A Review of IRS Notice 2024-35, Certain Required Minimum Distributions for 2024

By Rick Allen, CPA-East Texas

 

Notice 2024-35 is a detailed analysis and explanation of what the final regulations will say regarding required minimum distributions (RMDs) related to retirement accounts of decedents who died after 2019. The IRS seems to be giving taxpayers one more year of not taking RMDs without assessing an excise tax … that being 2024. So, taxpayers are protected if they did not take post death RMDs for 2021 (the first year they would have been required to take an RMD under the IRS interpretation), 2022, 2023 or 2024. 

 

It appears as if the relief will stop there. RMDs will be required to be made beginning in 2025. The notice seems to be silent about whether distributions which (in the IRS’ view) should have been made in 2021, 2022, 2023 or 2024 will need to all be made in 2025 or if the taxpayer can just begin taking normal RMDs in 2025.

 

The analysis is thorough, but I am unsure whether the IRS properly tied the RMD rules to the five-year rule (now changed to the 10-year rule) correctly.

 

I think TXCPA Federal Tax Policy Committee’s efforts in pushing back against the IRS regarding their late roll-out of the RMD rules bought taxpayers four years of free space not being required to take RMDs on inherited retirement accounts, and correspondingly, helped CPAs in working with these clients.

 

Taxpayers with illiquid retirement assets and other reasons to delay taking distributions have benefited by the delay and should be prepared to start taking RMDs in 2025. Texas CPAs should work to notify clients impacted by these rules accordingly.

 

Notice 2024-35: Relief with respect to certain required - KPMG United States


President Biden’s Energy Tax Proposals

William Stromsem, CPA, J.D.

George Washington School of Business

 

President Biden’s 2025 revenue proposals would eliminate fossil fuel tax preferences because they “distort markets by encouraging more investment in the fossil fuel sector than would occur under a neutral system. This market distortion is detrimental to long-term energy security and is also inconsistent with the Administration’s policy of supporting a clean energy economy, reducing our reliance on oil and reducing greenhouse gas emissions.”

 

President Biden’s budget provides billions of dollars to support renewable energy development in a continuation of his climate change agenda. The renewable energy proposals were detailed in a FACT Sheet on March 11, 2024.

 

The Energy Tax Proposals

 

The Biden proposals would repeal the following oil and gas tax benefits after 2024:

  • the use of percentage depletion with respect to oil and gas wells;
  • the expensing of intangible drilling costs;
  • the expensing of exploration and development costs;
  • two-year amortization of geological and geophysical expenditures by independent producers, instead allowing amortization over the seven-year period used by major integrated oil companies;
  • capital gains treatment for royalties;
  • the deduction for costs paid or incurred for any qualified tertiary injectant used as part of a tertiary recovery method;
  • the enhanced oil recovery credit for eligible costs attributable to a qualified enhanced oil recovery project;
  • the credit for oil and gas produced from marginal wells;
  • the exception to passive loss limitations provided to working interests in oil and natural gas properties;
  • percentage depletion for hard mineral fossil fuels;
  • the exemption from the corporate income tax for publicly traded partnerships with qualifying income and gains from activities relating to fossil fuels;
  • the Oil Spill Liability Trust Fund (OSTLF) and Superfund excise tax exemption for crude oil derived from bitumen and kerogenrich rock; and
  • accelerated amortization for air pollution control facilities.

 

The energy tax benefits repeal proposals are detailed in the Treasury Department's General Explanations of Administration's Fiscal Year 2025 Revenue Proposals, beginning at page 65.

 

Prospects

 

These proposals may sound familiar because they were also floated at the beginning of the Obama administration but were dropped because of the need for energy independence in the face of conflicts in the Middle East. The Middle East is still in turmoil, and the need for energy independence continues. Also, most Americans support the continued use of fossil fuels and believe that we are far from being able to shift to renewable alternatives. Even President Biden, in his 2023 State of the Union Address, said we would still need oil for another decade, with many believing that this short time frame was just aspirational cheerleading by the President. 

 

The legislation is unlikely to be enacted now any more than during the Obama administration. Even if the Democrats win both the House and Senate in the fall elections, the Senate is likely to still be fairly evenly divided, with all Senators from energy-producing states joining Republicans in opposing the Biden proposals.     

 


President Biden’s Budget Proposal for Taxable Gain on Gifts and Bequests—Another Reason to Consider Lifetime Gifts Now

William Stromsem, CPA, J.D.

George Washington School of Business

 

President Biden’s budget proposal would require gain recognition on appreciated assets transferred by gift or bequest and would end the step up in basis on inherited assets and the deferral of gain on gifted appreciated assets. The Biden proposal would make death a realization event and would also expand this to make gifting a realization event for appreciated assets.

 

The Basics

 

The proposal would treat death as a realization event, taxing the gain on the difference between the decedent’s basis and the fair market value at the date of death. The tax would be paid in the decedent’s final tax return. Inheritors would receive assets with a basis that is stepped-up to the fair market value at the date of death.

 

The proposal would also treat gifting as a realization event with tax due when the property is gifted as if it had been sold by the donor rather than current law where the gain is deferred through carryover basis. The gain would be the difference between the fair market value at the date of the gift and the donor’s basis, and again, the recipient would get stepped-up basis.

 

Details

 

The proposal is fairly developed with provisions that include:

  • There is a $5-million-per-donor gain exclusion on income taxes on appreciated property transferred by gift or bequest to the extent that the exclusion had not already been used by prior transfers. This is to make the proposal simpler and applicable only to higher-wealth individuals.
  • Gain is not taxed on items received by a surviving spouse with carryover basis that will result in gains when the surviving spouse transfers property during life or at death. This ends the partial step-up in basis at death for jointly held marital property.
  • A family-owned business would not be taxed if the heirs continue running the business. This allows the business to continue and avoids borrowing money or selling off assets to pay the taxes on the gain. Again, basis carries over.
  • The proposal does not contain any additional relief for family farms or businesses.
  • The proposal would allow the payments to be spread over up to 15 years when appreciated illiquid assets are inherited.
  • The proposal would not cover tangible personal property, avoiding some of the complexity of accounting for many assets for which the basis was never recorded.
  • There’s an exemption for appreciated assets contributed to charities.
  • The principal residence gain exclusion ($500,000 married filing jointly or $250,000 other filers) would continue.
  • The proposal does not address capital losses on bequests or gifts of depreciated property.
  • The tax imposed on gains would be deductible on a decedent’s estate tax return.
  • The Treasury Secretary is authorized to develop safe harbor and other rules regarding basis where records are not available.

 

Prospects

 

Nothing will likely happen in this election year with a Republican House, but we may hear a lot about inherited wealth and the need for wealth distribution in campaigns to lay the groundwork for possible legislation next year.  If the Democrats take over or retain control over both houses of Congress and the Presidency, legislation could move next year. The Biden proposal is structured to avoid most taxpayers' concerns by only applying it to the wealthy and providing various relief measures.

 

Planning

 

Those representing wealthy taxpayers should carefully watch the November elections and consider advising clients to be prepared to make gifts of appreciated property by year-end. If the Democrats sweep, legislation next year could be made retroactive to the first day of the new Congress, and the Biden budget proposals would have it become effective for transfers after Dec. 31, 2124.  Gifts before the effective date of such legislation would allow for continued deferral through carryover basis.

 

Another reason to consider lifetime gifts for wealthier clients is that the larger unified credit offset that was enacted in the Tax Cuts and Jobs Act of 2017 will sunset at the end of 2025, reducing the offset amount from its current level of $13.61 million per donor to the inflation-adjusted from before the increase of approximately $6.5 million beginning in 2026. Legislation could extend the higher credit amount but will not be passed if the Democrats control either House of Congress or the Presidency.

 

(See the White House description of its budget proposal with the capital gains provisions beginning on page 79.)

 


OPR Says to De-CAFinate Your Old Client Authorizations

The IRS Office of Professional Responsibility (OPR) recently reminded Circular 230 practitioners to maintain an up-to-date list of your valid authorizations in the IRS’ Central Authorization File (CAF) Unit and routinely withdraw any client authorizations no longer needed.

 

Why withdraw old authorizations? Several provisions of Circular 230 implicate a practitioner’s obligation to client authorizations and a responsibility to safeguard taxpayer data. If an authorization is listed as active in the CAF, the possibility exists that a cybercriminal could misuse it to gain access to valuable taxpayer information. You can prevent that unnecessary connection and risk.

 

There is no fixed form for withdrawing a CAF, but it must be done in writing and include all relative data. OPR says the easiest way is to write “WITHDRAW” across the top of the first page of a copy of the Form 2848, Power of Attorney and Declaration of Representation, with the current signature and date (see instructions).

 

You can also request a CAF77 report for a printout or electronic copy of current authorizations. See Freedom of Information Act's sample CAF client listing request letter. Edit and return your list per the instructions.

 

If you link your CAF numbers to your Tax Pro Account, you can manage all active authorizations in a more efficient and secure manner.

 

De-CAFinating Your Client Authorizations—Practice Good Records Hygiene by Filing a FOIA Request for a CAF77 Report and Withdrawing Unneeded Authorizations (govdelivery.com)


IRS Commissioner to Answer to Ways & Means on IRS Backdating Forms

By Christi Mondrik, J.D., CPA-Austin

 

The House Ways and Means Committee Chair Jason Smith, and Oversight Subcommittee Chair David Schweikert issued a letter to IRS Commissioner Daniel Werfel on Feb. 27, 2024, questioning the IRS’ response to the U.S. Tax Court’s decision in LakePoint Land II LLC v. Comm’r, T.C. Memo 2023-111, (Aug. 29, 2023). In its decision, the tax court sanctioned IRS counsel for failing to alert the court it had backdated penalty approval documents asserting penalties – a penalty lead sheet – against a partnership in a conservation easement. The court found it had relied upon a false declaration and a backdated document when it discovered different versions of a lead sheet, one of which was signed in February 2017 but backdated to July 2016. The court found the actions of the revenue agent and respondent’s counsel “to be in bad faith and to have multiplied the proceedings in this case unreasonably and vexatiously.” The court imposed sanctions against the IRS but declined to award costs and fees to the petitioner.

 

IRS Satisfies Penalty Approval Requirement in Easement Case | Tax Notes

IRS Backdating Case Nears an End: Agency Settlement Explained (bloombergtax.com)


IRS Direct File Program Comes to Texas

William Stromsem, CPA, J.D., George Washington University School of Business

 

The Inflation Reduction Act of 2022 directed the IRS to explore a direct filing program and for 2023, the IRS started a pilot program for individuals in Texas and 12 other states. The pilot program is limited to certain types of income, deductions and credits, and is aimed at more average taxpayers who are generally not our client base. IRS Direct File will affect return preparation software sellers, but it will not likely affect our practices for the next few years. However, it is worth noting as we look towards the future. 

 

IRS Direct File is an online program that works like most commercial return preparation software and walks the user step-by-step through the return process, asking questions and inviting input of identifying information, W-2s and certain other information returns. Direct filers have access to IRS employees who provide dedicated Direct-File customer support in both English and Spanish. When the data input is complete, the program shows a summary of the return and resulting taxes; the return is e-filed with receipts for the submission and when the IRS accepts the return. 

 

The types of income, deductions and credits covered by the program are limited:

  • Income—W-2 wages, SSA-1099 for Social Security, 1099-G for unemployment compensation and 1099-INT for interest income of $1,500 or less (not business income or income from the gig economy);
  • Deductions—standard deduction (not itemized deductions), student loan interest and educator expenses; and
  • Credits—earned income credit, child tax credit, credit for other dependents, but not the child and dependent care, saver’s or premium tax credits.

 

Most of our clients have tax issues that are not covered by the pilot program and in any case, they likely want professional assistance and will not want to figure out how to use the online program. Some may not entirely trust an IRS return preparation program. 

 

You may want to provide information on this program to non-clients with simple returns that you do not want to undertake.

 

You may also want to watch the program. It is likely to be expanded in future years – likely augmented by artificial intelligence – so this program bears watching. 

 

A Closer Look at the IRS Direct File Pilot | Internal Revenue Service


Hold Your Horses

By Janet C. Hagy, CPA-Austin

 

It looks like tax season may get delayed (current IRS funding runs out March 7) and even more complicated due to the pending legislation H.R.7024, Tax Relief for American Families and Workers Act of 2024. There are two provisions in the bill that would be potentially retroactive to 2023. On the table are the extension of deductibility of Section 174 domestic research and development (R&D) expenses and the extension of 100% bonus depreciation deduction, through Dec. 31, 2025.

 

With these potential changes to the 2023 rules, requesting extensions of time to file returns for taxpayers who might benefit from these changes should be considered. Of course, that brings the correct amount of tax to pay by the due date into question. If the legislation fails to pass and taxpayers base their extension estimates on taking these extra deductions, tax could be underpaid with resulting penalties and interest.

 

R&D expenses are an either/or deduction based on whether we follow current law or bank on the legislation passing.

 

We do have some ammunition to consider regarding depreciation deductions. Bonus depreciation is not limited by net income. This made it more desirable than taking a Section 179 deduction. But whether the legislation passes or not, combining the two types of accelerated depreciation deductions in a tax year may be advantageous for many clients.

 

Here is a recap of what depreciation limits we currently have for 2023.

 

Under Section 168(k), property eligible for bonus depreciation gets a deduction of 80% of cost with the remaining 20% depreciated over the remaining life of the asset. The deduction does not phase out and it is not limited to net income, thereby creating possible net deductible losses.

 

Section 179 is limited to $1.16 million and phases out between $2.89 and $4.05 million of investment. Section 179 is also limited by net income and cannot create a loss. More asset classes are eligible for Section 179 depreciation, such as HVAC and roofs on commercial business property. Section 179 depreciation carryovers are also 100% deductible in the subsequent year subject to the net income limitation.

 

Basis limitations and state law differences must also be considered in determining the tax effect of depreciation deductions.

 

Since 100% bonus depreciation became an option, Section 179 has not been utilized as frequently. But with the 20% haircut of bonus depreciation and the extended period for depreciation of this remainder, electing Section 179 may be a better alternative. Even if the client cannot use all the Section 179 amount, the carryover could potentially be used in full in the subsequent year versus depreciating the 20% haircut over the remaining life.

 

Claiming bonus depreciation on some assets and Section 179 on others allows us to dial in the deduction that creates the best tax option for the client. Very small businesses may not want to show a big loss they cannot use in the current year or that negates the benefit of certain individual tax credits. For example, the unusual purchase of a large piece of equipment may create a better tax benefit over time by claiming a lesser percentage of the cost with a Section 179 deduction, rather than the fixed 80% bonus depreciation deduction.

 

Be sure to review the restrictions for electing Section 179. In addition to net income, basis and state limitations, certain entities like estate and trusts cannot make the election. Also, passive investors in a trade or business cannot deduct Section 179 expenses even if it is allocated to them on their Form K-1. 

 

Hopefully, Congress will finalize the legislation soon. No matter what the outcome, more professional time is going to be spent evaluating depreciation options this tax season.

 

Tax Expert: Timing of Tax Deal Bill May Impact Taxpayer Decision on When to File (thomsonreuters.com)


2023 Proposed Regulations under IRC Section 987

By John Kelleher, CPA-Dallas

 

On Nov. 9, 2023, Treasury and the IRS issued proposed regulations under IRC Section 987 (the 2023 proposed regulations) providing guidance on how to determine income or loss with respect to a qualified business unit (QBU) operating in a functional currency that is different from its owner. Once finalized, the proposed regulations would generally apply to tax years beginning after Dec. 31, 2024. Since the issuance of proposed regulations in 1991 (the 1991 proposed regulations), several final, temporary and proposed regulations under Section 987 have followed, including the final regulations issued in December 2016 (the 2016 final regulations) and the final regulations issued in May 2019 (the 2019 final regulations). The effective dates of these final regulations have been postponed through several deferral notices.

 

The 2016 and 2019 final regulations generally adopted the Full Economic Exposure Poll (FEEP) method, which was first introduced in proposed regulations issued in 2006, with modifications as the default rule of computing Section 987 income or loss. The FEEP method aimed to provide a more accurate reflection of a QBU's economic exposure to currency fluctuations with regard to all the financial assets and liabilities of a QBU. Under the FEEP method, taxpayers determine income gain or loss of a QBU attributable to currency fluctuations in the functional currency of the owner using the yearly average exchange rates. In doing so, the basis of historic assets is translated at the average rate for the year acquired. All other items are translated at the average exchange rate for the year of the determination.

 

Taxpayers have expressed significant concerns regarding the FEEP method, primarily regarding the burden of information gathering required to determine the exchange rate for historic assets. The 2023 proposed regulations generally retain the FEEP method and offer a couple of simplifying elections to address the taxpayers’ concerns.

 

First, the current rate election allows taxpayers to translate all balance sheet items at the year-end spot rate and all items of income, gain or loss at the average rate for the year, thereby resulting in outcomes similar to results under the 1991 proposed regulations. If a current rate election is in effect, a Section 987 loss might be deferred or suspended at the owner’s level until there is an offsetting gain.

 

Second, the annual recognition election allows a QBU owner to recognize net unrecognized 987 gain or loss annually at the end of each tax year. Taxpayers may make either a current rate election, an annual recognition election or both. Taxpayers will need to evaluate the potential impact of the FEEP method and the simplifying elections on their planning.

 

As noted, these regulations are only proposed and subject to change before finalization. The transition rules, however, are something for taxpayers to take note of currently. The 2023 proposed regulations provide a transition method replacing the fresh start method under the 2016 final regulations. The new transition method requires QBU owners to determine unrecognized Section 987 gain or loss that has accrued prior to the transition date (pretransition gain or loss). If a QBU owner computed its Section 987 gain or loss under an eligible pretransition method, the owner can determine a pretransition gain or loss under that method. Among others, the 2023 proposed regulations provide that the eligible pretransition methods include the earnings and capital method described in the 1991 proposed regulations and the earnings-only method.

 

Complying with the 2006 or 2016 regulations would also be eligible methods. QBU owners who have not used an eligible method must determine a pretransition gain or loss using a specified method under the 2023 proposed regulations, including the simplifying elections. To assess the impact of the transition rules under the 2023 proposed regulations, at the outset, taxpayers should identify whether they currently apply an eligible pretransition method to track Section 987 gain or loss exposure. If not, they should examine the information necessary to comply with the transition rules, such as the acquisition dates for historic assets of QBUs.

 

In other respects, the 2023 proposed regulations address various Section 987 related issues such as source and character, terminating QBUs, partnerships and consolidated groups.


Don’t Forget to Check Your WISP!

By Kathy Ploch, CPA-Houston

 

Before we get too buried in the 2023 tax returns, this is a reminder about data security and our responsibilities as practitioners to have a written information security plan (WISP) in place. I am sure many of you may have noticed when you renewed your PTIN that it asked for you to attest you had this written plan in place.

 

There are several provisions in Circular 230 that state what a practitioner’s obligation is when dealing with data security and confidential client information. It lists the penalties, both civil (IRC Section 6713) and criminal (IRC Section 7216), for unauthorized disclosure of taxpayer information. Also, legislation enacted in 1999 in the Gramm-Leach-Bliley Act gave the Federal Trade Commission (FTC) authority to prescribe regulations establishing requirements of data protection for professional tax return preparers.

 

In Section 314.2(h)(2)(viii) of the Safeguards Rule in the Act, accountants and other firms in the business of completing income tax returns must implement safeguards, including a WISP, to protect the security, confidentiality and integrity of the information. In 2015, the IRS created a public-private partnership called the Security Summit that works to protect confidential taxpayer information. The Security Summit prepares resources and awareness campaigns to make planning easier.

 

Failure to maintain a WISP to fortify financial data may not only put clients at risk for identity theft and fraud, but it also exposes a practitioner to liability for violating the Safeguards Rule. The FTC can obtain penalties against a company that acted unfairly or deceptively through their Penalty Offense Authority (Section 5(m)(1)(B) of the FTC Act 15, U.S.C. Section 45(m)(1)(B)). If a company receives this notice and still engages in prohibited practices, it can face civil penalties of up to $50,120 per violation. This maximum penalty is adjusted for inflation every January.

 

Listed below are various resources to assist you in complying with the WISP rules. Remember this plan should be reviewed annually for any updates needed. The IRS also recommends that you contact your IRS Stakeholder Liaison and the FTC if you incur a data breach.

 

AICPA members, there are several resources and a template (Tax Section): Gramm-Leach-Bliley Act (GLBA) and the FTC Safeguards Rule

IRS Publication 5708, Creating a Written Information Security Plan for your Tax & Accounting Practice

IRS Publication 5709, How to Create a Written Information Security Plan for Data Safety

IRS Publication 4557, Safeguarding Taxpayer Data: A Guide for Your Business

Federal Trade Commission

Penalties Under IRS Sections 7216 and 6713


Warning: BOI Hazard

By Janet C. Hagy, CPA-Austin

 

Beneficial ownership information (BOI) reporting to FinCEN is unlike other compliance reporting that accountants are permitted to prepare for our clients. For the reasons discussed below, TXCPA and AICPA have issued extensive information on their websites. (See TXCPA BOI resources, AICPA BOI resources.) FinCEN has also published guides, forms and instructions for BOI reporting.

 

The primary concern for CPAs is whether preparation of the new FinCEN BOI form constitutes the practice of law. Accountants have been specifically granted authority to prepare other FinCEN forms, for example Form 114, commonly referred to as FBAR, because the filing of this form is under the jurisdiction of the IRS. BOI reports are filed directly with FinCEN. For this reason, many professional liability insurance carriers are advising CPAs that they are not covering preparation or consulting services related to BOI reporting. 

 

For companies created or registered after Jan. 1, 2024, the filing deadline is 90 days after creation or registration. For companies existing before Jan. 1, 2024, the filing deadline is Jan. 1, 2025, to file an initial report. For companies created on or after Jan. 1, 2025, the filing deadline is 30 days after creation or registration. Updates to previously reported information are due within 30 days of the change. These deadlines are tight and do not correspond to the normal cycle of business most CPAs experience with their clients.  

 

The penalties for failure to timely file initial and ownership change reports are astounding. Willful failure to complete or update BOI forms can cause a company or its senior officers to be penalized up to $591 per day with possible criminal penalties including imprisonment of up to two years and/or a fine of up to $10,000.

 

Companies that typically stand in as registered agents in other states like CT Corporation are offering to prepare BOI reports for their customers. Fortunately, we have an option to refer our clients to these services.

 

Although the summary of exemptions from BOI reporting states that accounting firms are exempt, only accounting firms registered in accordance with Section 102 of the Sarbanes-Oxley Act of 2002 (15 U.S.C. 7212) (PCBOA) are exempt.

 

Whether to advise your clients about the reporting requirement or accept engagements to prepare forms, and what to include or not include in engagement letters, are crucial topics to discuss with your attorney and professional liability insurance carrier as soon as possible.

 

Beneficial Ownership Information Reporting FAQ| FinCEN.gov