the expanded scope of covered employees under Section 162(m). Evaluating compensation strategies and ensuring compliance across affiliated groups will be critical as these regulations take effect.  Organizations are encouraged to review the proposed regulations and submit feedback through the Federal eRulemaking Portal.

Link to the proposed regulations 2025-00728.pdf

The IRS has finalized regulations (T.D. 10027) outlining tax obligations under Section 2801 of the Internal Revenue Code, which applies to U.S. citizens, residents, and certain trusts that receive gifts or bequests from "covered expatriates." Released on January 10, 2025, these regulations provide comprehensive guidance on calculating, reporting, and paying the tax using Form 708, the United States Return of Tax for Gifts and Bequests Received from Covered Expatriates. These regulations build upon the proposed rules issued in 2015 and implement provisions of the Heroes Earnings Assistance and Relief Tax Act of 2008 (P.L. 110-245).

Section 2801 imposes a tax at the highest estate or gift tax rate, currently 40%, on gifts and bequests from covered expatriates that exceed the inflation-adjusted annual exclusion, which is $18,000 for 2024. A covered gift includes property acquired directly or indirectly from a covered expatriate, while a covered bequest encompasses property acquired upon the death of a covered expatriate that would have been includible in their gross estate if they were a U.S. citizen or resident at the time of death. The term "covered expatriate" applies to individuals who expatriated on or after June 17, 2008, and, as of the expatriation date, meet at least one of the following criteria: an average annual net income tax liability exceeding $124,000 (indexed for inflation), a net worth of $2 million or more, or failure to certify compliance with all U.S. tax obligations for the previous five years.

Under these rules, U.S. recipients must report covered gifts and bequests on Form 708 for the calendar year in which they are received. The tax liability is determined by reducing the value of the transfers by the applicable annual exclusion and applying credits for any foreign gift or estate taxes paid.

The regulations include provisions that take effect on January 1, 2025, with others becoming applicable on January 14, 2025, upon publication in the Federal Register. Taxpayers affected by these rules should consult with a tax professional to fully understand their obligations under Section 2801 and ensure timely compliance. Here is a link to the actual regulations 2025-00284.pdf

최근 캘리포니아 산불로 인해 많은 가정과 기업이 집과 재산을 잃는 큰 피해를 입었다. 이런 힘든 시기에 재정적, 세금 혜택을 받을 수 있는 방법을 찾아보는 게 중요하다. 내부수익법(IRC) 섹션 1033은 화재나 다른 재난으로 강제로 전환된 자산에 대해 보험금을 받은 개인이나 기업이 세금 혜택을 받을 수 있도록 돕는 조항이다.

IRC 섹션 1033은 산불 같은 재난으로 자산이 파괴되고, 보험금이나 기타 보상을 통해 자산의 조정 기준가를 초과하는 금액을 받았을 때, 그 소득을 나중으로 미룰 수 있게 한다. 소득 연기를 받으려면 보상금을 사용해 일정 기간 내에 비슷하거나 관련된 용도의 대체 자산을 사야 한다.

대체 자산과 시간 제한

소득을 연기하려면 대체 자산을 소득이 발생한 연도의 말일로부터 2년 이내에 구매하거나 건설해야 한다. 만약 연방 재난 지역으로 지정된 곳이라면, 이 대체 기간은 4년으로 늘어날 수 있다.

부채를 활용한 대체 요건 충족

대체 요건을 충족하기 위해 부채를 사용할 수 있는지 궁금할 수 있다. 답은 "가능하다"이다. 하지만 보험금 전체를 대체 자산에 재투자해야 한다. 재무부 규정 1.1033(a)-2(c)(2)에 따르면, 강제 전환으로 받은 보험금만큼 또는 그 이상을 대체 자산에 재투자해야 소득을 연기할 수 있다. 만약 재투자되지 않은 금액이 있다면, 그 금액은 과세 대상이 된다.

따라서 대체 요건을 충족했다는 걸 입증하려면 적절한 문서화와 자금 사용 내역 관리가 중요하다.

보험 보상의 배분: 개인 자산과 부동산

보험 보상은 주로 부동산(집, 건물 등)과 개인 자산(가구, 가전 등)으로 나뉜다. 이 두 범주 간 배분은 연기 가능한 소득 금액을 계산하는 데 중요하다. 파손된 건물이나 토지에 배정된 보험금은 비슷한 부동산을 포함한 대체 자산을 구입하면 소득을 연기할 수 있다. 가구 같은 개인 자산에 배정된 보험금도 비슷한 개인 자산을 사면 소득 연기가 가능하다.

보험 보상의 배분이 산불 전 각 자산의 공정 시장 가치와 맞는지 신중히 확인해야 한다. 배분이 잘못되거나 문서화가 제대로 안 돼 있으면 예상치 못한 과세 소득이 발생하거나 감사 과정에서 문제가 생길 수 있다.

위 복구 과정을 헤쳐나가는 데 도움과 안내가 필요하다면, 재난 관련 세금 문제에 풍부한 경험을 가지고 있는 저희 KYJ 가 도움을 드릴 수 있습니다.

The recent California wildfires have left many families and businesses facing devastating losses, including the destruction of homes and properties. During these challenging times, it’s crucial to explore opportunities for financial and tax relief. One such provision in the Internal Revenue Code (“IRC”) is Section 1033, which can provide tax benefits for individuals and businesses that have received insurance settlements for involuntarily converted properties due to fire or other disasters.

IRC Section 1033 allows taxpayers to defer recognition of gain when their property is involuntarily converted—such as through destruction in a wildfire—and they receive insurance proceeds or other compensation that exceeds the property’s adjusted basis. To qualify for deferral, taxpayers must use the proceeds to acquire replacement property that is similar or related in service or use within a prescribed replacement period.

Replacement Property and Timing

To defer gain, replacement property must be purchased or constructed within two years from the end of the taxable year in which the gain is realized. For federally declared disaster areas, the replacement period may be extended to four years.

Use of Debt to Meet Replacement Requirements

A common question is whether debt can be used to meet the replacement requirement. The answer is “yes,” but one must reinvest the entire amount of the insurance proceeds into the replacement property.  Treasury regulation 1.1033(a)-2(c)(2) provides that gain is deferred only if the taxpayer reinvests an amount at least equal to the proceeds received from the involuntary conversion and any proceeds not reinvested in replacement property are considered “boot” and are taxable.

Proper documentation and allocation of funds are essential to substantiate compliance with the replacement requirements.

Allocation of Insurance Settlements: Personal Property vs. Real Property

Insurance settlements often cover multiple categories, including real property (e.g., homes, buildings) and personal property (e.g., furniture, appliances). The allocation between these categories is critical for determining the amount of gain that can be deferred.  Gain from insurance proceeds allocated to destroyed buildings or land can be deferred if the replacement property includes similar real property. Gain from proceeds allocated to personal property, such as household goods, may qualify for deferral if similar personal property is purchased.

Taxpayers must carefully analyze the insurance settlement’s allocation and ensure that it aligns with the fair market value of each category of property before the wildfire.  Misallocations or improper documentation can lead to unexpected taxable gains or challenges during an audit.

As you navigate the challenges of recovery, we’re here to provide the support and guidance you need. Our team has extensive experience in disaster-related tax matters and we are here to assist.

Under current U.S. Generally Accepted Accounting Principles (GAAP), the treatment of internal-use software development costs is determined based on the specific stages of the development process. In the preliminary project stage, activities such as planning, evaluating alternatives, and determining feasibility are considered, and all costs incurred during this stage are expensed. During the application development stage, activities include designing the software, coding, installation, and testing. Costs directly related to development, such as fees paid to third parties, payroll for employees working on the project, and interest costs, are capitalized, while training and data conversion costs are expensed. Finally, in the post-implementation or operation stage, which focuses on training and maintenance, all costs are expensed. This stage-based approach is detailed in ASC 350-40, "Intangibles—Goodwill and Other—Internal-Use Software."

In October 2024, the Financial Accounting Standards Board (FASB) proposed updates to this guidance to better align with modern, non-linear software development practices, such as agile and iterative methods. Proposed ASU Targeted Improvements to the Accounting for Internal-Use Software.pdf The proposed changes include eliminating references to sequential development stages and introducing revised criteria for capitalization. Under the proposal, costs would be capitalized once management authorizes and commits to funding the project, and it is probable that the software will be completed and perform its intended function. If significant development uncertainties exist, such as novel or unproven functionalities, the guidance suggests these costs should be expensed until the uncertainties are resolved. Additionally, the proposal requires presenting cash outflows for capitalized internal-use software costs as investing activities in the statement of cash flows to enhance transparency.

The proposed changes offer several advantages. They align better with contemporary software development practices, making the guidance more relevant and easier to apply. Enhanced transparency through improved financial statement disclosure provides stakeholders with clearer insights into software development costs. Simplifying the capitalization process by focusing on management's commitment and project completion likelihood reduces complexity.

However, the proposal also has potential drawbacks. It requires increased judgment to determine the probability of project completion and assess development uncertainties, which could introduce subjectivity and inconsistencies. Organizations may face implementation challenges as they transition to the new criteria, potentially requiring changes to internal processes and controls. The emphasis on resolving significant uncertainties before capitalization could also result in more costs being expensed, affecting financial metrics.

The proposed Accounting Standards Update is expected to be finalized in February 2025.

The U.S. Treasury Department’s Financial Crimes Enforcement Network (FinCEN) has announced an extension for filing the "Report of Foreign Bank and Financial Accounts (FBAR)" for specific U.S. individuals. The new deadline is April 15, 2026, and applies to individuals who have only signature or other authority, without financial interest, over certain foreign financial accounts.   FinCEN notice

This marks the 15th extension since 2011. It applies to U.S. employees and officers of specified regulated entities, such as publicly traded companies and financial institutions, for foreign financial accounts they controlled during the 2024 calendar year. The extension also covers reporting deadlines originally extended by earlier FinCEN notices starting in 2011.

The extension is necessary because proposed regulations issued in March 2016—intended to revise the FBAR filing requirements for U.S. individuals with signature or other authority over foreign accounts—remain unfinalized.

For all other U.S. individuals with an FBAR filing obligation, the deadline for calendar year 2024 FBARs is April 15, 2025, with an automatic six-month extension to October 15, 2025.

On November 7, 2024, the IRS unveiled Form 15620, Section 83(b) Election, designed to streamline the process for taxpayers making Section 83(b) elections.

Taxpayers receiving restricted property (e.g., stock or partnership interests) as part of a service-related transfer typically report compensation income when the property “vests,” or is no longer subject to a substantial risk of forfeiture. This amount is calculated as the fair market value at vesting minus any amount paid for the property. However, taxpayers can elect under Section 83(b) to report the income at the time the unvested property is transferred instead, potentially locking in a lower taxable amount. This election must be made within 30 days of the transfer and is generally irrevocable, with strict compliance requirements for validity.

The introduction of Form 15620 marks the first time the IRS has provided a standardized method for making Section 83(b) elections. Previously, taxpayers relied on sample language in Rev. Proc. 2012-29 or adhered to the requirements set forth in Reg. 1.83-2. While use of the form is not mandatory, it simplifies the process and is available for immediate use.

Taxpayers electing to use Form 15620 must mail the completed form to the IRS office where they file their federal income tax return. Additionally, a copy of the form should be provided to the entity for whom the services were performed in connection with the property transfer, consistent with existing procedures.

The IRS has announced plans to enable electronic filing of Form 15620 in the future. Until then, all other requirements for Section 83(b) elections remain unchanged.

Click the link to view the form:  https://www.irs.gov/pub/irs-pdf/f15620.pdf

As we approach the close of 2024, businesses have an excellent opportunity to optimize their tax positions through careful year-end planning. By accelerating deductions or deferring them where advantageous, companies can improve cash flow and maximize tax savings. The following strategies outline key areas where accrual-basis taxpayers may find opportunities to reduce their taxable income. It is essential to take necessary actions and make adjustments before the end of the taxable year.

Bonus Accrual

One area to consider is the deduction of accrued bonuses. In many cases, it is preferable to deduct bonuses in the year they are earned rather than when they are paid. To achieve this, taxpayers should review their bonus plans and consider revising terms to eliminate contingencies that might prevent the liability from meeting the “all events test” under Section 461. Strategies such as using a bonus pool with mechanisms for reallocating forfeited bonuses or implementing a minimum bonus strategy can help secure accelerated deductions while retaining the employment requirement for payment. It is important to fix bonus amounts through binding corporate actions or formulas based on financial data available by year-end. Additionally, scheduling bonus payments within 2.5 months after the tax year ends ensures compliance with Section 404 requirements, making these amounts deductible in the service year.

Prepaid Expenses

Another opportunity lies in the deduction of prepaid expenses. Under the “12-month rule,” certain prepayments, such as insurance, taxes, licensing fees, and software maintenance, may be deducted in the year of payment rather than being capitalized. This rule applies if the benefit period does not extend beyond the earlier of 12 months after the benefit begins or the end of the following taxable year. Identifying and addressing eligible prepaid expenses can provide an immediate deduction benefit, although this may require adopting a new method of accounting.

Inventory Write-Offs

For inventory-related deductions, companies holding obsolete, damaged, or unsellable inventory should consider disposing of these items by year-end to recognize associated losses. An exception applies to subnormal goods, defined as items unsellable at regular prices due to damage, imperfections, or other reasons. These goods may be written down to their actual offering price within 30 days after year-end, less selling costs, even if not sold by that time. Businesses should evaluate inventory levels and take the necessary steps to secure these deductions.

Bonus Depreciation

The continued phase-out of bonus depreciation also merits attention. In 2024, the bonus depreciation percentage drops to 60%. Companies should review fixed asset accounts to identify costs that can be deducted as repairs or maintenance rather than capitalized. Immediate expensing options under Section 179 and methods to reduce recovery periods should also be explored to maximize deductions for new assets placed in service during the year.

Pass-Through Entity Tax for High-Net-Worth Individuals

Finally, high-net-worth individuals participating in pass-through entities (PTEs) should evaluate the potential benefits of state pass-through entity tax (PTET) elections. These elections allow certain PTEs to bypass the $10,000 federal cap on state and local tax deductions. However, not all PTET elections are advantageous. A thorough analysis of federal and state tax impacts is necessary, taking into account the residency status of members and the availability of tax credits for nonresidents in their home states. Evaluating these factors and modeling potential outcomes can help PTEs determine whether a PTET election would be beneficial and avoid unintended tax consequences.

Year-end tax planning provides a valuable opportunity to refine tax strategies and maximize savings. Each of these options requires thoughtful evaluation and action before December 31, 2024. For assistance navigating these opportunities, reach out to your tax service provider.

Trump’s Return and Legislative Agenda

Former President Donald Trump has secured a second term in office, gaining broad Republican support and control over both chambers of Congress. With little expected opposition, his administration is poised to advance an ambitious agenda, particularly in the realm of taxation.

One of Trump's top priorities is to make permanent the 2017 tax cuts, a move with significant implications for both individuals and businesses. As these potential changes loom, taxpayers and businesses alike should familiarize themselves with what lies ahead in the tax landscape.

Key Proposals in Trump's Tax Agenda

Business Tax Cuts Trump is advocating to lower the corporate income tax rate from 21% to 20%, with a potential reduction to 15% for companies that manufacture products in the U.S. While details remain sparse, this could incentivize domestic production.

Furthermore, Trump aims to impose tariffs, possibly up to 20% across the board and 60% on imports from China. These tariffs are projected to raise government revenue but could lead to price increases for consumers.

Additional proposed business tax changes include:

• Eliminating clean-energy tax credits introduced in the 2022 Inflation Reduction Act.
• Reinstating 100% first-year bonus depreciation.
• Allowing businesses to deduct research and development expenses in the year incurred, rather than amortizing over multiple years.

Estate Taxes

The 2017 tax reform law nearly doubled the estate and gift tax exemption to $13.61 million per person, with this figure set to drop after 2025. Trump’s goal of making the 2017 tax cuts permanent may extend to maintaining the higher estate tax exemption, but it’s uncertain if further relief will be included.

Individual Income Tax

Trump has signaled a desire to permanently lower individual tax rates set by the 2017 Tax Cuts and Jobs Act and possibly reduce the current top income tax rate of 37%. Although specifics are yet to be announced, other proposed changes include:

• Lowering the long-term capital gains rate to 15%, down from the current 20%.
• Increasing the child tax credit to $5,000 per child (a 250% rise).
• Making tipped income nontaxable.
• Abolishing income tax on Social Security benefits, a measure popular with retirees but with potential budgetary impacts.
• Introducing tax incentives to promote homeownership, and proposing a tax deduction for the cost of generators in storm-prone areas.

SALT Deduction Cap Revisions

The $10,000 cap on state and local tax (SALT) deductions, introduced in 2017, could see modifications under Trump’s renewed administration. Despite his initial support for the cap, he is now open to increasing or removing it, though the decision is contested among his advisors. This change would benefit taxpayers in high-tax states but could also reduce federal revenue, affecting funding for other proposed cuts.

Preparing for Change

Trump’s tax proposals could significantly impact both personal finances and business operations, especially in high-tax states. While many details are pending, taxpayers should begin evaluating how potential tax reforms could affect them.

With control over Congress, Trump is positioned to advance these tax changes swiftly. Stay tuned for further developments as his administration provides more clarity on the specifics of each proposal.

The Tax Cuts and Jobs Act (TCJA) of 2017 significantly restricted the deduction of business-related interest expense under Section 163(j), limiting the deduction to 30% of adjusted taxable income (ATI) plus business interest income and floor plan financing interest. Initially, ATI was calculated like EBITDA, but since 2022, the add-back of depreciation and amortization has expired, increasing tax liabilities for higher-leveraged taxpayers.

To mitigate or eliminate the limitations, several strategies are available:

Small Business Exception

Businesses with average annual gross receipts of less than $30 million in 2024 may qualify for an exception under Sec. 163(j)(3), although aggregation rules may apply for related businesses.

Real Property Trade or Business (RPTOB) Election

Real property businesses, such as those involved in development, construction, or leasing, may elect to opt out of the interest deduction limitation, though they must switch to an alternative depreciation system and forgo bonus depreciation.

Self-Charged Interest

For partner loans to partnerships, the final 2021 regulations offer some relief by allowing certain interest expense allocations back to the lending partner.

Capitalization Strategies

Taxpayers can capitalize interest on certain properties including inventories, reducing their business interest expense. This applies after any required interest capitalization under Sec. 263A.  This allows for elective capitalization of certain costs, like interest, improving timing for deductions.

Buy vs. Lease Considerations

Taxpayers must weigh the benefits of leasing versus buying assets, considering both tax and financial reporting. With changes to depreciation and interest deduction limits, capital leases (now finance leases under GAAP) might be less attractive than before, as operating leases may allow for more flexible deductions.

Overall, the Sec. 163(j) limitation presents challenges but also opportunities for strategic tax planning, particularly in choosing between exceptions, capitalization, or restructuring to optimize deductions.