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Proposed regulations spell out the critical mineral and battery component requirements of the new clean vehicle credit, while also clarifying several other components of the credit. The proposed regs, along with modified Frequently Asked Questions on the IRS website, largely adopt previous IRS guidance, including Rev. Proc. 2022-42, Notice 2023-1, and Notice 2023-16. 

Proposed regulations spell out the critical mineral and battery component requirements of the new clean vehicle credit, while also clarifying several other components of the credit. The proposed regs, along with modified Frequently Asked Questions on the IRS website, largely adopt previous IRS guidance, including Rev. Proc. 2022-42, Notice 2023-1, and Notice 2023-16. Similarly, the critical minerals and battery component regs largely adopt the White Paper the Treasury Department released last December.

However, the proposed regs also:

• detail the income and price limits on the credit,
• prohibit multiple taxpayers from dividing the credit for a single vehicle, and
• coordinate the credit with other credits.

The regs are generally proposed to apply to vehicles placed in service after April 17, 2023, but taxpayers may rely on them for vehicles placed in service before that date. Comments are requested.

Critical Minerals Requirement

For purposes of the $3,750 credit for a qualified vehicle that satisfies the critical minerals requirement, the proposed regs provide a three-step process for determining the percentage of the value of the applicable critical minerals in a battery:

• 1. Determine the procurement chain for each critical mineral.
• 2. Identify qualifying critical minerals.
• 3. Calculate qualifying critical mineral content.

The proposed regs define relevant terms, including "procurement chain," "criticalminerals," "criticalmineral content," "extraction," "processing," "constituent materials," "recycling," and "value added."

For vehicles placed in service in 2023 and 2024, the proposed regs consider a critical mineral to meet the test if at least 50 percent of the value added by extracting, processing or recycling the mineral is due to extraction, processing or recycling in the U.S. or a country with which the U.S. has a free trade agreement in effect. The proposed regs identify the following countries as ones with a free trade agreement in effect with the U.S.: Australia, Bahrain, Canada, Chile, Colombia, Costa Rica, Dominican Republic, El Salvador, Guatemala, Honduras, Israel, Jordan, Korea, Mexico, Morocco, Nicaragua, Oman, Panama, Peru, and Singapore. The regs also propose criteria for identifying additional countries, such as the factors that are part of the Critical Minerals Agreement (CMA) the U.S. recently entered into with Japan.

Battery Component Requirement

For purposes of the $3,750 credit for a qualified vehicle that satisfies the battery components requirement, the proposed regs provide a four-step process for determining the percentage of the value of the battery components in a battery:

• 1. Identify components that are manufactured or assembled in North America.
• 2. Determine the incremental value of each battery component and North American battery component.
• 3. Determine the total incremental value of battery components.
• 4. Calculate the qualifying battery component.

MAGI Limit

The credit does not apply if the taxpayer’s modified adjusted gross income (MAGI) for the credit year or, if less, the previous year exceeds a limit based on filing status. The proposed regs clarify that if the taxpayer’s filing status changes during this two-year period, this test applies the MAGI limit for each year based on the taxpayer's filing status for that year.

The proposed regs also clarify that the MAGI limit does not apply to a corporation or any other taxpayer that is not an individual for which AGI is computed under Code Sec. 62.

MSRP Limits

A vehicle does not qualify for the credit if the manufacturer’s suggested retail price (MSRP) exceeds $80,000 for a van, sport utility vehicle (SUV), or pickup truck; or $55,000 for any other vehicle. The proposed regs adopt the vehicle classification system the IRS announced in Notice 2023-16. This is the vehicle classification that appears on the vehicle label and on the website FuelEconomy.gov. The regs also provide a more detailed definition of "MSRP" using information reported on the label affixed to the vehicle’s windshield or side window.

Vehicle with Multiple Owners

The proposed regs generally prohibit any allocation or proration of the credit if multiple taxpayers place a vehicle in service. However, a partnership or S corporation that places a vehicle in service may allocate the credit among its partners or shareholders. The MAGI limits on the credit apply separately to each individual partner or shareholder. The seller’s report for the vehicle lists the entity’s name and TIN.

Final Assembly in North America

To qualify for the credit, the final assembly of a new clean vehicle must occur in North America. The proposed regs reiterate earlier guidance on this requirement, but they also provide more detailed definitions of "final assembly" and "North America." Taxpayers may rely on the vehicle’s plant of manufacture as reported in the vehicle identification number (VIN), or the final assembly point reported on the label affixed to the vehicle. Taxpayers may also continue to rely on the information in the "VIN decoder sites" at https://afdc.energy.gov/laws/electric-vehicles-for-tax-credit and https://www.nhtsa.gov/vin-decoder.

Coordination with Other Credits

While the new vehicle credit is generally a nonrefundable personal credit, the credit for a depreciable vehicle is treated as part of the general business credit. If the taxpayer’s business use of a qualified vehicle is less than 50 percent of its total use, the proposed regs require the taxpayer to apportion the credit. Only the portion of the credit that corresponds to the percentage of the taxpayer’s business use of the vehicle is part of the general business credit; the rest of the credit remains a nonrefundable personal credit.

The proposed regs clarify that when the new clean vehicle credit is allowed for a particular vehicle, a subsequent buyer in a later tax year may still claim the used clean vehicle credit. However, a subsequent buyer cannot claim the commercial clean vehicle credit.

Effective Dates

Taxpayers may rely on the proposed regulations before they are published as final regs, provided the taxpayer follows them in their entirety and in a consistent manner. The regs are generally proposed to apply to new clean vehicles placed in service after April 17, the date the regs are scheduled to be published in the Federal Register.

Comments Requested

The IRS requests comments on the proposed regs. Comments may be mailed to the IRS, or submitted electronically via the Federal eRulemaking Portal at https://www.regulations.gov (indicate IRS and REG-120080-22). Written or electronic comments and requests for a public hearing must be received by June 16, 2023.

In particular, the IRS seeks comments on the following issues:

• 1. the critical mineral and battery component requirements, including the distinction between processing of applicable critical minerals and manufacturing and assembly of battery components, and related definitions;
• 2. the 50-percent value added test for critical minerals, and the best approach for adopting a more stringent test after 2024;
• 3. the list of countries with which the United States has free trade agreements in effect, proposed criteria for identifying other such countries, and other potential approaches; and
• 4. whether rules similar to those provided for partnerships and S corporation should apply to trusts and similar entities that place a qualified clean vehicle in service.

The IRS is obsoleting Rev. Rul. 58-74, 1958-1 CB 148, as of July 31, 2023. Rev. Rul. 58-74 generally allows a taxpayer that adopted the expense method for research and experimental (R&E) expenses to use a refund claim or amend a return to deduct R&E expenses that the taxpayer failed to deduct when they were paid or accrued.

The IRS is obsoleting Rev. Rul. 58-74, 1958-1 CB 148, as of July 31, 2023. Rev. Rul. 58-74 generally allows a taxpayer that adopted the expense method for research and experimental (R&E) expenses to use a refund claim or amend a return to deduct R&E expenses that the taxpayer failed to deduct when they were paid or accrued.

Rev. Rul. 58-74 conflicts with current procedures for accounting method changes.

TCJA Changes for R&E Expenses

The decision to obsolete Rev. Rul. 58-74 is unrelated to the changes made by the Tax Cut and Jobs Act (TCJA) (P.L. 115-97), even though the ruling relates to pre-TCJA accounting methods for R&E expenses.

Taxpayers could elect to amortize R&E expenses paid or incurred in tax years beginning before 2022, or deduct them currently. If the taxpayer did not make either election, the expenses had to be capitalized. A taxpayer that elected the expense method had to use it for all qualifying expenses unless the IRS consented to a different method for some or all of the expenses.

TCJA ended the expense election for R&E expenses paid or incurred in tax year beginning after 2021. Instead, the expenses must be amortized over five years (15 years for foreign expenses).

Rev. Rul. 57-74 and Change of Accounting Method Procedures

The IRS is obsoleting Rev. Rul. 58-74 because it includes insufficient facts to properly analyze whether the taxpayer’s failure to deduct certain R&E expenditures, such as the cost of obtaining a patent, when it deducted other R&E expenditures, constituted a method of accounting or an error.

For example, Rev. Rul. 58-74 does not explain whether the taxpayer consistently treated the costs of obtaining a patent in determining its taxable income. It also fails to describe the cause and extent of the deviation in the treatment of certain R&E expenditures that were not deducted.

In addition, filing an amended return, refund claim, or administrative adjustment request (AAR) under Rev. Rul. 58-74 is inconsistent with the IRS position that a taxpayer may not, without prior consent, retroactively change from an erroneous to a permissible method of accounting by filing amended returns. Rev. Rul. 58-74 is also inconsistent with the procedures for accounting method changes that qualify for automatic IRS consent.

Prospective Application of Decision to Obsolete Rev. Rul. 58-74

A taxpayer may rely on Rev. Rul. 58-74 if the taxpayer:

However, eligibility to rely on Rev. Rul. 58-74 does not imply that the IRS will grant the refund, deduction, or AAR. Instead, the IRS will continue to challenge the applicability of Rev. Rul. 58-74 when appropriate. For example, the IRS might challenge reliance on Rev. Rul. 58-74 when the taxpayer’s facts are distinguishable from Rev. Rul. 58-74, including where the taxpayer failed to adopt the expense method under pre-TCJA law.

The IRS has issued safe harbor deed language that may be used to amend eligible easement deeds intended to qualify for conservation contribution deductions under Code Sec. 170(f)(3)(B)(iii), to comply with changes to the law created by section 605(d) of the SECURE 2.0 Act of 2022.

The IRS has issued safe harbor deed language that may be used to amend eligible easement deeds intended to qualify for conservation contribution deductions under Code Sec. 170(f)(3)(B)(iii), to comply with changes to the law created by section 605(d) of the SECURE 2.0 Act of 2022. If a donor substitutes the prescribed safe harbor deed language for the corresponding language in the original eligible easement deed, and the amended deed is then signed by the donor and donee and recorded on or before July 24, 2023, the amended eligible easement deed will be treated as effective for purposes of Code Sec. 170 and section 605(d)(2) of the SECURE 2.0 Act. If these requirements are met, the amendment must be treated as effective from the date of the recording of the original easement deed.

The following are not considered an"eligible easement deed" for purposes of this safe harbor - any easement deed relating to any contribution:

• which is not treated as a qualified conservation contribution by reason of Code Sec. 170(h)(7);
• which is part of a reportable transaction under Code Sec. 6707A(c)(1), or is described in Notice 2017-10;
• if a deduction under Code Sec. 170 has been disallowed, the donor has contested such disallowance, and a case is docketed in federal court to resolve this dispute scheduled on a date before the date the amended deed is recorded by the donor; or
• if a claimed contribution deduction under Code Sec. 170 resulted in an underpayment penalty under either Code Sec. 6662 or 6663, and such penalty has been finally determined administratively or by final court decision.

If the safe harbor language is substituted according to the requirements spelled out in this Notice, the amended eligible easement deed will be treated as effective as of the date the eligible easement deed was originally recorded for federal purposes, regardless of whether the amended eligible easement deed is effective retroactively under the relevant state law.

The IRS closed out the 2023 Dirty Dozen campaign with a warning for taxpayers to beware of promoters peddling tax avoidance schemes. These schemes are primarily targeted at high income individuals seeking to reduce or eliminate their tax obligation. The IRS advice taxpayers to seek services from an independent, trusted tax professional and to avoid promotres focused on aggressively marketing and pushing questionable transactions.

The IRS closed out the 2023 Dirty Dozen campaign with a warning for taxpayers to beware of promoters peddling tax avoidance schemes. These schemes are primarily targeted at high income individuals seeking to reduce or eliminate their tax obligation. The IRS advice taxpayers to seek services from an independent, trusted tax professional and to avoid promotres focused on aggressively marketing and pushing questionable transactions.

The IRS has compiled a list of 12 scams and schemes that put taxpayers and tax professionals at risk. Some of them are:

• micro-captive insurance arrangements: is an insurance company whose owners elect to be taxed on the captive's investment income only;
• syndicated conservation easements: are arrangements wherein they attempt to game the system with grossly inflated tax deductions;
• offshore accounts & digital assets: unscrupulous promoters lure taxpayers into placing their asssets in offshore accounts under the pretense of being untraceable by the IRS;
• maltese individual retirement arrangements misusing treaty: are arrangements wherein the taxpayers attempt to avoid tax by contributing to foreign individual retirement arrangements in Malta; and
• puerto rican and other foreign captive insurance: are transactions wherein the business owners of closely held entities participate in a purported insurance arrangement with a Puerto Rican or other foreign corporation in which they have a financial interest.

Taxpayers are adviced to to rely on reputable tax professionals they know and trust to avoid such schemes. The IRS has also created the Office of Fraud Enforcement (OFE) and Office of Promoter Investigations (OPE) to coordinate service-wide enforcement activities against taxpayers committing tax fraud and promoters marketing and selling abusive tax avoidance transactions and schemes to effectuate tax evasion.

As part of the Dirty Dozen awareness effort, the IRS encourages people to report taxpayers who promote improper and abusive tax schemes as well as tax return preparers who deliberately prepare improper returns. To report an abusive tax scheme or a tax return preparer, taxpayers should mail or fax a completed and any supporting materials to the IRS Lead Development Center in the Office of Promoter Investigations. The postal address is: Internal Revenue Service Lead Development Center Stop MS5040 24000 Avila Road Laguna Niguel, California 92677-3405 Fax: 877-477-9135.

As part of the annual Dirty Dozen tax scams effort, the IRS and the Security Summit partners have urged taxpayers to be on the lookout for spearphishing emails. Through these emails, scammers try to steal client data, tax software preparation credentials and tax preparer identities with the goal of getting fraudulent tax refunds. These requests can range from an email that looks like it’s from a potential new client to a request targeting payroll and human resource departments asking for sensitive Form W-2 information.

As part of the annual Dirty Dozen tax scams effort, the IRS and the Security Summit partners have urged taxpayers to be on the lookout for spearphishing emails. Through these emails, scammers try to steal client data, tax software preparation credentials and tax preparer identities with the goal of getting fraudulent tax refunds. These requests can range from an email that looks like it’s from a potential new client to a request targeting payroll and human resource departments asking for sensitive Form W-2 information.

Cyber Security Tips to Prevent Spearphishing

Spearphishing is a tailored phishing attempt to a specific organization or business and usually begins with a suspicious email that may appear as a tax preparation application or another e-service or platform. Some scammers will even use the IRS logo and claim something like "Action Required: Your account has now been put on hold." Often these emails stress urgency and will ask tax pros or businesses to click on links to input or verify information.

How to prevent spearphishing:

• Never click suspicious links.
• Double check the requests with the original sender.
• Be vigilant year-round, not just during filing season.

The IRS and its Security Summit partners continue to see spearphishing attempts that impersonate a new potential client, known as the New Client scam. Lastly, taxpayers should never respond to tax-related phishing or spearfishing or click on the URL link. Instead, the scams should be reported by sending the email or a copy of the text/SMS as an attachment to phishing@irs.gov.

The American Institute of CPAs is recommending the Internal Revenue Service place a greater emphasis on service as the agency works on its strategic plan for the $80 billion in additional appropriations provided to the IRS in the Inflation Reduction Act.

The American Institute of CPAs is recommending the Internal Revenue Service place a greater emphasis on service as the agency works on its strategic plan for the $80 billion in additional appropriations provided to the IRS in the Inflation Reduction Act.

"Given the historic low levels of IRS taxpayer services, we are concerned that there was an insufficient allocation of funding to improve taxpayer services to appropriate levels" the AICPA March 28, 2023, letter to the IRS and the Department of the Treasury states, noting that the COVID-19 pandemic "made it painfully clear that the IRS was not funded to accomplish all its responsibilities."

AICPA argued that the agency’s service deficiencies "prevent taxpayers from complying with their tax obligations and hamper our members’ ability to as professional advisors to do their jobs, which is to help these taxpayers comply."

And despite funds being targeted toward enforcement and a stated goal of ensuring that wealthy individuals and corporations are paying their fair share of taxes, AICPA states that "enforcement actions must be in balance with the services the IRS provides to taxpayers."

The Inflation Reduction Act allocates $45.6 billion to enforcement activities and only $3.1 billion to service, and the AICPA suggested that more money be focused on service-related issues, including allocating sufficient funds for employee training to help replace the institutional knowledge that is expected to be lost in the coming years as the aging workforce retires.

AICPA is also calling on the IRS to develop a comprehensive customer service strategy, including creating more empowered employees; better access to timely information; and access to tailored resources, including resources designed specifically for tax professionals.

Additionally, the organization recommended that the agency develop a comprehensive plan to redesign the agency, including adopting a more customer-focused culture; integrating its technical infrastructure so the disparate legacy systems can communicate with each other; and creating a practitioner services division "that would centralize and modernize its approach to all practitioners."

Finally, AICPA recommended that IRS continue with its business systems modernizations initiatives.

"Currently, the IRS has two of the oldest information systems in the federal government making the information technology functions one of the biggest constraints overall for the IRS" the letter states. "Without modern infrastructure, the IRS is unable to timely and efficiently meet the needs of taxpayers and practitioners. … We recommend that the IRS more fully explore options to allocate IRA enforcement funding to BSM issues."

Automated Collection Notices To Resume

Another area that the organization recommends the funds be used for is the ongoing effort by the agency to reduce the backlog of unprocessed paper tax returns and other paper correspondence.

AICPA acknowledged the work done to reduce levels after the backlog spiked during the pandemic, but stated that "more needs to be done to ensure that taxpayers and practitioners are not faced at any time in 2023 with yet another year with significant levels of unprocessed returns, leading to additional delays in processing and incorrect notices and penalties."

And while this is going on, the organization recommends that the IRS "continue the suspension of certain automated collection notices until it is prepared to devote the necessary resources for a proper and timely resolution of matters. Until the IRS can respond to taxpayer replies to notices in a timely manner, these collection notices should not be restarted."

According to the letter, the agency is planning on restarting automated collection notices in June 2023, even though "this June date has not been widely publicized. The IRS should communicate the stat date of automated collection action to the public, specifically identifying what actions will be part of this process and providing resources for taxpayers on dealing with these actions."

Additionally, the organization is calling for "a streamlined reasonable cause penalty waiver without requiring a written request, similar to the procedures of the FTA administrative waiver, based solely on the pandemic’s effects on both the taxpayer and the practitioner."

By Gregory Twachtman, Washington News Editor

National Taxpayer Advocate Erin Collins offered both praise and criticism of the Internal Revenue Service’s Strategic Operating Plan outlining how it will spend the additional $80 billion allocated to the agency as part of the Inflation Reduction Act of 2022.

National Taxpayer Advocate Erin Collins offered both praise and criticism of the Internal Revenue Service’s Strategic Operating Plan outlining how it will spend the additional $80 billion allocated to the agency as part of the Inflation Reduction Act of 2022.

"This is a game changer to transform how the U.S. government administers the tax laws in a more helpful and efficient manner while focusing on providing the service taxpayers deserve,"Collins wrote in an April 6, 2023, blog post about the plan.

However, she reiterated criticism over how the funds would be allocated throughout the next 10 years. The IRA allocates only $3.2 billion going to taxpayer services and $4.8 billion allocated to business system modernization, two areas that are in need of funding to help improve the service the agency provides to taxpayers.

"Combined, that’s just ten percent of the total," she noted. "By contrast, 90 percent was allocated for enforcement ($45.6 billion) and operations support ($25.3 billion). The additional long-term funding provided by the IRA, while appreciated and welcomed, is disproportionately allocated for enforcement activities, and I believe Congress should reallocate IRS funding to achieve a better balance with taxpayer services and IT modernization."

Collins also cited the report in stating that the funds allocated for taxpayer services will be depleted within four years and cautioned that the agency needs to ensure that funds are continually being allocated for this specific purpose beyond that point.

"Although I share the long-term vision of the SOP, I want to caution that the IRS should not lose sight of its core mission and its immediate challenge of reducing the large backlog of amended returns and taxpayer correspondence."

Gregory Twachtman, Washington News Editor

On April 4, 2023, the Internal Revenue Service released the Strategic Operating Plan, which details the agency’s plans to use Inflation Reduction Act resources to transform the administration of the tax system and services provided to taxpayers.

On April 4, 2023, the Internal Revenue Service released the Strategic Operating Plan, which details the agency’s plans to use Inflation Reduction Act resources to transform the administration of the tax system and services provided to taxpayers.

The goal of the changes outlined in the Strategic Operating Plan is to "provide taxpayers with world-class customer service" and reduce the deficit by "hundreds of billions by pursuing tax evasion by wealthy individuals, big corporations, and complex partnerships," said Deputy Secretary of the Treasury Wally Adeyemo.

The Strategic Operating Plan is organized around five key objectives:

• Dramatically improve services to help taxpayers meet their obligations and receive the tax incentives for which they are eligible.
• Quickly resolve taxpayer issues when they arise.
• Focus expanded enforcement on taxpayers with complex tax filings and high-dollar noncompliance to address the tax gap.
• Deliver cutting-edge technology, data, and analytics to operate more effectively.
• Attract, retain, and empower a highly skilled, diverse workforce and develop a culture that is better equipped to deliver results for taxpayers.

The plan outlines a series of initiatives and projects aligned to each objective, including 42 key initiatives, 190 key projects, and more than 200 specific milestones designed to achieve the objectives set forth by the IRS.

Improved customer service, compliance efforts, and technology updates are also essential to achieving the goals set forth in the Strategic Operating Plan.

With long-term funding in place, the IRS has hired more than 5,000 phone assisters, increased walk-in service availability, and added new digital tools, according to IRS Commissioner Daniel Werfel.

"In the first five years of the 10-year plan, taxpayers will be able to securely file documents and respond to notices online," said Werfel. Taxpayers will also be able securely access and download account data and account history. "For the first time, the IRS will help taxpayers identify potential mistakes before filing, quickly fix errors that could delay their refunds, and more easily claim credits and deductions they may be eligible for," he said.

The Strategic Operating Plan also includes targeted efforts to ensure fair tax law enforcement and compliance with existing laws. The plan focuses on "areas where compliance has eroded the most," specifically compliance issues involving "wealthy individuals, complex partnerships, and large corporations," said Werfel. The IRS will increase hiring efforts for experienced accountants and attorneys to ensure enforcement "at the top." Werfel further noted that the IRS does not intend to increase the audit rate for small businesses or households making less than $400,000.

Finally, the Strategic Operating Plan utilizes Inflation Reduction Act funding to modernize the agency’s technology infrastructure to protect taxpayer data. In the first five years of the 10-year plan, the IRS aims to eliminate paper backlogs that have delayed taxpayer refunds by digitizing forms and returns when they are received and transitioning to fully digital correspondence processes.

"This plan is only the beginning of our work," Werfel said. "This is a unique opportunity for the IRS and the nation, and we will continue to work closely with our partners as this effort moves forward. This investment in the IRS is already helping taxpayers this tax season, and this plan shows that historic changes are coming."

The American Institute of CPAs is calling on the Internal Revenue Service to issue guidance related to how digital asset losses affect tax obligations.

The American Institute of CPAs is calling on the Internal Revenue Service to issue guidance related to how digital asset losses affect tax obligations.

"With the complexities and recent bankruptcies involved with digitalasset exchanges, taxpayers and practitioners are facing many issues with the taxtreatment of losses of digitalassets and need guidance," Eileen Sherr, AICPA Director for Tax Policy & Advocacy, said in a statement. "Taxpayers and their advisors need clear guidance to accurately calculate their losses and properly meet their tax obligations and we urge the IRS to adopt our recommendations and provide this guidance."

In an April 14, 2023, letter to the agency, AICPA said it hopes the submission of the comments that the "IRS will provide additional guidance to clarify how digitalassetlosses are handled in various scenarios. Such guidance will provide greater certainty to taxpayers and their preparers in confidently and properly complying with their overall reporting requirements for digitalassets, and better ensure consistent application of the tax law among taxpayers."

The organization offers a range of recommendations on a number of topics related to the tax treatment of digital asset losses, with a focus on losses incurred by an individual investor rather than a trade or business.

One scenario highlighted by the AICPA is the determination of worthlessness of a digital asset. The organization notes that Chief Counsel Advice (CAA) 20230211 "states that ‘a loss may be sustained…if the cryptocurrency becomes worthless resulting in an identifiable event that occurs during the tax year for purposes of section 165(a),"’ adding that the advice notes that cryptocurrency can be valued at less than one cent but still greater than zero because it can still be traded and "that could potentially create future value."

AICPA wrote that if "the position of Treasury and the IRS s that a cryptocurrency is listed on an exchange and has liquidating value greater than absolute zero, we recommend that Treasury and IRS state this in binding guidance (published in the Internal Revenue Bulletin)."

Another topic covered by the comments was the question of when, if ever, might digital assets be securities for tax purposes.

"Authoritative guidance is needed on when, if ever, the section 156(g) worthless security capital losstreatment applies to cryptocurrency and other digitalassets," AICPA wrote. "Binding guidance should also be provided on basis determination for digitalassets (currently the special options are only in non-binding FAQs), as this is a matter relevant to measuring gains and losses."

AICPA also stated that guidance "is needed on the treatment of lending of virtual currency other digital asses under sections 162 such as if the taxpayer is in a business of ‘lending’ digitalassets), 165, 166, 469, 1001, and 1058, and possibly other provisions. This guidance should cover not only losses from ‘lending’ virtual currency and other digitalassets, but the categorization of the income generated (portfolio, business or other) and related expenses."

Other topics covered by the comment letter include:

• What facts indicate abandonment of a digital asset?
• In the case of theft of a digital asset, does the Ponzi loss guidance apply beyond Ponzi-losses to other fraudulent arrangements, including digital asset losses from certain digital asset exchange activities?
• When would section 1234A apply to termination of a digital asset?
• How should a taxpayer report digital asset activity if they are unable to access their records due to bankruptcy of an exchange?
• Is a digital asset considered disposed of by transferring the investor’s interest in a bankruptcy proceeding? Must there be proof of transfer of the underlying digital asset?

This and other tax policy and advocacy comment letters filed by the AICPA can be found here.

By Gregory Twachtman, Washington News Editor

Holiday season - a time for giving to friends and family, but not, you hope, to the IRS. Many, if not most, people are aware that the Tax Code imposes a tax on certain gifts, but not everyone is certain as to how this works. How do you know when you've given the gift that keeps on taking - a taxable gift?

Exclusion Amount

The general rule is that there is a designated limit above which gifts become taxable to the giver. For the 2009 tax year, that limit is $13,000. The gift tax threshold is from each donor to each recipient per year. In other words, a donor may give multiple gifts to a single recipient in 2009 up to $13,000, and may repeat this with an unlimited number of recipients without incurring gift tax liability.

Furthermore, married couples may give up to $26,000 during 2009 to each recipient in a year without incurring tax, but to do this, they must indicate on a gift tax return that they are electing to split the gift.

Contributions to so-called 529 plans are subject to this limitation, except that a donor may "front-load" giving by contributing up to $60,000 to an individual's account in a single tax year and counting the gift against that year and the four succeeding years. This does make any gifts to that individual in the subsequent years taxable.

Exceptions to the Rule

Some gifts do not count against this threshold. There is no limitation on gifts to spouses or charitable organizations (although there are limits on the tax benefits of charitable contributions). Payments for medical or educational expenses also do not count against the threshold if the money is paid directly to the source of the expenses. A gift of $15,000 to a relative for college tuition is a taxable gift, but a $15,000 payment to the college is not.

Even when a gift exceeds the threshold, it is not necessary to pay tax on the gift. This is because in addition to the annual exclusion amount, there is a lifetime credit against the estate and gift tax. The credit effectively exempts the first $3.5 million of taxable gifts from gift tax in 2009, and must be claimed by filing a gift tax return, Form 709.

The gift tax applies not only to gifts of cash, but also to property. The value of property given as a gift counted against the exclusion amount is the fair market value of the property at the time of the gift, whether the gift is of stocks and other securities or more traditional holiday presents, including food and drink.

The Business Context

Sometimes, gift giving makes for good business. However, even if you give an employee or business contact a gift completely out of gratitude, with no expectation of profit in return, the IRS treats these gifts as business gifts. As such, certain tax rules apply. Gifts of cash within a business context are always taxed to the recipient, whether an employee, contractor or other business. Gifts of property are similarly taxed subject, however, to a de minimis exception for small gifts of approximately $35 or less. The silver lining for this rule is that if it is taxable to an employee, it is also deductible by the employer. In addition, that rule also has a favorable exception within it: the employer may deduct the cost of a de minimis gift or the cost of a general holiday office party (subject to the entertainment deduction limitations).

To sum up, a taxable holiday gift occurs when the total value of all gifts, both of money and property, to an individual over the course of a year, excluding direct payments for medical and educational expenses, exceeds the exclusion amount, which is currently $13,000. When given with a business context, however, it is the recipient and not the giver who is generally subject to tax. Nevertheless, certain important exceptions apply within that general rule. If you need further assistance in sorting out the tax repercussions of holiday gift giving, please feel free to contact this office.

Given a choice between recognizing income now or in a later year, most people want to be paid now and be taxed in a later year.  As a practical matter, however, an employee cannot defer compensation after performing services and becoming entitled to payment.  Routine compensation earned over a prescribed pay period -- a week, two weeks, or a month, for example - usually is paid or made available in the same year it was earned.  Recognition of the income cannot be put off to a later year.

If the employee earns compensation in one year but will not receive it until the following year, the amount is treated as deferred compensation (unless the employer has funded or secured its obligation to pay, or the 2 1/2 month rule, noted below, applies). If an amount is treated as deferred compensation, the employer cannot take a deduction until the year the employee includes the compensation in income. This rule applies even if the employer is on the accrual basis and all events have occurred that entitle the employee to a specific bonus amount. This "matching" principle is contained in Code Sec. 404(a)(5).

The 2 1/2 Month Rule

However, payments made in the first 2 1/2 months of the end of the year that the services were performed are not treated as deferred compensation. This allows the employer to accrue and deduct the compensation in the year it is earned (the year the services were performed), not the later year when it is paid. Nevertheless, the employee still is entitled to defer his or her recognition of income into the next year if certain conditions are satisfied.

Employers who want to spare their employees from being taxed in the year a bonus is earned should not make any amounts available to the employee until the following year. This is particularly important if the employee earns a bonus based on an objective measure, such as corporate earnings. If the bonus is paid solely in the employer's discretion, the amounts will not be taxable until the year paid. If the bonus is paid within the first 2 1/2 months of the following year, the amount is not deferred compensation, and an accrual-basis taxpayer can deduct the bonus in the year the employee performed the services.

Elective Deferral Requirements

If an employer wants to give the employee an election to defer the bonus, it is necessary to look to Code Sec. 409A, enacted in the American Jobs Creation Act of 2004. Under Code Sec. 409A, a bonus based on measures of the company's or the individual's performance is treated as deferred compensation. If the bonus is based on services performed over a 12-month period or longer, the employee must make an election to defer income at least six months before the end of the bonus period.

The tax rules are very liberal for individuals in the armed forces who are serving in a combat zone. The combat zone extension automatically extends the date for paying tax or claiming a refund, as well as for filing. The extension also applies to paying estimated tax.

Generally, the time period for filing returns, paying taxes or claiming a credit or refund is suspended for the period of the taxpayer's service in the combat zone plus 180 days. The time period is similarly suspended while the taxpayer is hospitalized because of a combat-related injury, or while the individual is missing in action, plus 180 days. If the taxpayer is hospitalized in the U.S., the maximum extension period is five years from the date the taxpayer returns to the U.S.

Example. Sandra is deployed to serve in a combat zone on September 15, 2005. Sandra does not make her third estimated tax payment for the year, due the same day.  The combat zone extension extends her deadline for making her third estimated tax payment for the period of her service in the combat zone plus 180 days after her last day in the combat zone.

Who qualifies?

The extension is available to all persons serving in the U.S. Armed Forces in a combat zone. This includes regular military personnel as well as National Guard and Reserve personnel. Civilian support personnel under the direction of the U.S. Armed Forces also qualify.

Red Cross personnel serving in a combat zone also may take advantage of the extension. Accredited press correspondents similarly qualify.