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President Biden, on August 16, 2022, signed the Inflation Reduction Act ( P.L. 117-169) into law following its passage along party lines in both chambers of Congress.

The law is a slimmed down version of the Build Back Better Act that passed the House in 2021 but failed to even come up for a vote in the Senate due to opposition primarily from Sen. Joe Manchin (D-W.V.). The Inflation Reduction Act did manage to keep some of the failed Build Back Better Act’s provisions in terms of generating revenues from corporations and wealthy taxpayers, as well as meeting some of the White House’s goals in the energy and health care sectors.

The law includes a one percent excise tax on stock repurchases, which goes into effect beginning in 2023, as well as a new corporate alternative minimum tax, although that does not apply to companies owned by private equity funds or certain manufacturing.

On the individual side, the IRS received a boost in funding of $80 billion across 10 years, part of which will be used to hire new agents who will help to the agency close the tax gap and get the wealthiest individuals to pay their fair share of taxes. Department of the Treasury Secretary Janet Yellen has directed the Internal Revenue Service to not use any of the new funding to increase the share of small businesses or households making $400,000 or less that are exposed to audit.

To help meet the Biden Administration’s environmental goals, the law includes tax credits for electric vehicle purchases, as well as new tax credits and extensions on expiring tax credits to produce electricity from renewable sources; making homes more energy efficient; and other activities aimed at reducing the carbon output of the nation.

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President Biden signed the CHIPS and Science Act into law after it received bipartisan support in both the House of Representatives and the Senate.

The law ( H.R. 4346) "will boost American semiconductor research, development, and production, ensuring U.S. leadership in the technology that forms the foundation of everything from automobiles to household appliances to defense systems," the White House said in a fact sheet released August 9, 2022, the day of the signing.

To help with that, the bill contains a 25 percent investment tax credit for the manufacture of semiconductors as well and the manufacture of the tools to do so in addition to the grants that it provides the semiconductor industry.

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Department of the Treasury Secretary Janet Yellen is seeking a detailed plan from the Internal Revenue Service on how it plans to spend to the $80 billion in additional funds that the agency received as part of the Inflation Reduction Act that was signed by President Biden on August 16, 2022.

"I would like the IRS to work closely with the Deputy Secretary to identify specific operational initiatives and associated timelines that will improve taxpayer services, modernize technology, and increase equity in our system of tax administration by pursuing tax evasion by those at the top who today do not pay their tax bill," Secretary Yellen said in an August 17, 2022, memorandum to IRS Commissioner Charles Rettig.

In the memo, she directed the IRS to deliver an operational plan within six months, which "should include details on how resources will be spent over the ten-year horizon on technology, service equipment, and personnel. This operational plan is key to ensuring the public and Congress are able to hold the agency accountable as it pursues needed improvements."

Yellen added that she is "prepared to approve the near-term use of funds to improve services for next filing season, but we should treat this plan as a prerequisite for expending these resources more broadly, as I think there is value in thinking carefully over the course of the next few months how work should be prioritized and sequenced to achieve our goals."

Replacing Those Who Will Be Retiring

Yellen’s memo comes in the wake of GOP messaging that states the IRS is looking to hire 87,000 new agents that will be coming after the lower and middle class individuals.

Yellen reiterated in her memo that new funds from the Inflation Reduction Act "will not result in households earning $400,000 per year or less or small businesses seeing an increase in the chances they are audited relative to historic levels. Instead, they will allow the IRS to work to end the two-tiered system, where most Americans pay what they owe, but those at the top of the distribution often do not."

Much of the new hiring will go to simply maintaining employment levels as the funds will help "to replace the attrition that is on the horizon from the expected retirement of at least 50,000 employees over the next five years," the memo states. At this time, the official was not able to provide a breakdown in the functions of the people expected to retire, but the official emphasized that these are simply not new employees that would be added to the agency.

A Treasury official noted that revenue agents will not be the main focus of the hiring, but rather the majority will be individuals who will help improve customer service through IT upgrades and serving as customer service representatives. The IRS will also seek out auditors with specialized experience who can enforce the tax laws against high income individuals and corporations who avoid paying their tax bill.

The official noted that the number of IRS auditors that can handle the complex returns of high income individuals and corporations is roughly the same number today as the agency had during World War II, which allows the IRS to exam about 7,500 returns of the nearly 4.5 million it receives in this category.

The Criminal Investigations unit is not expected to see a spike in its number of employed. The official points out that the CI unit accounts for less than three percent of the total IRS workforce (less than 2,000 employees).

Closing The Tax Gap

The aim of the hiring of specialized auditors and agents that target high earners is to close the tax gap. The official noted that with the additional resources from the Inflation Reduction Act, the IRS could collect an additional $400 billion over the next 10 years, although others, including former IRS Commissioner Charles Rossotti puts the collection amount at more than $1 trillion during the additional funding time period, according to testimony he provided to the Senate Finance Committee’s Subcommittee on Taxation and IRS Oversight during a May 11, 2021 hearing.

The Treasury official said the IRS is unable to collect 15 percent of the taxes that are owed, and over the next ten years, the tax gap could reach as high as $7.5 trillion.

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National Taxpayer Advocate Erin Collins has taken an "unusual step" to appeal an Internal Revenue Service Deputy Commissioners’ decision directly to Commissioner Charles Rettig for reconsideration regarding the use of scanning technology for paper tax returns.

In March, Collins issued a Taxpayer Advocate Directive calling on the agency to work with tax software companies to implement a 2-D barcode on all returns prepared using the software. The barcodes would be printed on the paper returns and, when scanned, would transfer all the information from a paper-filed return without the need for manual entry, which is currently required for all paper returns.

For handwritten returns or returns where the barcode was not readable, the directive called for the agency to use optical scanning technology to automate the processing of those returns.

"If the IRS had implemented scanning technology, it is unlikely the current processing backlog would exist," Collins said in a March 29, 2022, letter outlining the directive.

Collins noted in an August 4 blog post that the IRS Deputy Commissioner for Services and Enforcement Douglas O’Donnell and Deputy Commissioner for Operations Support Jeffrey Tribiano would not be following the directive.

In a July 18, 2022, memorandum for Collins, the deputy commissioners said the agency was exploring various barcoding technologies, but it would not follow the directive related to the scanning of handwritten forms or forms where the barcode could not be read.

Collins stated in the blog that "due to the magnitude of this issue and the unprecedented backlog of paper returns, I took the unusual step of appealing the Deputy Commissioners’ decision to the Commissioner for reconsideration."

In an August 2, 2022, memorandum to Commissioner Rettig, Collins noted that deputy commissioners’ response "declined to make a commitment to implement scanning technology to machine read v-coded returns, and it expressly rejected implementing scanning technology to machine read handwritten returns." She again called for the implementation of the use of some form of barcoding technology by the start of the 2023 filing season and the use of technology to machine read handwritten returns by the start of the 2023 filing season or, if that is not feasible, by the start of the 2024 filing season.

To frame the need, Collins noted in her blog post that the IRS "will have to process an average of about 525,000 paper-filed Forms 1040 per week during the second half of 2022 to eliminate the backlog" that came about as a result of the COVID-19 pandemic. "As of July 15, however, it had processed a weekly average of paper-filed Forms 1040 over the prior four weeks of just 295,000."

She added: "While we all hope the IRS can work through the backlog this year, I often say that hope is not a business plan."

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The IRS and the Security Summit partners have warned tax professionals to beware of evolving identity theft scams perpetrated through phishing emails and SMS-text that are designed to trick practitioners into opening embedded links or attachments that infect their computer systems with the potential to steal personal and client information such as passwords, bank account numbers, credit card numbers, or social security numbers.

The IRS and the Security Summit partners have warned tax professionals to beware of evolving identity theft scams perpetrated through phishing emails and SMS-text that are designed to trick practitioners into opening embedded links or attachments that infect their computer systems with the potential to steal personal and client information such as passwords, bank account numbers, credit card numbers, or social security numbers. The IRS has urged tax professionals to work on strengthening their systems and protect client data by avoiding such scams and take necessary measures to protect themselves, such as:

multi-factor authentication, wherein tax professionals using cloud-based platforms are urged to use multi-factor options like phone, text, or tokens. This could avoid potential vulnerabilities with authentication done just through email, which may be accessible to identity thieves;
automatic updating of anti-virus software to prevent scams that target software vulnerabilities; and
drive encryption and regular backing up of files to help stop theft and ransomware attacks.

The IRS has also identified various kinds of scams that tax professionals should keep an eye out for, such as:

spear phishing in which scammers take time to identify their victim and craft a more enticing phishing email known as a lure;
identity thieves who pose as potential clients and exchange several emails with tax professionals before following up with an attachment that they claimed was their tax information. Once the tax professional click on the embedded URL and/or opened the attachment, malware is secretly downloaded onto their computers, and gives thieves access to passwords to client accounts or remote access to the computers themselves. After the thieves take over the computer systems, they identify pending tax returns, complete them, and e-file them, changing only the bank account information to steal the refund; and
ransomware attacks that make an unsuspecting tax professional open links or attachments, triggering malware to attack their computer system to encrypt files and the thieves hold the data for ransom.

The IRS has also reminded tax professionals that securing their network to protect taxpayer data is their responsibility as a tax preparer.

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The IRS has extended the deadlines for amending a retirement plan or individual retirement arrangement (IRA) to reflect certain provisions of Division O of the Further Consolidated Appropriations Act, 2020, P. L. 116-94, known as the Setting Every Community Up for Retirement Enhancement Act of 2019 (SECURE Act), and Section 104 of Division M of the Further Consolidated Appropriations Act, 2020, known as the Bipartisan American Miners Act of 2019 (Miners Act). In addition, the IRS has extended the deadline for amending a retirement plan to reflect Section 2203 of the Coronavirus Aid, Relief, and Economic Security Act (CARES Act), P. L. 116-136.The extended amendment deadline for (1) a qualified retirement plan or Code Sec. 403(b) plan (including an applicable collectively bargained plan) that is not a governmental plan or (2) an IRA is December 31, 2025.

SECURE Act and Miners Act

The deadlines for amending a retirement plan or IRA to reflect the provisions of the SECURE Act or the Miners Act, as set forth in Notice 2020-68 and Notice 2020-86, are extended as follows:

For a qualified plan (including an applicable collectively bargained plan) that is not a governmental plan within the meaning of Code Sec. 414(d), the deadline to amend a plan for provisions of the SECURE Act, or section 104 of the Miners Act is December 31, 2025.
The plan amendment deadline for a qualified governmental plan, within the meaning of Code Sec. 414(d), is 90 days after the close of the third regular legislative session of the legislative body with the authority to amend the plan that begins after December 31, 2023.
The deadline for a Code Sec. 403(b) plan (including an applicable collectively bargained plan) that is not maintained by a public school, as described in Code Sec. 403(b)(1)(A)(ii), to amend a plan for provisions of the SECURE Act or the regulations thereunder is December 31, 2025.
The plan amendment deadline for a Code Sec. 403(b) plan that is maintained by a public school, as described in Code Sec. 403(b)(1)(A)(ii), is 90 days after the close of the third regular legislative session of the legislative body with the authority to amend the plan that begins after December 31, 2023.
The deadline to amend a governmental plan under Code Sec. 457(b) for provisions of the SECURE Act or section 104 of the Miners Act is the later of (i) 90 days after the close of the third regular legislative session of the legislative body with the authority to amend the plan that begins after December 31, 2023, or (ii) if applicable, the first day of the first plan year beginning more than 180 days after the date of notification by the Secretary that the plan was administered in a manner that is inconsistent with the requirements of Code Sec. 457(b).
The deadline to amend the trust governing an IRA that is an individual retirement account or the contract issued by an insurance company with respect to an IRA that is an individual retirement annuity for provisions of the SECURE Act is December 31, 2025, or such later date as the Secretary prescribes in guidance.

Amendments to a retirement plan to reflect a provision of the SECURE Act that are made on or before the dates as extended will not cause the retirement plan to fail to satisfy the anti-cutback requirements of Code Sec. 411(d)(6) or section 204(g) of ERISA by reason of such amendments.

CARES Act

The deadlines for amending a retirement plan to reflect the provisions of section 2203 of the CARES Act are extended as follows:

the deadline for amending a retirement plan that is not a governmental plan is December 31, 2025; and
the deadline for amending a retirement plan that is a governmental plan is 90 days after the close of the third regular legislative session of the legislative body with the authority to amend the plan that begins after December 31, 2023, or, if later, with respect to a governmental plan under Code Sec. 457(b), the first day of the first plan year beginning more than 180 days after the date of notification by the Secretary that the plan was administered in a manner that is inconsistent with the requirements of Code Sec. 457(b).

Notice 2020-68, 2020-38 I.R.B. 567, and Notice 2020-86, 2020-53 I.R.B. 1786 are modified.

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The Treasury and IRS have issued final regulations eliminating the signature requirement for making a Code Sec. 754 election (section 754 election). The regulations finalize 2017 proposed regulations ( REG-116256-17), on which taxpayers were entitled to rely.

Election Signature Requirement

A partnership can make a section 754 election to adjust the basis of partnership property in the event the inside and outside bases are unequal. If the partnership files a section 754 election and there is a distribution of property, the basis of partnership property will be adjusted in the manner provided in Code Sec. 734. If the partnership files a section 754 election and there is a transfer of a partnership interest, the basis of partnership property will be adjusted in the manner provided in Code Sec. 743. The section 754 election applies to all distributions of property by the partnership and to all transfers of interests in the partnership during the tax year for which the election was filed and all subsequent tax years.

The regulations under Code Sec. 754 require a section 754 election to be made in a written statement (section 754 election statement) filed with the partnership return for the tax year during which the distribution or transfer occurs. The requirement of a written statement applies to returns filed either electronically or on paper. For the election to be valid, the return must be filed by the due date for the return, including extensions.

The amended regulation, which is identical to the 2017 proposed amendment, removes a requirement that the section 754 election statement be signed by one of the partners. Under the regulation before its amendment, a partnership filing an unsigned section 754 election statement with its partnership return failed to make a valid section 754 election. An unsigned statement is valid under the amended regulation if it meets the remaining requirements.

The regulation, as amended, retains two requirements. It continues to provide that a taxpayer making a section 754 election must file a statement with its return that:

sets forth the name and address of the partnership making the section 754 election, and
contains a declaration that the partnership elects under section 754 to apply the provisions of Code Sec. 734(b) and Code Sec. 743(b).

Effective and Applicability Dates

The amendment eliminating the signature requirement is effective August 5, 2022, and applies to tax years ending on or after the date of publication of the final regulation in the Federal Register. Taxpayers may, however, apply the amendment to tax years ending before that date.

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The American Institute of CPAs highlighted several challenges that tax practitioners are experiencing with the use of the Internal Revenue Service’s Practitioner Priority Service (PPS) line.

In an August 9, 2022, letter to the agency, the AICPA called the “plummeting” PPS line level of service "an area of continuing concern."

"Anecdotally, we are hearing from tax practitioners everyday regarding their significant PPS line challenges and the impact those challenges have on their interactions with IRS on behalf of taxpayers," the letter states.

The letter highlights issues with the handling of power of attorney (POA), transcripts, and account management versus automated collections, as well as providing some general recommendations.

In the area of power of attorney, the AICPA offered several recommendations, including having customer service representatives provide a fax number at the start of the call if a practitioner states that the POA likely is not on file and where "a delegated POA is presented and appears in order, do not require the first POA be posted to the Central Authorization File (CAF) before recognizing the delegated POA."

The AICPA also noted that customer service representatives "are often inconsistent on what is required to be completed on a POA for it to be valid," and called for better training of the representatives. The organization noted that the agency "should allow use of POAs that are signed by the taxpayer and the representative calling in—even if it is not yet signed by other listed representatives. While the Internal Revenue Manual (IRM) provides that IRS staff are to accept the POAs, the IRM is not universally followed in this regard."

In the area of transcripts, the AICPA asked the IRS to restore customer service representatives’ ability to provide internal screen-print type transactions as well as the IRS message line that existed solely to provide internal and other types of transcripts to practitioners as they waited.

"PPS CSRs have indicated lately that they will not provide internal screen-print type transcripts by fax or secure mailbox; they are only willing to use U.S. mail, which takes 4 to 6 weeks for receipt," the AICPA stated, adding that the delay makes it more difficult to resolve issues in a timely manner.

The AICPA also called for the elimination of the so-called "law line."

"Practitioners should not need to consult with IRS staff on interpretations of law—the practitioners should be competent in those areas. Moreover, the breadth of knowledge of the ‘law line’ staff is often not high or incorrect information is given," the letter states

The organization suggested the law line staff be utilized in other areas of the PPS line to help alleviate long wait times.

Another suggestion forwarded by the AICPA was that the IRS restore the ability of accounts management (AM) staff to grant cycle holds for accounts not in collection.

"Recently, AM has been unwilling to grant cycle holds, referring such requests to ACS [automated collection system]," the letter states. "Restoring authority to grant cycle holds with AM before an account goes to Collection will return more speed and efficiency in resolving issues, will eliminate needless Collection Due Process cases, and will keep more cases out of the Taxpayer Advocate Service as well."

That being said, the AICPA suggested that automated collection system be empowered to resolve more account issues, such as penalty abatement and other account-related issues and authorize PPS CSRs to grant 180-day holds where correspondence was sent in.

Other general recommendations included staffing the PPS line with "highly trained, highly empowered personnel;" discontinuing the practice of asking practitioners for their social security number and date of birth; enhancing the new automatic return call system; providing more supervisor availability; and enabling PPS CSRs to handle international issues.

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The American Institute of CPAs offered up suggestions to Congress, focused on the trust and estate proposals found within the fiscal year 2023 revenue proposal, as the legislative branch considers the White House Budget request.

In a July 28, 2022, letter sent to Democrat and Republican leadership on both the Senate Finance Committee and the House Ways and Means Committee, AICPA outlined a number of proposals across four areas, including strengthening taxation of high-income taxpayers; modifying estate and gift taxation; and improving tax administration and compliance.

The White House budget revenue proposals were published in March 2022 in the so-called "Green Book."

With regards to strengthening taxation of high-income taxpayers, AICPA noted that it is "currently concerned that some of the provisions in the 2023 Treasury Green Book … regarding valuation rules for certain transfers of assets are inconsistent with well-established valuation principles and could result in valuations that do not reflect the true economic value of transferred assets. These inconsistencies could, in turn, unjustly negatively affect taxpayers."

Specifically, it raised concerns with treating transfers of appreciated property by gift or on death "as realization events," which could alter how the property is valuated and could put taxpayers at a disadvantage for not having complete access to different valuations.

In the tax administration section, AICPA expressed concern that proposed reporting requirements, the organization expressed concern that reporting requirements for tax year would apply to each trust whose estimated total value on the last day of the tax year exceeds $300,000 or whose gross income for the tax year exceeds $10,000, along with what may be overly burdensome informational reporting requirements.

"These low thresholds would capture a substantial number of trusts – many of which are likely of lower risk to the IRS due to the lowers dollars at stake," the letter states.

AICPA also called the taxing of estates the same as trusts for many of the provisions in the Green Book "problematic. The AICPA recommends that estates be treated similar to married filing separately for all estate provisions in the Green Book, as well as existing law (such as income tax and net investment income tax). This recommendation would restore estates to their federal tax position from 1954-1986."

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With the April 15th filing season deadline now behind us, it’s not too early to turn your attention to next year’s deadline for filing your 2014 return. That refocus requires among other things an awareness of the direct impact that many "ordinary," as well as one-time, transactions and events will have on the tax you will eventually be obligated to pay April 15, 2015. To gain this forward-looking perspective, however, taking a moment to look back … at the filing season that has just ended, is particularly worthwhile. This generally involves a two-step process: (1) a look-back at your 2013 tax return to pinpoint new opportunities as well as "lessons learned;" and (2) a look-back at what has happened in the tax world since January 1st that may indicate new challenges to be faced for the first time on your 2014 return.

Your 2013 Form 1040

Examining your 2013 Form 1040 individual tax return can help you identify certain changes that you might want to consider this year, as well encourage you to continue what you’re doing right. These "key ingredients" to your 2014 return may include, among many others considerations, a fresh look at:

Your refund or balance due. While it is nice to get a big refund check from the IRS, it often indicates unnecessary overpayments over the course of the year that has provided the federal government with an interest-free loan in the form of your money. Now’s the time to investigate the reasons behind a refund and whether you need to take steps to lower wage withholding and/or quarterly estimated tax payments.

If on the other hand you had to pay the IRS when filing your return (or requesting an extension), you should consider whether it was due to a sudden windfall of income that will not repeat itself; or because you no longer have the same itemized deductions, you had a change in marital status, or you claimed a one-time tax credit such as for energy savings or education. Likewise, examining anticipated changes between your 2013 and 2014 tax years—marriage, the birth of a child, becoming a homeowner, retiring, etc.—can help warn you whether your're headed for an underpayment or overpayment of your 2014 tax liability.

Investment income. One area that blindsided many taxpayers on their 2013 returns was the increased tax bill applicable to investment income. Because of the "great recession," many investors had carryforward losses that could offset gains realized for a number of years as markets gradually improved. For many, however, 2013 saw not only a significant rise in investment income but also a rise in realized taxable investment gains that were no longer covered by carryforward losses used up during the 2010–2012 period.

Furthermore, dividends and long-term capital gains for the first time in 2013 were taxed at a new, higher 20 percent rate for higher income taxpayers and an additional 3.8 percent net investment income tax surtax for those in the higher income brackets. Short-term capital gains saw the highest rate jump, from 35 percent to 43.4 percent rate, which reflected a new 39.6 percent regular rate and the new 3.8 percent net investment income tax rate. This tax structure remains in place for 2014.

Personal exemption/itemized deductions. Effective January 1, 2013, the American Taxpayer Relief Act (ATRA) revived the personal exemption phaseout (PEP). The applicable threshold levels are $250,000 for unmarried taxpayers; $275,000 for heads of households; $300,000 for married couples filing a joint return (and surviving spouses); and $150,000 for married couples filing separate returns (adjusted for inflation after 2013). Likewise, for it revived the limitation on itemized deductions (known as the "Pease" limitation after the member of Congress who sponsored the original legislation) for those same taxpayers.

Medical and dental expenses. Starting in 2013, the Affordable Care Act (ACA) increased the threshold to claim an itemized deduction for unreimbursed medical expenses from 7.5 percent of adjusted gross income (AGI) to 10 percent of AGI. However, there is a temporary exemption for individuals age 65 and older until December 31, 2016. Qualified individuals may continue to deduct total medical expenses that exceed 7.5 percent of adjusted gross income through 2016. If the qualified individual is married and only one spouse is age 65 or older, the taxpayer may still deduct total medical expenses that exceed 7.5 percent of adjusted gross income.

Recordkeeping. If you cannot find the paperwork necessary to prove your right to a deduction or credit, you cannot claim it. An organized tax recordkeeping system—whether on paper or computerized–therefore is an essential component to maximizing tax savings.

Filing Season Developments

So far this year, the IRS, other federal agencies and the courts have issued guidance on individual and business taxation, retirement savings, foreign accounts, the ACA, and much more. Congress has also been busy working up a "tax extenders" bill as well as tax reform proposals. All these developments can impact how you plan to maximize benefits on your 2014 income tax return.

Tax reform. President Obama, the chairs of the House and Senate tax writing committees, and individual lawmakers all made tax reform proposals in early 2014. The proposals range from comprehensive tax reform to more piece-meal approaches. Although only small, piecemeal proposals have the most promising chances for passage this year, taxpayers should not ignore the broader push toward tax reform that will be taking shape in 2015 and 2016.

Tax extenders. The Senate Finance Committee (SFC) approved legislation (EXPIRE Act) in April that would extend nearly all of the tax extenders that expired after 2013. Included in the EXPIRE Act are individual incentives such as the state and local sales tax deduction, the higher education tuition deduction, transit benefits parity, and the classroom teacher’s deduction; along with business incentives such as enhanced Code 179 small business expensing, bonus depreciation, the research tax credit, and more. Congress may now move quickly on an extenders bill or it may not come up with a compromise until after the November mid-term elections. Many of these tax benefits are significant and will directly impact the 2014 tax that taxpayers will pay.

Individual mandate. The Affordable Care Act’s individual mandate took effect January 1, 2014. Individuals failing to carry minimum essential coverage after January 1, 2014 and who are not exempt from the requirement will make an individual shared responsibility payment when they file their 2014 federal income tax returns in 2015. There are some exemptions, including a hardship exemption if the taxpayer experienced problems in signing up with a Health Insurance Marketplace before March 31, 2014. Further guidance is expected before 2014 tax year returns need to be filed, especially on how to calculate the payment and how to report to the IRS that an individual has minimum essential coverage.

Employer mandate. The ACA’s shared responsibility provision for employers (also known as the “employer mandate”) will generally apply to large employers starting in 2015, rather than the original 2014 launch date. Transition relief provided in February final regulations provides additional time to mid-size employers with 50 or more but fewer than 100 employees, generally delaying implementation until 2016. Employers that employ fewer than 50 full-time or full time equivalent employees are permanently exempt from the employer mandate. The final regulations do not change this treatment under the statute.

Other recent tax developments to be aware of for 2014 planning purposes include:

IRA rollovers. The IRS announced that, starting in 2015, it intends to follow a one-rollover-per-year limitation on Individual Retirement Account (IRA) rollovers as an aggregate limit.
myRAs. In January, President Obama directed the Treasury Department to create a new retirement savings vehicle, “myRA,” to be rolled out before 2015.
Same-sex married couples. In April, the IRS released guidance on how the Supreme Court’s Windsor decision, which struck down Section 3 of the Defense of Marriage Act (DOMA), applies to qualified retirement plans, opting not to require recognition before June 26, 2013.
Passive activity losses. The Tax Court found in March that a trust owning rental real estate could qualify for the rental real estate exception to passive activity loss treatment.
FATCA deadline. The IRS has indicated that it is holding firm on the July 1, 2014, deadline for foreign financial institutions (FFIs) to comply with the FATCA information reporting requirements or withhold 30 percent from payments of U.S.-source income to their U.S. account holders.
Vehicle depreciation. The IRS announced that inflation-adjusted limitations on depreciation deductions for business use passenger autos, light trucks and vans first placed in service during calendar year 2014 are relatively unchanged from 2013 (except for first year $8,000 bonus depreciation that may be removed if Congress does not act in time.
Severance payments. In March, the U.S. Supreme Court held that supplemental unemployment benefits (SUB) payments made to terminated employees and not tied to the receipt of state unemployment benefits are wages for FICA tax purposes.
Virtual currency. The IRS announced that convertible virtual currencies, such as Bitcoin, would be treated as property and not as currency, thus creating immediate tax consequences for those using Bitcoins to pay for goods.

Please contact this office if you’d like further information on how an examination of your 2013 return, and examination of recent tax developments, may point to revised strategies for lowering your eventual tax bill for 2014.

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Code Sec. 162 permits a business to deduct its ordinary and necessary expenses for carrying on the business. However, Code Sec. 274 restricts the deduction of entertainment expenses incurred for business by disallowing expenses of entertainment activities and entertainment facilities. Many expenses are totally disallowed; other amounts, if allowed under Code Sec. 274, are limited to 50 percent of the expense.

The income tax regulations define entertainment as any activity of a type generally considered to be entertainment, amusement, or recreation, such as entertaining at night clubs, lounges, theaters, country clubs, golf and athletic clubs, and sports events, as well as hunting, fishing, vacation and similar trips. There are special rules for the costs of facilities used to entertain the customer, such as a boat or a country club membership. Dues or fees for any social, athletic or sporting club or organization are treated as items involving facilities.

Deduction allowed

Expenses are allowed if the expense was either "directly related" to the active conduct of the taxpayer’s trade or business, or "associated with" the conduct of the trade or business. An activity is "associated with" business if the activity directly precedes or follows a substantial and bona fide business discussion.

Entertainment expenses are not directly related to the business if the activity occurred under circumstances with little or no possibility of engaging in the active conduct of the trade or business. These circumstances include an activity where the distractions are substantial, such as a meeting or discussion at a night club, theater, or sporting event. However, taking a customer to a meal at a restaurant or for drinks at a bar can be considered conducive to a business discussion, if there are no substantial distractions to a discussion.

Substantial business discussion

For expenses that are either directly related to or associated with business, the taxpayer must establish that the he or she conducted a substantial and bona fide business discussion with the customer. The IRS has said that there is no specified length for a discussion to be substantial; all facts and circumstances will be considered. The discussion is substantial if the active conduct of the business was the principal character of the combined business and entertainment activity, but it is not necessary that more time be devoted to business than to entertainment.

For an activity that is associated with, the discussion can directly precede or follow the activity. For a discussion to be directly before or after the activity, it generally must be on the same day as the activity. However, facts and circumstances may allow the entertainment and the discussion to be on consecutive days, for example if the customer is from out of town.

Season tickets

The special rules for facilities do not apply to season tickets. Instead, the taxpayer must allocate the cost of the season tickets to each separate entertainment event. The amount deductible is limited to the face value of the ticket. For a "skybox" or other area leased and used exclusively by the taxpayer and guests, the amount deductible is limited to the face value of non-luxury seats for the area covered by the lease.

Under these rules, it appears that the deductible costs of baseball season tickets must be determined separately for each baseball game. Attendance at a baseball game would involve a "distracting" activity that is not conducive to a business discussion, so the cost of the game would not be directly related to the conduct of the trade or business. However, attendance at a game before or after the conduct of a substantial business discussion could qualify as being associated with the business; in these circumstances, the cost of the event would be deductible.

If the taxpayer provided food to the customer at the baseball game, the cost of the food would be deductible as part of the cost of the event. Some "luxury" seats include food provided by the baseball team to the ticket user. It appears that the taxpayer would have to determine the fair market value of the ticket and the food separately, although the costs of food actually provided to the customer may still be deductible.

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