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The IRS issued frequently asked questions (FAQs) addressing the new deduction for qualified overtime compensation added by the One, Big, Beautiful Bill Act (OBBBA). The FAQs provide general information to taxpayers and tax professionals on eligibility for the deduction and how the deduction is determined.

The IRS issued frequently asked questions (FAQs) addressing the new deduction for qualified overtime compensation added by the One, Big, Beautiful Bill Act (OBBBA). The FAQs provide general information to taxpayers and tax professionals on eligibility for the deduction and how the deduction is determined.

General Information

The FAQs explain what constitutes qualified overtime compensation for purposes of the deduction, including overtime compensation required under section 7 of the Fair Labor Standards Act (FLSA) that exceeds an employee’s regular rate of pay. The FAQs also describe which individuals are covered by and not exempt from the FLSA overtime requirements.

FLSA Overtime Eligibility

The FAQs address how individuals, including federal employees, can determine whether they are FLSA overtime-eligible. For federal employees, eligibility is generally reflected on Standard Form 50 and administered by the Office of Personnel Management, subject to certain exceptions.

Deduction Amount and Limits

The FAQs explain that the deduction is limited to a maximum amount of qualified overtime compensation per return and is subject to phase-out based on modified adjusted gross income. Special filing and identification requirements also apply to claim the deduction.

Reporting and Calculation Rules

The FAQs describe how qualified overtime compensation is reported for tax purposes, including special reporting rules for tax year 2025 and required separate reporting by employers for tax years 2026 and later. The FAQs also outline methods taxpayers may use to calculate the deduction if separate reporting is not provided.

FS-2026-1

IR 2026-10

Proposed regulations regarding the deduction for qualified passenger vehicle loan interest (QPVLI) and the information reporting requirements for the receipt of interest on a specified passenger vehicle loan (SPVL), Code Sec. 163(h)(4), as added by the One Big Beautiful Bill Act (P.L. 119-21), provides that for tax years beginning after December 31, 2024, and before January 1, 2029, personal interest does not include QPVLI. Code Sec. 6050AA provides that any person engaged in a trade or business who, in the course of that trade or business, receives interest from an individual aggregating $600 or more for any calendar year on an SPVL must file an information return reporting the receipt of the interest.

Proposed regulations regarding the deduction for qualified passenger vehicle loan interest (QPVLI) and the information reporting requirements for the receipt of interest on a specified passenger vehicle loan (SPVL), Code Sec. 163(h)(4), as added by the One Big Beautiful Bill Act (P.L. 119-21), provides that for tax years beginning after December 31, 2024, and before January 1, 2029, personal interest does not include QPVLI. Code Sec. 6050AA provides that any person engaged in a trade or business who, in the course of that trade or business, receives interest from an individual aggregating $600 or more for any calendar year on an SPVL must file an information return reporting the receipt of the interest.

Qualified Personal Vehicle Loan Interest

QPVLI is deductible by an individual, decedent's estate, or non-grantor trust, including a with respect to a grantor trust or disregarded entity deemed owned by the individual, decedent's estate, or non-grantor trust. The deduction for QPVLI may be taken by taxpayers who itemize deductions and those who take the standard deduction. Lease financing would not be considered a purchase of an applicable passenger vehicle (APV) and, thus, would not be considered a SPVL. QPVLI would not include any amounts paid or accrued with respect to lease financing.

Indebtedness will qualify as an SPVL only to the extent it is incurred for the purchase of an APV and for any other items or amounts customarily financed in an APV purchase transaction and that directly relate to the purchased APV, such as vehicle service plans, extended warranties, sales, and vehicle-related fees. Indebtedness is an SPVL only if it was originally incurred by the taxpayer, with an exception provided for a change in obligor due to the obligor's death. Original use begins with the first person that takes delivery of a vehicle after the vehicle is sold, registered, or titled and does not begin with the dealer unless the dealer registers or titles the vehicle to itself.

Personal use is defined to mean use by an individual other than in any trade or business, except for use in the trade or business of performing services as an employee, or for the production of income. An APV is considered purchased for personal use if, at the time of the indebtedness is incurred, the taxpayer expects the APV will be used for personal use by the taxpayer that incurred the indebtedness, or by certain members of that taxpayer's family and household, for more than 50 percent of the time. Rules with respect to interest that is both QPVLI and interest otherwise deductible under Code Sec. 163(a) or other Code section are provided and intended to provide clarity and to prevent taxpayers from claiming duplicative interest deductions. The $10,000 limitation of Code Sec. 163(h)(4)(C)(i) applies per federal tax return. Therefore, the maximum deduction on a joint return is $10,000. If two taxpayers have a status of married filing separately, the $10,000 limitation would apply separately to each return.

Information Reporting Requirements

If the interest recipient receives from any individual at least $600 of interest on an SPVL for a calendar year, the interest recipient would need to file an information return with the IRS and furnish a statement to the payor or record on the SPVL. Definitions of terms used in the proposed rules are provided in Prop. Reg. §1.6050AA-1(b).

Assignees of the right to receive interest payments from the lender of record are permitted to rely on the information in the contract if it is sufficient to satisfy its information reporting obligations. The assignee may choose to make arrangements to obtain information regarding personal use from the obligor, lender of record, or by other means. The written statement provided to the payor of record must include the information that was reported to the IRS and identify the statement as important tax information that is being furnished to the IRS and state that penalties may apply for overstated interest deductions.

Effective Dates and Requests for Comments

The regulations are proposed to apply to tax years in which taxpayers may deduct QPVLI pursuant to Code Sec. 163(h)(4). Taxpayers may rely on the proposed regulations under Code Sec. 163 with respect to indebtedness incurred for the purchase of an APV after December 31, 2024, and on or before the regulations are published as final regulations, so long as the taxpayer follows the proposed regulations in their entirety and in a consistent manner. Likewise, interest recipients may rely on the proposed regulations with respect to indebtedness incurred for the purchase of an APV after December 31, 2024, and on or before the date the regulations are published as final regulations, so long as the taxpayer follows the proposed regulations in their entirety and in a consistent manner.

Written or electronic comments must be received by February 2, 2026. A public hearing is scheduled for February 24, 2026.

Proposed Regulations, NPRM REG-113515-25

IR 2025-129

The IRS has released interim guidance to apply the rules under Regs. §§1.168(k)-2 and 1.1502-68, with some modifications, to the the acquisition date requirement for property qualifying for 100 percent bonus depreciation under Code Sec. 168(k)(1), as amended by the One Big Beautiful Bill Act (OBBBA) (P.L. 119-21). In addition, taxpayers may apply modified rules under to the elections to claim 100-percent bonus depreciation on specified plants, the transitional election to apply the bonus rate in effect in 2025, prior to the enactment of OBBBA, and the addition of qualified sound recording productions to qualified property under Code Sec, 168(k)(2). Proposed regulations for Reg. §1.168(k)-2 and Reg. §1.1502-68 are forthcoming.

The IRS has released interim guidance to apply the rules under Regs. §§1.168(k)-2 and 1.1502-68, with some modifications, to the the acquisition date requirement for property qualifying for 100 percent bonus depreciation under Code Sec. 168(k)(1), as amended by the One Big Beautiful Bill Act (OBBBA) (P.L. 119-21). In addition, taxpayers may apply modified rules under to the elections to claim 100-percent bonus depreciation on specified plants, the transitional election to apply the bonus rate in effect in 2025, prior to the enactment of OBBBA, and the addition of qualified sound recording productions to qualified property under Code Sec, 168(k)(2). Proposed regulations for Reg. §1.168(k)-2 and Reg. §1.1502-68 are forthcoming.

Under OBBBA qualified property acquired and specified plants planted or grafted after January 19, 2025, qualify for 100 percent bonus depreciation. When determining whether such property meets the acquisition date requirements, taxpayers may generally apply the rules under Regs. §§1.168(k)-2 and 1.1502-68 by substituting “January 19, 2025” for “September 27, 2017” and “January 20, 2025” for “September 28, 2017” each place it appears. In addition taxpayers should substitute “100 percent” for “the applicable percentage” each place it appears, except for the examples provided in Reg. § 1.168(k)-2(g)(2)(iv). Specifically, these rules apply to the acquisition date (Reg. § 1.168(k)-2(b)(5) and Reg. §1.1502-68(a) through (d)) and the component election for components of larger self-constructed property (Reg. § 1.168(k)-2(c)).

With regards to the Code Sec. 168(k)(5) election to claim 100-percent bonus depreciation on specified plants, taxpayer may follow the rules set forth in Reg. § 1.168(k)-2(f)(2). Taxpayers making the transitional election to apply the lower bonus rate in effect in 2025, prior to the enactment of OBBBA may follow Reg. § 1.168(k)-2(f)(3) after substituting “January 19, 2025” for “September 27, 2017”, “January 20, 2025” for “September 28, 2017”, and “40 percent” (“60 percent” in the case of Longer production period property or certain noncommercial aircrafts) for “50 percent”, and applicable Form 4562, Depreciation and Amortization,” for “2017 Form 4562, “Depreciation and Amortization,” each place it appears .

For qualified sound recording productions acquired before January 20, 2025, in a tax year ending after July 4, 2025, taxpayers should apply the rules under Reg. § 1.168(k)-2 as though a qualified sound recording production (as defined in Code Sec. 181(f)) is included in the list of qualified property provided in Reg. § 1.168(k)-2(b)(2)(i). If electing out of bonus depreciation for a qualified sound recording production under Code Sec. 168(k)(7) a taxpayer should follow the rules under Reg. § 1.168(k)-2(f)(1) as if the definition of class of property is expanded to each separate production of a qualified sound recording production.

Taxpayers may rely on this guidance for property placed in service in tax years beginning before the date the forthcoming proposed regulations are published in the Federal Register.

Notice 2026-11

IR 2026-6

The IRS released the optional standard mileage rates for 2026. Most taxpayers may use these rates to compute deductible costs of operating vehicles for:

• business,
• medical, and
• charitable purposes

Some members of the military may also use these rates to compute their moving expense deductions.

The IRS released the optional standard mileage rates for 2026. Most taxpayers may use these rates to compute deductible costs of operating vehicles for:

• business,
• medical, and
• charitable purposes

Some members of the military may also use these rates to compute their moving expense deductions.

2026 Standard Mileage Rates

The standard mileage rates for 2026 are:

• 72.5 cents per mile for business uses;
• 20.5 cents per mile for medical uses; and
• 14 cents per mile for charitable uses.

Taxpayers may use these rates, instead of their actual expenses, to calculate their deductions for business, medical or charitable use of their own vehicles.

FAVR Allowance for 2026

For purposes of the fixed and variable rate (FAVR) allowance, the maximum standard automobile cost for vehicles places in service after 2026 is:

• $61,700 for passenger automobiles, and
• $61,700 for trucks and vans.

Employers can use a FAVR allowance to reimburse employees who use their own vehicles for the employer’s business.

2026 Mileage Rate for Moving Expenses

The standard mileage rate for the moving expense deduction is 20.5 cents per mile. To claim this deduction, the taxpayer must be:

• a member of the Armed Forces of the United States,
• on active military duty, and
• moving under an military order and incident to a permanent change of station

The Tax Cuts and Jobs Act of 2017 suspended the moving expense deduction for all other taxpayers until 2026.

Unreimbursed Employee Travel Expenses

For most taxpayers, the Tax Cuts and Jobs Act suspended the miscellaneous itemized deduction for unreimbursed employee travel expenses. However, certain taxpayers may still claim an above-the-line deduction for these expenses. These taxpayers include:

• members of a reserve component of the U.S. Armed Forces,
• state or local government officials paid on a fee basis, and
• performing artists with relatively low incomes.

Notice 2025-5, is superseded.

Notice 2026-10

IR 2025-128

The IRS issued frequently asked questions (FAQs) addressing the limitation on the deduction for business interest expense under Code Sec. 163(j). The FAQs provide general information to taxpayers and tax professionals and reflect statutory changes made by the Tax Cuts and Jobs Act, the CARES Act, and the One, Big, Beautiful Bill.

The IRS issued frequently asked questions (FAQs) addressing the limitation on the deduction for business interest expense under Code Sec. 163(j). The FAQs provide general information to taxpayers and tax professionals and reflect statutory changes made by the Tax Cuts and Jobs Act, the CARES Act, and the One, Big, Beautiful Bill.

General Information

The FAQs explain the Code Sec. 163(j) limitation, identify taxpayers subject to the limitation, and describe the gross receipts test used to determine whether a taxpayer qualifies as an exempt small business.

Excepted Trades or Businesses

The FAQs address trades or businesses that are excepted from the Code Sec. 163(j) limitation, including electing real property trades or businesses, electing farming businesses, regulated utility trades or businesses, and services performed as an employee.

Determining the Section 163(j) Limitation Amount

The FAQs explain how to calculate the Code Sec. 163(j) limitation, including the definitions of business interest expense and business interest income, the computation of adjusted taxable income, and the treatment of disallowed business interest expense carryforwards.

CARES Act Changes

The FAQs describe temporary modifications to Code Sec. 163(j) made by the CARES Act, including increased adjusted taxable income percentages and special rules and elections applicable to partnerships and partners for taxable years beginning in 2019 and 2020.

One, Big, Beautiful Bill Changes

The FAQs outline amendments made by the One, Big, Beautiful Bill, including changes affecting the calculation of adjusted taxable income for tax years beginning after Dec. 31, 2024, and the application of Code Sec. 163(j) before interest capitalization provisions for tax years beginning after Dec. 31, 2025.

FS-2025-9

IR 2025-126

The IRS issued frequently asked questions (FAQs) addressing updates to the Premium Tax Credit. The FAQs clarified changes to repayment rules, the removal of outdated provisions and how the IRS will treat updated guidance.

The IRS issued frequently asked questions (FAQs) addressing updates to the Premium Tax Credit. The FAQs clarified changes to repayment rules, the removal of outdated provisions and how the IRS will treat updated guidance.

Removal of Repayment Limitations

For tax years beginning after December 31, 2025, limitations on the repayment of excess advance payments of the Premium Tax Credit no longer applied.

Previously Applicable Provisions

Premium Tax Credit rules that applied only to tax years 2020 and 2021 were no longer applicable and were removed from the FAQs.

Updated FAQs

The FAQs were updated throughout for minor style clarifications, topic updates and question renumbering.

Reliance on FAQs

The FAQs were issued to provide general information to taxpayers and tax professionals and were not published in the Internal Revenue Bulletin.

Legal Authority

If an FAQ was inconsistent with the law as applied to a taxpayer’s specific circumstances, the law controlled the taxpayer’s tax liability.

Penalty Relief

Taxpayers who reasonably and in good faith relied on the FAQs were not subject to penalties that included a reasonable cause standard for relief, to the extent reliance resulted in an underpayment of tax.

FS-2025-10

IR 2025-127

The IRS issued guidance providing penalty relief to individuals and corporations that make a valid Code Sec. 1062 election to defer taxes on gains from the sale of qualified farmland. Taxpayers who opt to pay their applicable net tax liability in four annual installments will not be penalized under sections 6654 or 6655 for underpaying estimated taxes in the year of the sale.

The IRS issued guidance providing penalty relief to individuals and corporations that make a valid Code Sec. 1062 election to defer taxes on gains from the sale of qualified farmland. Taxpayers who opt to pay their applicable net tax liability in four annual installments will not be penalized under sections 6654 or 6655 for underpaying estimated taxes in the year of the sale.

The relief permits these taxpayers to exclude 75 percent of the deferred tax from their estimated tax calculations for that year. However, 25 percent of the tax liability must still be paid by the return due date for the year of the sale. The IRS emphasized that this waiver applies automatically if the taxpayer qualifies and does not self-report the penalty.

Taxpayers who have already reported a penalty or receive an IRS notice can request abatement by filing Form 843, noting the relief under Notice 2026-3. This measure aligns with the policy objectives of the One, Big, Beautiful Bill Act of 2025, which introduced section 1062 to support farmland continuity by facilitating sales to qualified farmers. The IRS also plans to update relevant forms and instructions to reflect the changes, ensuring clarity for those seeking relief.

Notice 2026-3

The IRS has extended the transition period provided in Rev. Rul. 2025-4, I.R.B. 2025-6, for states administering paid family and medical leave (PFML) programs and employers participating in such programs with respect to the portion of medical leave benefits a state pays to an individual that is attributable to employer contributions, for an additional year.

The IRS has extended the transition period provided in Rev. Rul. 2025-4, I.R.B. 2025-6, for states administering paid family and medical leave (PFML) programs and employers participating in such programs with respect to the portion of medical leave benefits a state pays to an individual that is attributable to employer contributions, for an additional year.

The IRS found that states with PMFL statuses have requested that the transition period be extended for an additional year or that the effective date be amended because the required changes cannot occur within the current timeline. For this reason, calendar year 2026 will be regarded as an additional transition period for purposes of IRS enforcement and administration with respect to the following components:

• For medical leave benefits a state pays to an individual in calendar year 2026,with respect to the portion of the medical leave benefits attributable to employer contributions, (a) a state or an employer is not required to follow the income tax withholding and reporting requirements applicable to third-party sick pay, and (b)consequently, a state or employer would not be liable for any associated penalties under Code Sec. 6721 for failure to file a correct information return or under Code Sec. 6722 for failure to furnish a correct payee statement to the payee; and

• For medical leave benefits a state pays to an individual in calendar year 2026, with respect to the portion of the medical leave benefits attributable to employer contributions, (a) a state or an employer is not required to comply with § 32.1 and related Code sections (as well as similar requirements under § 3306) during thecalendar year; (b) a state or an employer is not required to withhold and pay associatedtaxes; and (c) consequently, a state or employer would not be liable for any associated penalties.

This notice is effective for medical leave benefits paid from states to individuals during calendar year 2026.

Notice 2026-6

Addressing health care will be the key legislative priority a 2026 starts, leaving little chance that Congress will take up any significant tax-related legislation in the coming election year, at least until health care is taken care of.

Addressing health care will be the key legislative priority a 2026 starts, leaving little chance that Congress will take up any significant tax-related legislation in the coming election year, at least until health care is taken care of.

Top legislative staff from the tax writing committees in Congress (House Ways and Means Committee and Senate Finance Committee) were all in basic agreement during a January 7, 2026, panel discussion at the 2026 D.C. Bar Tax Conference that health care would be tackled first.

“I will say that my judgement, and this is not the official party line, by that my judgement is that a deal on health care is going to have to unlock before there’s a meaningful tax vehicle,” Andrew Grossman, chief tax counsel for the House Ways And Means Committee Democratic staff, said, adding that it is difficult to see Democratic members working on tax extenders and other provisions when 15 million are about to lose their health insurance.

Sean Clerget, chief tax counsel for the Ways and Means GOP staff, added that “our view’s consistent with what Andrew [Grossman] said, adding that committee chairman Jason Smith (R-Mo.) “would be very open to having a tax vehicle whether or not there’s a health care deal, but obviously we need bipartisan cooperation to move something like that. And so, Andrew’s comments are sort of very important to the outlook on this.”

Even some of the smaller items that may have bipartisan support could be held up as the parties work to find common ground on health care legislation.

“It’s hard to see some of the smaller tax items that are hanging out there getting over the finish line without a deal on health, Sarah Schaefer, chief tax advisor to the Democratic staff of the Senate Finance Committee, said. “And I think our caucus will certainly hold out for that.”

Randy Herndon, deputy chief tax counsel for the Finance Committee Republican staff, added that he agreed with Clerget and said that Finance Committee Chairman Mike Crapo (R-Idaho) would be “open to a tax vehicle absent any health care deal, but understand, again, the bipartisan cooperation that would be required.”

No Planned OBBBA Part 2

Clerget said that currently there no major reconciliation bill on the horizon to follow up on the One Big Beautiful Bill Act, but “I’ve always thought that if there were to be a second reconciliation bill, it would need to be very narrow for a very specific purpose, rather than a large kind of open, multicommittee, big bill.”

Herndon added that Chairman Crapo’s “current focus is on pursuing potential bipartisan priorities in the Finance Committee jurisdiction,” noting that a lot of the GOP priorities were addressed in the OBBBA “and our members are very invested in seeing that through the implementation process.”

Of the things we can expect the committees to work on, Herndon identified areas ripe for legislative activity in the coming year, including crypto and tax administration bills and other focused issues surrounding affordability, but GOP members will more be paying attention to the implementation of OBBBA.

Schaefer said that Finance Committee Democrats will maintain a focus on the child tax credit as well as working to get reinstated clean energy credits that were allowed to expire.

Clerget said that of the things that could happen on this legislative calendar is on the taxation of digital assets, stating that “I think there’s a lot of interest in establishing clear tax rules in the digital asset space.… I think we have a good prospect of getting bipartisan cooperation on the tax side of digital assets.”

He also said there has been a lot of bipartisan cooperation on tax administration in 2025, suggesting that the parties could keep working on improving the taxpayer experience in 2026.

By Gregory Twachtman, Washington News Editor

The Fifth Circuit Court of Appeals held that a "limited partner" in Code Sec. 1402(a)(13) is a limited partner in a state-law limited partnership that has limited liability. The court rejected the "passive investor" rule followed by the IRS and the Tax Court in Soroban Capital Partners LP (Dec. 62,310).

The Fifth Circuit Court of Appeals held that a "limited partner" in Code Sec. 1402(a)(13) is a limited partner in a state-law limited partnership that has limited liability. The court rejected the "passive investor" rule followed by the IRS and the Tax Court in Soroban Capital Partners LP (Dec. 62,310).

Background

A limited liability limited partnership operated a business consulting firm, and was owned by several limited partners and one general partner. For the tax years at issue, the limited partnership allocated all of its ordinary business income to its limited partners. Based on the limited partnership tax exception in Code Sec. 1402(a)(13), the limited partnership excluded the limited partners’ distributive shares of partnership income or loss from its calculation of net earnings from self-employment during those years, and reported zero net earnings from self-employment.

The IRS adjusted the limited partnership's net earnings from self-employment, and determined that the distributive share exception in Code Sec. 1402(a)(13) did not apply because none of the limited partnership’s limited partners counted as "limited partners" for purposes of the statutory exception. The Tax Court upheld the adjustments, stating it was bound by Soroban.

Limited Partners and Self Employment Tax

Code Sec. 1402(a)(13) excludes from a partnership's calculation of net earnings from self-employment the distributive share of any item of income or loss of a limited partner, as such, other than guaranteed payments in Code Sec. 707(c) to that partner for services actually rendered to or on behalf of the partnership to the extent that those payments are established to be in the nature of remuneration for those services.

In Soroban, the Tax Court determined that Congress had enacted Code Sec. 1402(a)(13) to exclude earnings from a mere investment, and intended for the phrase “limited partners, as such” to refer to passive investors. Thus, the Tax Court there held that the limited partner exception of Code Sec. 1402(a)(13) did not apply to a partner who is limited in name only, and that determining whether a partner is a limited partner in name only required an inquiry into the limited partner's functions and roles.

Passive Investor Treatment

Here, the Fifth Circuit rejected the interpretation that "limited partner" in Code Sec. 1402(a)(13) refers only to passive investors in a limited partnership. Reviewing the text of the statute, the court determined that dictionaries at the time of Code Sec. 1402(a)(13)’s enactment defined "limited partner" as a partner in a limited partnership that has limited liability and is not bound by the obligations of the partnership. Also, longstanding interpretation by the Social Security Administration and the IRS had confirmed that a "limited partner" is a partner with limited liability in a limited partnership. IRS partnership tax return instructions had for decades defined "limited partner" as one whose potential personal liability for partnership debts was limited to the amount of money or other property that the partner contributed or was required to contribute to the partnership.

The Fifth Circuit determined that the interpretation of "limited partner" as a mere "passive investor" in a limited partnership is wrong. The court stated that the passive-investor interpretation makes little sense of the "guaranteed payments" clause in Code Sec. 1402(a)(13), and that the text of the statute contemplates that "limited partners" would provide actual services to the partnership and thus participate in partnership affairs. A strict passive-investor interpretation that defined "limited partner" in a way that prohibited him from providing any services to the partnership would make the "guaranteed payments" clause superfluous.

Further, the court stated that had Congress wished to only exclude passive investors from the tax, it could have easily written the exception to do so, but it did not do so in Code Sec. 1402(a)(13). Additionally, the passive investor interpretation would require the IRS to balance an infinite number of factors in performing its "functional analysis test," and would make it more complicated for limited partners to determine their tax liability.

The Fifth Circuit rejected the Tax Court's conclusion in Soroban that by adding the words "as such" in Code Sec. 1402(a)(13), Congress had made clear that the limited partner exception applies only to a limited partner who is functioning as a limited partner. Adding "as such" did not restrict or narrow the class of limited partners, and does not upset the ordinary meaning of "limited partner."

Vacating and remanding an unreported Tax Court opinion.

Sirius Solutions, L.L.L.P., CA-5

On April 28, 2021, the White House released details on President Biden’s new $1.8 trillion American Families Plan. The proposal follows the already passed $1.9 trillion American Rescue Plan Act and the recently proposed $2.3 trillion infrastructure-focused American Jobs Plan. The details were released in advance of President Biden’s address to a joint session of Congress.

On April 28, 2021, the White House released details on President Biden’s new $1.8 trillion American Families Plan. The proposal follows the already passed $1.9 trillion American Rescue Plan Act and the recently proposed $2.3 trillion infrastructure-focused American Jobs Plan. The details were released in advance of President Biden’s address to a joint session of Congress.

The plan includes many provisions that would make good on the President’s campaign promises. The proposal would provide universal preschool to three and four year-olds, two free years of community college, and free tuition for certain universities specializing in serving underrepresented students. The plan would also invest in teacher and child care education, provide free or lower cost child care to lower income families, expand paid leave programs, and improve the quality of student lunch programs. It would also establish automatic adjustments to unemployment insurance, depending upon economic conditions.

Personal Tax Breaks Extended

The proposal would also extend tax benefits already signed into law under the American Rescue Plan Act. This includes:

• extending enhanced premium tax credits and making premium reductions permanent;
• extending the enhanced child tax credit through 2025 (currently a fully refundable $3,000 per child ($3,600 for a child under age six) for 2021 only);
• permanently extending the enhancements of the child and dependent care tax credit, which increase the amount of the credit as well as the incomes at which the credit is phased out;
• permanently extending the increased earned income tax credit for taxpayers without children.

Tax Changes, TCJA Rollback

On the campaign trail, President Biden promised to increase taxes on both corporations and higher-income individuals. While the provisions of the American Jobs Plan are largely funded through a proposed increase in the corporate tax rate from 21% to 28%, the provisions of his American Families Plan are funded by the promised increases to individual taxes.

The proposal would increase the top tax rate on individuals to 39.6 percent from the current rate of 37 percent. This would return the tax rate on the highest bracket of income to where it was before the Tax Cuts and Jobs Act took effect in 2018.

The proposal would also increase the tax rate on capital gains and dividends for households making over $1 million, to match the 39.6 percent rate on income. For 2021, capital gains and certain qualified dividends are taxed at 20 percent for joint filers with taxable income of $496,000 or more.

The plan proposes to eliminate the tax-free step-up in basis on inherited property where the gain would be in excess of $1 million (up to $2.5 million in the case of a couple using existing real estate exemptions. The plan also eliminates the carried interest loophole that allows hedge fund partners to pay tax on income at capital gains rates. The plan would also limit a provision allowing for tax deferral on property exchanges, permanently extend the limitation on excess business losses, and ensure that higher income taxpayers cannot avoid the 3.8 percent Medicare tax.

The plan also provides increased funding for the IRS to improve enforcement, specifically to ensure that higher income taxpayers are unable to avoid proper payment of taxes. While the White House estimates that this will produce an additional $700 billion in revenue over 10 years, many believe this to be a vast overestimate.

Notably absent from the plan is an increase to the cap on the deduction of state and local taxes. The Tax Cuts and Jobs Act set a $10,000 limit for the deduction, but many lawmakers, particularly those representing higher tax states like New York and California, have been pressing to increase the limit or completely eliminate it

Next Steps?

It is uncertain when Congress may take up the process of proposing legislation carrying out the American Families Plan. President Biden has indicated his willingness to negotiate on any proposals he makes. However, the chilly reception to his American Jobs Plan does not indicate a smooth process to get a vote on a legislative package for the infrastructure proposal, let alone passage with razor-thin majorities in both chambers of Congress. With many lawmakers indicated that they want to work on infrastructure before moving on to other proposals, the process from proposal to law could stretch out for months.

The IRS announced that it had started issuing refunds to eligible taxpayers who paid taxes on 2020 unemployment compensation that was excluded from taxable income by the recently enacted American Rescue Plan (ARP) (P.L. 117-2).

The IRS announced that it had started issuing refunds to eligible taxpayers who paid taxes on 2020 unemployment compensation that was excluded from taxable income by the recently enacted American Rescue Plan (ARP) ( P.L. 117-2).

Unemployment compensation is taxable income, but the ARP excludes $10,200 in unemployment compensation from the income used to calculate the amount of taxes owed. The $10,200 per person exclusion applies to taxpayers who are single or married filing jointly, with modified adjusted gross income of less than $150,000. The $10,200 is the amount of income exclusion, not the amount of the refund itself.

The IRS has identified over 10 million taxpayers who filed their tax returns prior to the ARP becoming law in March, and is reviewing past returns to determine the correct taxable amount of unemployment compensation and tax. This could potentially result in a refund, reduced balance due, or with no refund being owed.

The first phase of adjustments is being made for single taxpayers who had the simplest tax returns, such as those filed by taxpayers who did not claim children or any refundable tax credits. Notices explaining the corrections will be sent to taxpayers, and are expected to reach them within 30 days of the correction being made.

The IRS stated that it will issue refunds by direct deposit to taxpayers who provided their bank account information on their returns. Alternatively, refunds will be mailed as a paper check to the taxpayer’s address of record.

These refunds will be subject to normal offset rules, such as past-due federal tax, state income tax, state unemployment compensation debts, child support, spousal support or certain federal nontax debts, such as student loans. The IRS will send separate notices to those taxpayers whose refunds could be offset to settle unpaid debts.

Further, corrections to any Earned Income Tax Credit (EITC) without qualifying children and the recovery rebate credit are being made automatically as part of this process. However, some taxpayers may be eligible for certain income-based tax credits that were not claimed on their original return. The IRS also reminded taxpayers to file an amended tax return if the revised adjusted gross income amount makes them eligible for additional benefits.

A safe harbor is available for certain Paycheck Protection Program (PPP) loan recipients who relied on prior IRS guidance and did not deduct eligible business expenses. These taxpayers may elect to deduct the expenses for their first tax year following their 2020 tax year, rather than filing an amended return or administrative adjustment request for 2020.

A safe harbor is available for certain Paycheck Protection Program (PPP) loan recipients who relied on prior IRS guidance and did not deduct eligible business expenses. These taxpayers may elect to deduct the expenses for their first tax year following their 2020 tax year, rather than filing an amended return or administrative adjustment request for 2020.

The IRS had initially determined that businesses whose PPP loans were forgiven or expected to be forgiven could not deduct business expenses paid for by the loan. However, the Consolidated Appropriations Act of 2021 ( P.L. 116-260), enacted on December 27, 2020, subsequently permitted taxpayers to deduct these expenses.

Safe Harbor Eligibility

To be eligible for the safe harbor, the taxpayer must have received an original PPP covered loan and filed a federal income tax return or information return for the 2020 tax year on or before December 27, 2020. The taxpayer must have paid or incurred original eligible expenses during the taxpayer’s 2020 tax year that the taxpayer did not deduct because:

• the expenses resulted in forgiveness of the original PPP covered loan; or
• the taxpayer reasonably expected at the end of the 2020 tax year that the expenses would result in forgiveness.

Electing the Safe Harbor

A taxpayer elects the safe harbor by attaching a statement to a timely, including extensions, federal income tax return or information return for the taxpayer’s first tax year following the 2020 tax year in which the original eligible expenses were paid or incurred. The statement must include:

• the taxpayer’s name, address, and social security number or taxpayer identification number;
• a statement that the taxpayer is applying the safe harbor provided by section 3.01 of Revenue Procedure 2021-20;
• the amount and date of disbursement of the taxpayer’s original PPP loan; and
• a list, including descriptions and amounts, of the original eligible expenses.

Certain Expenses and Loans Not Covered

The safe harbor applies only to original eligible expenses, and not to additional expenses that were added by the Consolidated Appropriations Act. The safe applies only to original PPP loans. It does not apply to PPP second draw loans.

Individuals may use two special procedures to file returns for 2020 that allow them to receive advance payments of the 2021 child credit and the 2021 Recovery Rebate Credit.

Individuals may use two special procedures to file returns for 2020 that allow them to receive advance payments of the 2021 child credit and the 2021 Recovery Rebate Credit. Under the procedures:

• individuals who are not required to file returns for 2020 can use a simplified federal income tax return filing procedure; and
• individuals with zero adjusted gross income (AGI) for 2020 can file electronic returns by entering "$1" in several fields.

Simplified Return Procedures

Individuals may file simplified 2020 returns electronically or on paper if they have not filed and are not required to file 2020 returns. The simplified procedures apply to Forms 1040, 1040-SR and 1040-NR.

The individual should write "Rev. Proc. 2021-24" at the top of a paper return. The procedure includes detailed instructions for providing identification, income and direct deposit information.

Zero AGI

Many filing systems for electronic returns will not accept returns that report zero AGI. To file an electronic return, in addition to all other information required to be entered on Form 1040, Form 1040-SR, or Form 1040-NR, an individual with no AGI should report:

• $1 as taxable interest on line 2b of the form;
• $1 as total income on line 9 of the form; and
• $1 as AGI on line 11 of the form.

Filers of Form 1040-NR with no AGI should also report $1 as itemized deductions on lines 7 and 8 of Schedule A (Form 1040-NR) and line 12 of Form 1040-NR.

Returns Must Be Accurate

Simplified returns and zero-AGI electronic returns are federal income tax returns for all purposes. Thus, the individual must properly sign the return under penalties of perjury. The returns must also provide accurate information. However, the IRS will not challenge the accuracy of income items reported by taxpayers using these special procedures.

Individuals Who Filed 2020 Returns

Individuals who have already filed their 2020 returns do not have to do anything further to:

• receive advance child credit payments for an eligible child shown on that return;
• receive a third-round Economic Impact Payment (EIP) for the 2021 recovery rebate credit that is attributable to a dependent shown on that return; or
• claim a previously claimed 2020 recovery rebate credit and additional 2020 recovery rebate credit for themselves and for each eligible qualifying child.

Similarly, an individual who filed a federal income tax return for 2019, including by entering information in the "Non-Filers: Enter Information Here" tool on the IRS website, also do not need to file any additional forms of contact the IRS in order to receive advance child credit payments for a qualifying child shown on that return. An individual who did not receive EIPs for the full amount of the 2020 Recovery Rebate Credits may claim them by filing a 2020 federal income tax return.

U.S. Territory Residents

The simplified return and zero-AGI procedures do not apply to residents of American Samoa, Guam, the Commonwealth of the Northern Mariana Islands, the Commonwealth of Puerto Rico, or the U.S. Virgin Islands.

• Residents of Puerto Rico may be eligible to claim the child tax credit from the IRS under procedures to be announced at a later date, but they are not eligible to receive advance child tax credit payments.
• Residents of other U.S. territories should contact their local territory tax agency for additional information about the child tax credit and advance child tax credit payments, third-round economic impact payments, the 2020 recovery rebate credit, and the additional 2020 recovery rebate credit.

The IRS has postponed the federal tax filing and payment deadlines, and associated interest, penalties, and additions to tax, for certain taxpayers who have been adversely affected by the Coronavirus Disease 2019 (COVID-19) pandemic. 

The IRS has postponed the federal tax filing and payment deadlines, and associated interest, penalties, and additions to tax, for certain taxpayers who have been adversely affected by the Coronavirus Disease 2019 (COVID-19) pandemic. For individual taxpayers, the notice postpones to May 17, 2021, certain deadlines that would normally fall on April 15, 2021, such as the time for making IRA contributions and for filing federal income tax refund claims. The notice also extends the time for return preparers to participate in the Annual Filing Season Program for the 2021 calendar year.

The IRS has released this notice as a follow-up to a previous announcement on March 17 that the federal income tax filing due date for individuals for the 2020 tax year was extended from April 15, 2021, to May 17, 2021. This notice provides details on the additional tax deadlines which have been postponed until May 17.

Federal Tax Returns and Tax Payments
For an affected taxpayer, the due date for filing federal income tax returns in the Form 1040 series having an original due date of April 15, 2021, and for making federal income tax payments in connection with one of these forms, is automatically postponed to May 17, 2021. Affected taxpayers do not have to file any form, including Form 4868, Application for Automatic Extension of Time to File U.S. Individual Income Tax Return, to obtain this relief.

This relief includes the filing of all schedules, returns, and other forms that are filed as attachments to the Form 1040 series, or are required to be filed by the due date of the Form 1040 series, including, for example, Schedule H, Household Employment Taxes, and Schedule SE, Self-Employment Tax, as well as:

• Form 965-A (Individual Report of Net 965 Tax Liability);
• Form 3520 (Annual Return to Report Transactions with Foreign Trusts and Receipt of Certain Foreign Gifts);
• Form 5329 (Additional Taxes on Qualified Plans (Including IRAs) and Other Tax-Favored Accounts);
• Form 5471 (Information Return of U.S. Persons With Respect to Certain Foreign Corporations);
• Form 8621 (Information Return by a Shareholder of a Passive Foreign Investment Company or Qualified Electing Fund);
• Form 8858 (Information Return of U.S. Persons With Respect to Foreign Disregarded Entities (FDEs) and Foreign Branches (FBs));
• Form 8865 (Return of U.S. Persons With Respect to Certain Foreign Partnerships);
• Form 8915-E (Qualified 2020 Disaster Retirement Plan Distributions and Repayments); and
• Form 8938 (Statement of Specified Foreign Financial Assets).

Additionally, elections that are made or required to be made on a timely filed Form 1040 series (or attachment to such form) will be timely made if filed on such form or attachment, as appropriate, on or before May 17, 2021.

Claims for Refund
Individuals with a period of limitations to file a claim for credit or refund of federal income tax expiring on or after April 15, 2021, and before May 17, 2021, have until May 17, 2021, to file those claims for credit or refund. This postponement is limited to claims for credit or refund properly filed on the Form 1040 series or on a Form 1040-X. As a result of this postponement, the period beginning on April 15, 2021, and ending on May 17, 2021, will be disregarded in determining whether the filing of those claims is timely.

IRA and HSA Contributions
The postponement also automatically postpones to May 17, 2021, the time for affected taxpayers to make 2020 contributions to their individual retirement arrangements (IRAs and Roth IRAs), health savings accounts (HSAs), Archer Medical Savings Accounts (Archer MSAs), and Coverdell education savings accounts (Coverdell ESAs). It also automatically postpones to May 17, 2021, the time for reporting and payment of the 10-percent additional tax on amounts includible in gross income from 2020 distributions from IRAs or workplace-based retirement plans.

For affected taxpayers that must file forms in the Form 5498 series, the due date for filing and furnishing the Form 5498 series is postponed to June 30, 2021. The period beginning on the original due date of those forms and ending on June 30, 2021, will be disregarded in the calculation of any penalty for failure to file those forms.

Estimated Tax Payments, Other Items Not Extended
The postponement also automatically postpones to May 17, 2021, the time for affected taxpayers to make 2020 contributions to their individual retirement arrangements (IRAs and Roth IRAs), health savings accounts (HSAs), Archer Medical Savings Accounts (Archer MSAs), and Coverdell education savings accounts (Coverdell ESAs). It also automatically postpones to May 17, 2021, the time for reporting and payment of the 10-percent additional tax on amounts includible in gross income from 2020 distributions from IRAs or workplace-based retirement plans.

The IRS is urging employers to take advantage of the newly-extended employee retention credit (ERC), which makes it easier for businesses that have chosen to keep their employees on the payroll despite challenges posed by COVID-19. The Taxpayer Certainty and Disaster Tax Relief Act of 2020 (Division EE of P.L. 116-260), which was enacted December 27, 2020, made a number of changes to the ERC previously made available under the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) ( P.L. 116-136), including modifying and extending the ERC, for six months through June 30, 2021.

The IRS is urging employers to take advantage of the newly-extended employee retention credit (ERC), which makes it easier for businesses that have chosen to keep their employees on the payroll despite challenges posed by COVID-19. The Taxpayer Certainty and Disaster Tax Relief Act of 2020 (Division EE of P.L. 116-260), which was enacted December 27, 2020, made a number of changes to the ERC previously made available under the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) ( P.L. 116-136), including modifying and extending the ERC, for six months through June 30, 2021.

Eligible employers can now claim a refundable tax credit against the employer share of Social Security tax equal to 70-percent of the qualified wages they pay to employees after December 31, 2020, through June 30, 2021. Qualified wages are limited to $10,000 per employee per calendar quarter in 2021. Thus, the maximum ERC amount available is $7,000 per employee per calendar quarter, for a total of $14,000 in 2021.

Effective January 1, 2021, employers are eligible if they operate a trade or business during January 1, 2021, through June 30, 2021, and experience either:

• a full or partial suspension of the operation of their trade or business during this period because of governmental orders limiting commerce, travel or group meetings due to COVID-19; or
• a decline in gross receipts in a calendar quarter in 2021 where the gross receipts for that calendar quarter are less than 80% of the gross receipts in the same calendar quarter in 2019 (to be eligible based on a decline in gross receipts in 2020, the gross receipts were required to be less than 50-percent of those in the same 2019 calendar quarter).

In addition, effective January 1, 2021, the definition of "qualified wages" for the ERC has been changed:

• For an employer that averaged more than 500 full-time employees in 2019, qualified wages are generally those wages paid to employees that are not providing services because operations were fully or partially suspended or due to the decline in gross receipts.
• For an employer that averaged 500 or fewer full-time employees in 2019, qualified wages are generally those wages paid to all employees during a period that operations were fully or partially suspended or during the quarter that the employer had a decline in gross receipts, regardless of whether the employees are providing services.

The IRS points out that, retroactive to the enactment of the CARES Act on March 27, 2020, the law now allows employers who received Paycheck Protection Program (PPP) loans to claim the ERC for qualified wages that are not treated as payroll costs in obtaining forgiveness of the PPP loan.

PPP Loan Forgiveness

In a recent posting on its webpage (see "Didn’t Get Requested PPP Loan Forgiveness? You Can Claim the Employee Retention Credit for 2020 on the 4th Quarter Form 941"), the IRS has clarified that, under section 206(c) of the 2020 Taxpayer Certainty Act, an employer that is eligible for the ERC can claim the credit even if the employer received a Small Business Interruption Loan under the PPP. Accordingly, eligible employers can claim ERS on any qualified wages that are not counted as payroll costs in obtaining PPP loan forgiveness. Note, however, that any wages that could count toward eligibility for ERC or PPP loan forgiveness can be applied to either program, but not to both programs.

If an employer received a PPP loan and included wages paid in the 2nd and/or 3rd quarter of 2020 as payroll costs in support of an application to obtain forgiveness of the loan (rather than claiming ERC for those wages), and the employer's request for forgiveness was denied, the employer an claim the ERC related to those qualified wages on its 4th quarter 2020 Form 941, Employer's Quarterly Federal Tax Return. An employer can could report on its 4th quarter Form 941 any ERC attributable to health expenses that are qualified wages that it did not include in its 2nd and/or 3rd quarter Form 941.

Employers that choose to use this limited 4th quarter procedure must:

• Add the ERC attributable to these 2nd and/or 3rd quarter qualified wages and health expenses on line 11c or line 13d (as relevant) of their original 4th quarter Form 941 (along with any other ERC for qualified wages paid in the 4th quarter).
• Include the amount of these qualified wages paid during the 2nd and/or 3rd quarter (excluding health plan expenses) on line 21 of its original 4th quarter Form 941 (along with any qualified wages paid in the 4th quarter).
• Enter the same amount on Worksheet 1, Step 3, line 3a (in the 941 Instructions).
• Include the amount of these health plan expenses from the 2nd and/or 3rd quarter on line 22 of the 4th quarter Form 941 (along with any health expenses for the 4th quarter).
• Enter the same amount on Worksheet 1, Step 3, line 3b.

The IRS recognized that it might be difficult to implement these special procedures so late in the timeframe to file 4th quarter returns. Therefore, employers can instead choose the regular process of filing an adjusted return or claim for refund for the appropriate quarter to which the additional ERC relates using Form 941-X.

More Information

For more information on the employee retention credit, the IRS urges taxpayers to visit its "COVID-19-Related Employee Retention Credits: How to Claim the Employee Retention Credit FAQs" webpage (at https://www.irs.gov/newsroom/covid-19-related-employee-retention-credits-how-to-claim-the-employee-retention-credit-faqs).

The IRS has issued guidance clarifying that taxpayers receiving loans under the Paycheck Protection Program (PPP) may deduct their business expenses, even if their PPP loans are forgiven. The IRS previously issued Notice 2020-32 and Rev. Rul. 2020-27, which stated that taxpayers who received PPP loans and had those loans forgiven would not be able to claim business deductions for their otherwise deductible business expenses.

The IRS has issued guidance clarifying that taxpayers receiving loans under the Paycheck Protection Program (PPP) may deduct their business expenses, even if their PPP loans are forgiven. The IRS previously issued Notice 2020-32 and Rev. Rul. 2020-27, which stated that taxpayers who received PPP loans and had those loans forgiven would not be able to claim business deductions for their otherwise deductible business expenses.

The COVID-Related Tax Relief Act of 2020 ( P.L. 116-260) amended the CARES Act ( P.L. 116-136) to clarify that business expenses paid with amounts received from loans under the PPP are deductible as trade or business expenses, even if the PPP loan is forgiven. Further, any amounts forgiven do not result in the reduction of any tax attributes or the denial of basis increase in assets. This change applies to years ending after March 27, 2020.

Notice 2020-32, I.R.B. 2020-21, 83 and Rev. Rul. 2020-27, I.R.B. 2020-50, 1552 are obsoleted.