The IRS has updated its simplified procedure for estates requesting an extension of time to make a portability election under Code Sec. 2010(c)(5)(A). The updated procedure replaces that provided in Rev. Proc. 2017-34. If the portability election is made, a decedent’s unused exclusion amount (the deceased spousal unused exclusion (DSUE) amount) is available to a surviving spouse to apply to transfers made during life or at death.

The IRS has updated its simplified procedure for estates requesting an extension of time to make a portability election under Code Sec. 2010(c)(5)(A). The updated procedure replaces that provided in Rev. Proc. 2017-34. If the portability election is made, a decedent’s unused exclusion amount (the deceased spousal unused exclusion (DSUE) amount) is available to a surviving spouse to apply to transfers made during life or at death. The simplified method is to be used instead of the letter ruling process. No user fee is due for submissions filed in accordance with the revenue procedure.

A simplified method to obtain an extension of time was available to decedents dying after December 31, 2010, if the estate was only required to file an estate tax return for the purpose of electing portability. However, that method was only available on or before December 31, 2014. Since December 31, 2014, the IRS has issued numerous letter rulings under Reg. §301.9100-3 granting extensions of time to elect portability in situations in which the estate was not required to file a return under Code Sec. 6018(a). The number of ruling requests that were received after December 31, 2014, and the related burden imposed on the IRS, prompted the continued relief for estates that have no filing requirement under Code Sec. 6018(a). Rev. Proc. 2017-34 provided a simplified method to obtain an extension of time to elect portability that is available to the estates of decedents having no filing obligation under Code Sec. 6018(a) for a period the last day of which is the later of January 2, 2018, or the second anniversary of the decedent’s death. An estate seeking relief after the second anniversary of the decedent’s death could do so by requesting a letter ruling in accordance with Reg. §301.9100-3.

Despite this simplified procedure, there remained a significant number of estates seeking relief through letter ruling requests in which the decedent died within five years of the date of the request. The number of these requests has placed a continuing burden on the IRS. Therefore, the updated procedure extends the period within which the estate of a decedent may make the portability election under that simplified method to on or before the fifth anniversary of the decedent’s date of death.

Section 3 provides that the simplified procedure is only available if certain criteria are met. The taxpayer must be the executor of the estate of a decedent who: (1) was survived by a spouse; (2) died after December 31, 2010; and (3) was a U.S. citizen or resident at the time of death. In addition, the estate must not be required to file an estate tax return under Code Sec. 6018(a) and did not file an estate tax return within the time prescribed by Reg. §20.2010-2(a)(1) for filing a return required to elect portability. Finally, all requirements of section 4.01 of the revenue procedure must be met.

The revenue procedure does not apply to estates that filed an estate tax return within the time prescribed by Reg. §20.2010-2(a)(1) to elect portability. For taxpayers that do not qualify for relief because the requirements of section 4.01 are not met, the estate can request an extension of time to file the estate tax return to make the portability election by requesting a letter ruling.

Under Section 4.01, the requirements for relief are: (1) a person permitted to make the election on behalf of a decedent must file a complete and properly-prepared Form 706, United States Estate (and Generation-Skipping Transfer) Tax Return, (as provided in Reg. §20.2010-2(a)(7)) on or before the fifth annual anniversary of the decedent’s date of death; and (2) "FILED PURSUANT TO REV. PROC. 2022-32 TO ELECT PORTABILITY UNDER §2010(c)(5)(A)" must be written at the top of the Form 706. If the requirements of sections 3.01 and 4.01 are met, the estate will be deemed to meet the requirements for relief under Reg. §301.9100-3 and relief will be granted to extend the time to elect portability. If relief is granted pursuant to the revenue procedure and it is later determined that the estate was required to file a federal estate tax return, based on the value of the gross estate, plus any adjusted taxable gifts, the extension of time granted to make the portability election is deemed null and void.

If a decedent’s estate is granted relief under this revenue procedure so that the estate tax return is considered timely for electing portability, the decedent’s deceased spousal unused exclusion amount that is available to the surviving spouse or the surviving spouse’s estate for application to the transfers made by the surviving spouse on or after the decedent’s date of death. If the increase in the surviving spouse’s applicable exclusion amount attributable to the addition of the decedent’s deceased spousal unused exclusion amount as of the date of the decedent’s death result in an overpayment of gift or estate tax by the surviving spouse or his or her estate, no claim for credit or refund may be made if the limitations period for filing a claim for credit or refund with respect to that transfer has expired. A surviving spouse will be deemed to have filed a protective claim for refund or credit of tax if such a claim is filed within the time prescribed in Code Sec. 6511(a) in anticipation of a Form 706 being filed to elect portability pursuant to the revenue procedure.

The revenue procedure is effective July 8, 2022. Through the fifth anniversary of a decedent’s date of death, the procedure described in section 4.01 of this revenue procedure is the exclusive procedure for obtaining an extension of time to make portability election if the decedent and the executor meet the requirements of section 3.01 of this revenue procedure. If a letter ruling request is pending on July 8, 2022, and the estate is within the scope of the revenue procedure, the file on the ruling request will be closed and the user fee will be refunded. The estate may obtain relief as outlined in the revenue procedure by complying with section 4.01. Rev. Proc. 2017-34, I.R.B. 2017-26, 1282, is superceded.

The IRS intends to amend the base erosion and anti-abuse tax (BEAT) regulations under Code Secs. 59A and 6038A to defer the applicability date of the reporting of qualified derivative payments (QDPs) until tax years beginning on or after January 1, 2025.

The IRS intends to amend the base erosion and anti-abuse tax (BEAT) regulations under Code Secs. 59A and 6038A to defer the applicability date of the reporting of qualified derivative payments (QDPs) until tax years beginning on or after January 1, 2025.

Background

Final BEAT regulations adopted with T.D. 9885 include rules under Code Secs. 59A and 6038A addressing the reporting of QDPs, which are not treated as base erosion payments for BEAT purposes. The final regulations generally apply to tax years ending on or after December 17, 2018.

In general, a payment qualifies for the QDP exception if the taxpayer satisfies certain reporting requirements. Reg. §1.6038A-2(b)(7)(ix) requires a taxpayer subject to the BEAT to report on Form 8991, Tax on Base Erosion Payments of Taxpayers With Substantial Gross Receipts, the aggregate amount of QDPs for the tax year, and make a representation that all payments satisfy the reporting requirements of Reg. §1.59A-6(b)(2). If a taxpayer fails to satisfy these reporting requirements with respect to any payments, those payments are not eligible for the QDP exception and are treated as base erosion payments, unless another exception applies.

The QDP reporting rules of Reg. §1.6038A-2(b)(7)(ix) apply to tax years beginning on or after June 7, 2021. Before these rules are applicable (the transition period), a taxpayer is treated as satisfying the QDP reporting requirements to the extent that the taxpayer reports the aggregate amount of QDPs on Form 8991, Schedule A, provided that the taxpayer reports this amount in good faith ( Reg. §1.59A-6(b)(2)(iv); Reg. §1.6038A-2(g)).

In Notice 2021-36, I.R.B. 2021-26, 1227, the IRS announced the intention to extend the transition period through tax years beginning before January 1, 2023, while the IRS studies the interaction of the QDP exception, the BEAT netting rule in Reg. §1.59A-2(e)(3)(vi), and the QDP reporting requirements. The IRS has not yet issued regulations amending the applicability date of Reg. §1.6038A-2(g). The IRS continue to study these provisions and has determined that it is appropriate to further extend the transition period.

Deferred Applicability Date of QDP Reporting and Taxpayer Reliance

The IRS intends to amend Reg. §1.6038A-2(g) to provide that the QDP reporting rules of Reg. §1.6038A-2(b)(7)(ix) will apply to tax years beginning on or after January 1, 2025. Until these rules apply, the transition period rules described above will continue to apply. Taxpayers may rely on this Notice before the amendments to the final regulations are issued.

John Hinman, Director, IRS Whistleblower Office highlighted the importance of whistleblower information in identifying noncompliance and reducing the tax gap in an executive column published by the IRS. Each year, the IRS receives thousands of award claims from individuals who identify taxpayers who may not be abiding by U.S. tax laws. The IRS Whistleblower Office ensures that award claims are reviewed by the appropriate IRS business unit, determines whether an award should be paid and the percentage of any award and ensures that approved awards are paid. The IRS has paid over $1.05 billion in over 2,500 awards to whistleblowers since 2007.

John Hinman, Director, IRS Whistleblower Office highlighted the importance of whistleblower information in identifying noncompliance and reducing the tax gap in an executive column published by the IRS. Each year, the IRS receives thousands of award claims from individuals who identify taxpayers who may not be abiding by U.S. tax laws. The IRS Whistleblower Office ensures that award claims are reviewed by the appropriate IRS business unit, determines whether an award should be paid and the percentage of any award and ensures that approved awards are paid. The IRS has paid over $1.05 billion in over 2,500 awards to whistleblowers since 2007.

Further, Hinman stated that according to the IRS’s Large Business and International (LB&I) division, whistleblowers have provided invaluable insights into violations perpetuated by large corporations, wealthy individuals and their planners. Further, since the inception of the Whistleblower Office, information from whistleblowers has resulted in over 900 criminal tax cases. Hinman stated that individuals can file a Form 211, Application for Award for Original Information, to be considered for an award. Specific, credible and timely claims are most likely to be accepted for additional consideration and referred to one of IRS’s operating divisions. A subject matter expert may contact the whistleblower to ensure the IRS fully understands the information submitted. The IRS will notify whistleblowers when a case for which they provided information is referred for audit or examination.

Further, Hinman noted that the IRS takes the protection of whistleblower identity very seriously.The IRS prevents the disclosure of a whistleblower’s identity, and even the fact that they have provided information, to the maximum extent that the law allows. Additionally, whistleblowers are protected from retaliation by their employers under a law passed in 2019. Finally, Hinman noted that going forward, the Whistleblower Office team will continue to make improvements to this important program, raise awareness about the program for potential whistleblowers and look for ways to gain internal efficiencies to move cases forward as quickly as possible.

A group of Senate Democrats is calling on the IRS to extend the filing deadline for those unable to file for and receive the advanced child tax credit (CTC) due to the processing backlog of individual taxpayer identification number (ITIN) applications.

A group of Senate Democrats is calling on the IRS to extend the filing deadline for those unable to file for and receive the advanced child tax credit (CTC) due to the processing backlog of individual taxpayer identification number (ITIN) applications.

In a July 14, 2022, letter to Treasury Secretary Janet Yellen and IRS Commissioner Charles Rettig, the Senators, led by Robert Menendez (D-N.J.), called on the IRS to "allow families who applied for an ITIN or ITIN renewal prior to April 15, 2022, to file for and receive the advanced CTC if they file a return before or on October 15, 2022."

An ITIN is needed for taxpayers who do not have and are not eligible to receive a Social Security number but still have a U.S. tax filing requirement. This includes individuals who are nonresident aliens; U.S. resident aliens; dependents or spouses of U.S. citizen/resident alien; dependent or spouse of a nonresident alien visa holder; nonresident alien claiming a tax treaty benefit; or nonresident alien student, professor, or researcher filing a U.S. tax return claiming an exception.

The senators cite figures from the Treasury Inspector General of Tax Administration stating that prior to COVID-19 pandemic, it generally took between seven and 11 weeks to process an ITIN application (depending on if it was filed during tax season).

"But, as reported by TIGTA and the IRS’ own website, processing times have increased—with ITIN application processing averaging three to four months and renewal times doubling to 41 days," the letter states.

"Given that the Protecting Americans from Tax Hikes (PATH) Act required that an ITIN had to be issued on or before the due date of the return in order to file for the CTC, many families may not have received their ITIN prior to April 15, 2022," the letter adds, preventing access to the benefit.

The IRS has released a Fact Sheet to help taxpayers understand how and why agency representatives may contact them and how to identify them and avoid scams. Generally, the IRS sends a letter or written notice to a taxpayer in advance, but not always.

The IRS has released a Fact Sheet to help taxpayers understand how and why agency representatives may contact them and how to identify them and avoid scams. Generally, the IRS sends a letter or written notice to a taxpayer in advance, but not always. Depending on the situation, IRS employees may first call or visit with a taxpayer. Further, the IRS clarified that other than IRS Secure Access, the agency does not use text messages to discuss personal tax issues, such as those involving bills or refunds. The IRS does not initiate contact with taxpayers by email to request personal or financial information. The IRS initiates most contacts through regular mail. Taxpayers can report fraudulent emails and text messages by sending an email to phishing@irs.gov.

Further, taxpayers will generally first receive several letters from the IRS in the mail before receiving a phone call. However, the IRS may call taxpayers if they have an overdue tax bill, a delinquent or unfiled tax return or have not made an employment tax deposit. The IRS does not leave pre-recorded, urgent or threatening voice messages and will never call to demand immediate payment using a specific payment method, threaten to immediately bring in law enforcement groups, demand tax payment without giving the taxpayer an opportunity or ask for credit or debit cards over the phone.

Additionally, IRS revenue officers generally make unannounced visits to a taxpayers home or place of business to discuss taxes owed or tax returns due. However, taxpayers would have first been notified by mail of their balance due or missing return. Taxpayers should always ask for credentials or identification when visited by IRS personnel. Finally, the IRS clarified that taxpayers who have filed a petition with the U.S. Tax Court may receive a call or voicemail message from an Appeals Officer. However, the Appeals Officer will provide self-identifying information such as their name, title, badge number and contact information.

The American Institute of CPAs offered the Internal Revenue Service a series of recommendations related to proposed regulations for required minimum distributions from individual retirement accounts.

The American Institute of CPAs offered the Internal Revenue Service a series of recommendations related to proposed regulations for required minimum distributions from individual retirement accounts.

The July 1, 2022, comment letter to the agency covered two specific areas: minimum distribution requirements for designated beneficiaries when death of the employee or IRA owner occurs after the required beginning date, and the definition of employer and guidance for multiple arrangements.

Regarding the minimum distribution requirements, AICPA recommended in the letter that the agency "eliminate the requirement … mandating that a designated beneficiary who is not an eligible designated beneficiary take distribution in each of the 10 years following the death of an employee."

AICPA also recommended that "the final regulations follow the rule … requiring only that the entire interest is to be distributed no later than by the end of the tenth year following the death of the employee/IRA owner."

Regarding the definition of employer and guidance related to multiple employer agreements, AICPA recommended "defining the retirement requirement in section 401 (a)(9)-2(b)(1)(ii) as met at the plan level in reference to MEPs [multiple employer plans] and PEPs [pooled employer plans]; when an employee terminates employment with the employer after attaining age 72 and is reemployed with either the same employer or another employer sponsoring the same MEP or PEP prior to attaining their RBD of April 1 the following year."

The Government Accountability Office (GAO) issued a report on stimulus checks during the Coronavirus 2019 (COVID-19) pandemic. From April 2020 to December 2021, the federal government made direct payments to taxpayers totaling $931 billion to address pandemic-related financial stress.

The Government Accountability Office (GAO) issued a report on stimulus checks during the Coronavirus 2019 (COVID-19) pandemic. From April 2020 to December 2021, the federal government made direct payments to taxpayers totaling $931 billion to address pandemic-related financial stress.

Report Findings

Some eligible taxpayers never received payments. Eligible taxpayers can still claim their payments through October 17. There were challenges for the Service and Treasury to get payments especially to nonfilers, or those who were not required to file tax returns. Taxpayers who think they may be eligible but did not receive the third economic impact payment (EIP) or child tax credit (CTC) can request an extension and file a simplified return at https://www.childtaxcredit.gov/. Although no new EIP and advance CTC payments are underway, the Treasury and Service could learn to manage other refundable tax credits such as the earned income tax credit (EITC). Further, the IRS’s new Taxpayer Experience Office could help improve outreach and improve taxpayer experience.

Recommendations

GAO made two recommendations. First, the Treasury and IRS could use available data to update their estimate of eligible taxpayers to better tailor and redirect their ongoing outreach and communications efforts for similar tax credits. Second, both agencies could focus on improving interagency collaboration. They could use data to assess their efforts to educate more taxpayers about refundable tax credits and eligibility requirements.

The Organisation for Economic Co-operations and Development (OECD) is delaying the implementation of Pillar One of the landmark agreement on international tax reform.

The Organisation for Economic Co-operations and Development (OECD) is delaying the implementation of Pillar One of the landmark agreement on international tax reform.

A new Progress Report on Pillar One, which includes "a comprehensive draft of the technical model rules to implement a new taxing right that will allow market jurisdictions to tax profits from some of the largest multinational enterprises," will be open to stakeholder comment through August 19, 2022, OECD said in a statement.

That report notes that the plan is to finalize Pillar One by mid-2023, with the more than 135 countries and jurisdictions that are a part of the agreement able to put the framework into operation in 2024.

The revised timeline "is designed to allow greater engagement with citizens, businesses, and parliamentary bodies which will ultimately have to ratify the agreement," OECD said.

The Department of the Treasury welcomed the delay.

"Treasury welcomes the additional year agreed to at the OECD to allow further time for negotiations among governments and consultations with stakeholders on implementation of the Pillar One agreement, which will make the international tax system more stable and fair for businesses and workers in the United States and globally," a spokesperson for the agency said. "Tremendous progress has been made, and additional time will ensure we all get this historic agreement right."

OECD also noted that technical work under Pillar Two, which will introduce the 15 percent global minimum corporate tax rate, "is largely complete." The implementation framework is expected to be released later this year.

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.

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.