The U.S. Tax Court lacks jurisdiction over a taxpayer’s appeal of a levy in a collection due process hearing when the IRS abandoned its levy because it applied the taxpayer’s later year overpayments to her earlier tax liability, eliminating the underpayment on which the levy was based. The 8-1 ruling by the Court resolves a split between the Third Circuit and the Fourth and D.C. Circuit.

The U.S. Tax Court lacks jurisdiction over a taxpayer’s appeal of a levy in a collection due process hearing when the IRS abandoned its levy because it applied the taxpayer’s later year overpayments to her earlier tax liability, eliminating the underpayment on which the levy was based. The 8-1 ruling by the Court resolves a split between the Third Circuit and the Fourth and D.C. Circuit.

The IRS determined that taxpayer had a tax liability for 2010 and began a levy procedure. The taxpayer appealed the levy in a collection due process hearing, and then appealed that adverse result in the Tax Court. The taxpayer asserted that she did not have an underpayment in 2010 because her then-husband had made $50,000 of estimated tax payments for 2010 with instructions that the amounts be applied to the taxpayer’s separate 2010 return. The IRS instead applied the payments to the husband’s separate account. While the agency and Tax Court proceedings were pending, the taxpayer filed several tax returns reflecting overpayments, which she wanted refunded to her. The IRS instead applied the taxpayer’s 2013-2016 and 2019 tax overpayments to her 2010 tax debt.

When the IRS had applied enough of the taxpayer’s later overpayments to extinguish her 2010 liability, the IRS moved to dismiss the Tax Court proceeding as moot, asserting that the Tax Court lacked jurisdiction because the IRS no longer had a basis to levy. The Tax Court agreed. The taxpayer appealed to the Third Circuit, which held for the taxpayer that the IRS’s abandonment of the levy did not moot the Tax Court proceedings. The IRS appealed to the Supreme Court, which reversed the Third Circuit.

The Court, in an opinion written by Justice Barrett in which seven other justices joined, held that the Tax Court, as a court of limited jurisdiction, only has jurisdiction under Code Sec. 6330(d)(1) to review a determination of an appeals officer in a collection due process hearing when the IRS is pursuing a levy. Once the IRS applied later overpayments to zero out the taxpayer’s liability and abandoned the levy process, the Tax Court no longer had jurisdiction over the case. Justice Gorsuch dissented, pointing out that the Court’s decision leaves the taxpayer without any resolution of the merits of her 2010 tax liability, and “hands the IRS a powerful new tool to avoid accountability for its mistakes in future cases like this one.”

Zuch, SCt

The Internal Revenue Service collected more than $5.1 trillion in gross receipts in fiscal year 2024. It is the first time the agency broke the $5 trillion mark, according to the 2024 Data Book, an annual publication that reviews IRS activities for the given fiscal year.

The Internal Revenue Service collected more than $5.1 trillion in gross receipts in fiscal year 2024.

It is the first time the agency broke the $5 trillion mark, according to the 2024 Data Book, an annual publication that reviews IRS activities for the given fiscal year. It was an increase over the $4.7 trillion collected in the previous fiscal year.

Individual tax, employment taxes, and real estate and trust income taxes accounted for $4.4 trillion of the fiscal 2024 gross collections, with the balance of $565 billion coming from businesses. The agency issued $120.1 billion in refunds, including $117.6 billion in individual income tax refunds and $428.4 billion in refunds to businesses.

The 2024 Data Book broke out statistics from the pilot year of the Direct File program, noting that 423,450 taxpayers logged into Direct File, with 140,803 using the program, which allows users to prepare and file their tax returns through the IRS website, to have their tax returns filed and accepted by the agency. Of the returns filed, 72 percent received a refund, with approximately $90 million in refunds issued to Direct File users. The IRS had gross collections of nearly $35.3 million (24 percent of filers using Direct File). The rest had a return with a $0 balance due.

Among the data highlighted in this year’s publication were service level improvements.

"The past two filing seasons saw continued improvement in IRS levels of service—one the phone, in person, and online—thanks to the efforts of our workforce and our use of long-term resources provided by Congress," IRS Acting Commissioner Michael Faulkender wrote. "In FY 2024, our customer service representatives answered approximately 20 million live phone calls. At our Taxpayer Assistance Centers around the country, we had more than 2 million contacts, increasing the in-person help we provided to taxpayers nearly 26 percent compared to FY 2023."

On the compliance side, the IRS reported in the 2024 Data Book that for all returns filed for Tax Years 2014 through 2022, the agency "has examined 0.40 percent of individual returns filed and 0.66 percent of corporation returns filed, as of the end of fiscal year 2024."

This includes examination of 7.9 percent of taxpayers filing individual returns reporting total positive incomes of $10 million or more. The IRS collected $29.0 billion from the 505,514 audits that were closed in FY 2024.

By Gregory Twachtman, Washington News Editor

IR-2025-63

The IRS has released guidance listing the specific changes in accounting method to which the automatic change procedures set forth in Rev. Proc. 2015-13, I.R.B. 2015- 5, 419, apply. The latest guidance updates and supersedes the current list of automatic changes found in Rev. Proc. 2024-23, I.R.B. 2024-23.

The IRS has released guidance listing the specific changes in accounting method to which the automatic change procedures set forth in Rev. Proc. 2015-13, I.R.B. 2015- 5, 419, apply. The latest guidance updates and supersedes the current list of automatic changes found in Rev. Proc. 2024-23, I.R.B. 2024-23.

Significant changes to the list of automatic changes made by this revenue procedure to Rev. Proc. 2024-23 include:

• (1) Section 6.22, relating to late elections under § 168(j)(8), § 168(l)(3)(D), and § 181(a)(1), is removed because the section is obsolete;
• (2) The following paragraphs, relating to the § 481(a) adjustment, are clarified by adding the phrase “for any taxable year in which the election was made” to the second sentence: (a) Paragraph (2) of section 3.07, relating to wireline network asset maintenance allowance and units of property methods of accounting under Rev. Proc. 2011-27; (b) Paragraph (2) of section 3.08, relating to wireless network asset maintenance allowance and units of property methods of accounting under Rev. Proc. 2011-28; and (c) Paragraph (3)(a) of section 3.11, relating to cable network asset capitalization methods of accounting under Rev. Proc. 2015-12;
• (3) Section 6.04, relating to a change in general asset account treatment due to a change in the use of MACRS property, is modified to remove section 6.04(2)(b), providing a temporary waiver of the eligibility rule in section 5.01(1)(f) of Rev. Proc. 2015-13, because the provision is obsolete;
• (4) Section 6.05, relating to changes in method of accounting for depreciation due to a change in the use of MACRS property, is modified to remove section 6.05(2) (b), providing a temporary waiver of the eligibility rule in section 5.01(1)(f) of Rev. Proc. 2015-13, because the provision is obsolete;
• (5) Section 6.13, relating to the disposition of a building or structural component (§ 168; § 1.168(i)-8), is clarified by adding the parenthetical “including the taxable year immediately preceding the year of change” to sections 6.13(3)(b), (c), (d), and (e), regarding certain covered changes under section 6.13;
• (6) Section 6.14, relating to dispositions of tangible depreciable assets (other than a building or its structural components) (§ 168; § 1.168(i)-8), is clarified by adding the parenthetical “including the taxable year immediately preceding the year of change” to sections 6.14(3)(b), (c), (d), and (e), regarding certain covered changes under section 6.14; June 9, 2025 1594 Bulletin No. 2025–24;
• (7) Section 7.01, relating to changes in method of accounting for SRE expenditures, is modified as follows. First, to remove section 7.01(3)(a), relating to changes in method of accounting for SRE expenditures for a year of change that is the taxpayer’s first taxable year beginning after December 31, 2021, because the provision is obsolete. Second, newly redesignated section 7.01(3)(a) (formerly section 7.01(3)(b)) is modified to remove the references to a year of change later than the first taxable year beginning after December 31, 2021, because the language is obsolete;
• (8) Section 12.14, relating to interest capitalization, is modified to provide under section 12.14(1)(b) that the change under section 12.14 does not apply to a taxpayer that wants to change its method of accounting for interest to apply either: (1) current §§ 1.263A-11(e)(1)(ii) and (iii); or (2) proposed §§ 1.263A-8(d)(3) and 1.263A-11(e) and (f) (REG-133850-13), as published on May 15, 2024 (89 FR 42404) and corrected on July 24, 2024 (89 FR 59864);
• (9) Section 15.01, relating to a change in overall method to an accrual method from the cash method or from an accrual method with regard to purchases and sales of inventories and the cash method for all other items, is modified by removing the first sentence of section 15.01(5), disregarding any prior overall accounting method change to the cash method implemented using the provisions of Rev. Proc. 2001-10, as modified by Rev. Proc. 2011- 14, or Rev. Proc. 2002-28, as modified by Rev. Proc. 2011-14, for purposes of the eligibility rule in section 5.01(e) of Rev. Proc. 2015-13, because the language is obsolete;
• (10) Section 15.08, relating to changes from the cash method to an accrual method for specific items, is modified to add new section 15.08(1)(b)(ix) to provide that the change under section 15.08 does not apply to a change in the method of accounting for any foreign income tax as defined in § 1.901-2(a);
• (11) Section 15.12, relating to farmers changing to the cash method, is clarified to provide that the change under section 15.12 is only applicable to a taxpayer’s trade or business of farming and not applicable to a non-farming trade or business the taxpayer might be engaged in;
• (11) Section 12.01, relating to certain uniform capitalization (UNICAP) methods used by resellers and reseller-producers, is modified as follows. First, to provide that section 12.01 applies to a taxpayer that uses a historic absorption ratio election with the simplified production method, the modified simplified production method, or the simplified resale method and wants to change to a different method for determining the additional Code Sec. 263A costs that must be capitalized to ending inventories or other eligible property on hand at the end of the taxable year (that is, to a different simplified method or a facts-and-circumstances method). Second, to remove the transition rule in section 12.01(1)(b)(ii)(B) because this language is obsolete;
• (12) Section 15.13, relating to nonshareholder contributions to capital under § 118, is modified to require changes under section 15.13(1)(a)(ii), relating to a regulated public utility under § 118(c) (as in effect on the day before the date of enactment of Public Law 115-97, 131 Stat. 2054 (Dec. 22, 2017)) (“former § 118(c)”) that wants to change its method of accounting to exclude from gross income payments or the fair market value of property received that are contributions in aid of construction under former § 118(c), to be requested under the non-automatic change procedures provided in Rev. Proc. 2015- 13. Specifically, section 15.13(1)(a)(i), relating to a regulated public utility under former § 118(c) that wants to change its method of accounting to include in gross income payments received from customers as connection fees that are not contributions to the capital of the taxpayer under former § 118(c), is removed. Section 15.13(1)(a)(ii), relating to a regulated public utility under former § 118(c) that wants to change its method of accounting to exclude from gross income payments or the fair market value of property received that are contributions in aid of construction under former § 118(c), is removed. Section 15.13(2), relating to the inapplicability of the change under section 15.13(1) (a)(ii), is removed. Section 15.13(1)(b), relating to a taxpayer that wants to change its method of accounting to include in gross income payments or the fair market value of property received that do not constitute contributions to the capital of the taxpayer within the meaning of § 118 and the regulations thereunder, is modified by removing “(other than the payments received by a public utility described in former § 118(c) that are addressed in section 15.13(1)(a)(i) of this revenue procedure)” because a change under section 15.13(1)(a)(i) may now be made under newly redesignated section 15.13(1) of this revenue procedure;
• (13) Section 16.08, relating to changes in the timing of income recognition under § 451(b) and (c), is modified as follows. First, section 16.08 is modified to remove section 16.08(5)(a), relating to the temporary waiver of the eligibility rule in section 5.01(1)(f) of Rev. Proc. 2015-13 for certain changes under section 16.08, because the provision is obsolete. Second, section 16.08 is modified to remove section 16.08(4)(a)(iv), relating to special § 481(a) adjustment rules when the temporary eligibility waiver applies, because the provision is obsolete. Third, section 16.08 is modified to remove sections 16.08(4)(a) (v)(C) and 16.08(4)(a)(v)(D), providing examples to illustrate the special § 481(a) adjustment rules under section 16.08(4)(a) (iv), because the examples are obsolete;
• (14) Section 19.01, relating to changes in method of accounting for certain exempt long-term construction contracts from the percentage-of-completion method of accounting to an exempt contract method described in § 1.460-4(c), or to stop capitalizing costs under § 263A for certain home construction contracts, is modified by removing the references to “proposed § 1.460-3(b)(1)(ii)” in section 19.01(1), relating to the inapplicability of the change under section 19.01, because the references are obsolete;
• (15) Section 19.02, relating to changes in method of accounting under § 460 to rely on the interim guidance provided in section 8 of Notice 2023-63, 2023-39 I.R.B. 919, is modified to remove section 19.02(3)(a), relating to a change in the treatment of SRE expenditures under § 460 for the taxpayer’s first taxable year beginning after December 31, 2021, because the provision is obsolete;
• (16) Section 20.07, relating to changes in method of accounting for liabilities for rebates and allowances to the recurring item exception under § 461(h)(3), is clarified by adding new section 20.07(1)(b) (ii), providing that a change under section 20.07 does not apply to liabilities arising from reward programs;
• (17) The following sections, relating to the inapplicability of the relevant change, are modified to remove the reference to “proposed § 1.471-1(b)” because this reference is obsolete: (a) Section 22.01(2), relating to cash discounts; (b) Section 22.02(2), relating to estimating inventory “shrinkage”; (c) Section 22.03(2), relating to qualifying volume-related trade discounts; (d) Section 22.04(1)(b)(iii), relating to impermissible methods of identification and valuation of inventories; (e) Section 22.05(1)(b)(ii), relating to the core alternative valuation method; Bulletin No. 2025–24 1595 June 9, 2025 (f) Section 22.06(2), relating to replacement cost for automobile dealers’ parts inventory; (g) Section 22.07(2), relating to replacement cost for heavy equipment dealers’ parts inventory; (h) Section 22.08(2), relating to rotable spare parts; (i) Section 22.09(3), relating to the advanced trade discount method; (j) Section 22.10(1)(b)(iii), relating to permissible methods of identification and valuation of inventories; (k) Section 22.11(2), relating to a change in the official used vehicle guide utilized in valuing used vehicles; (l) Section 22.12(2), relating to invoiced advertising association costs for new vehicle retail dealerships; (m) Section 22.13(2), relating to the rolling-average method of accounting for inventories; (n) Section 22.14(2), relating to sales-based vendor chargebacks; (o) Section 22.15(2), relating to certain changes to the cost complement of the retail inventory method; (p) Section 22.16(2), relating to certain changes within the retail inventory method; and (q) Section 22.17(1)(b)(iii), relating to changes from currently deducting inventories to permissible methods of identification and valuation of inventories; and
• (18) Section 22.10, relating to permissible methods of identification and valuation of inventories, is modified to remove section 22.10(1)(d).

Subject to a transition rule, this revenue procedure is effective for a Form 3115 filed on or after June 9, 2025, for a year of change ending on or after October 31, 2024, that is filed under the automatic change procedures of Rev. Proc. 2015-13, 2015-5 I.R.B. 419, as clarified and modified by Rev. Proc. 2015-33, 2015-24 I.R.B. 1067, and as modified by Rev. Proc. 2021-34, 2021-35 I.R.B. 337, Rev. Proc. 2021-26, 2021-22 I.R.B. 1163, Rev. Proc. 2017-59, 2017-48 I.R.B. 543, and section 17.02(b) and (c) of Rev. Proc. 2016-1, 2016-1 I.R.B. 1 .

Rev. Proc. 2025-23

The Treasury Department and IRS have issued Notice 2025-33, extending and modifying transition relief for brokers required to report digital asset transactions using Form 1099-DA, Digital Asset Proceeds From Broker Transactions. The notice builds upon the temporary relief previously provided in Notice 2024-56 and allows additional time for brokers to comply with reporting requirements.

The Treasury Department and IRS have issued Notice 2025-33, extending and modifying transition relief for brokers required to report digital asset transactions using Form 1099-DA, Digital Asset Proceeds From Broker Transactions. The notice builds upon the temporary relief previously provided in Notice 2024-56 and allows additional time for brokers to comply with reporting requirements.

Reporting Requirements and Transitional Relief

In 2024, final regulations were issued requiring brokers to report digital asset sale and exchange transactions on Form 1099-DA, furnish payee statements, and backup withhold on certain transactions beginning January 1, 2025. Notice 2024-56 provided general transitional relief, including limited relief from backup withholding for certain sales of digital assets during 2026 for brokers using the IRS’s TIN-matching system in place of certified TINs.

Additional Transition Relief from Backup Withholding, Customers Not Previously Classified as U.S. Persons

Under Notice 2025-33, transition relief from backup withholding tax liability and associated penalties is extended for any broker that fails to withhold and pay the backup withholding tax for any digital asset sale or exchange transaction effected during calendar year 2026.

Brokers will not be required to backup withhold for any digital asset sale or exchange transactions effected in 2027 when they verify customer information through the IRS Tax Information Number (TIN) Matching Program. To qualify, brokers must submit a customer's name and tax identification number to the matching service and receive confirmation that the information corresponds with IRS records.

Additionally, penalties that apply to brokers that fail to withhold and pay the full backup withholding due are limited with respect to any decrease in the value of received digital assets between the time of the transaction giving rise to the backup withholding obligation and the time the broker liquidates 24 percent of a customer’s received digital assets.

Finally, the notice also provides additional transition relief for brokers for sales of digital assets effected during calendar year 2027 for certain preexisting customers. This relief applies when brokers have not previously classified these customers as U.S. persons and the customer files contain only non-U.S. residence addresses.

Notice 2025-33

IR-2025-67

The IRS failed to establish that it issued a valid notice of deficiency to an individual under Code Sec. 6212(b). Thus, the Tax Court dismissed the case due to lack of jurisdiction.

The IRS failed to establish that it issued a valid notice of deficiency to an individual under Code Sec. 6212(b). Thus, the Tax Court dismissed the case due to lack of jurisdiction.

The taxpayer filed a petition to seek re-determination of a deficiency for the tax year at issue. The IRS moved to dismiss the petition under Code Sec. 6213(a), contending that it was untimely and that Code Sec. 7502’s "timely mailed, timely filed" rule did not apply. However, the Court determined that the notice of deficiency had not been properly addressed to the individual’s last known address.

Although the individual attached a copy of the notice to the petition, the Court found that the significant 400-day delay in filing did not demonstrate timely, actual receipt sufficient to cure the defect. Because the IRS could not establish that a valid notice was issued, the Court concluded that the 90-day deadline under Code Sec. 6213(a) was never triggered, and Code Sec. 7502 was inapplicable.

L.C.I. Cano, TC Memo. 2025-65, Dec. 62,679(M)

A limited partnership classified as a TEFRA partnership was not entitled to exclude its limited partners’ distributive shares from net earnings from self-employment under Code Sec. 1402(a)(13). The Tax Court found that the individuals materially participated in the partnership’s investment management business and were not acting as limited partners “as such.”

A limited partnership classified as a TEFRA partnership was not entitled to exclude its limited partners’ distributive shares from net earnings from self-employment under Code Sec. 1402(a)(13). The Tax Court found that the individuals materially participated in the partnership’s investment management business and were not acting as limited partners “as such.”

Furthermore, the Court concluded that the limited partners’ roles were indistinguishable from those of active general partners. Accordingly, their distributive shares were includible in net earnings from self-employment under Code Sec. 1402(a) and subject to tax under Code Sec. 1401. The taxpayer’s argument that the partners’ actions were authorized solely through the general partner was found unpersuasive. The Court emphasized substance over form and found that the partners’ conduct and economic relationship with the firm were determinative.

Additionally, the Court held that the taxpayer failed to meet the requirements under Code Sec. 7491(a) to shift the burden of proof because it did not establish compliance with substantiation and net worth requirements. Lastly, the Tax Court also upheld the IRS’s designation of the general partner LLC as the proper tax matters partner under Code Sec. 6231(a)(7)(B), finding that the attempted designation of a limited partner was invalid because an eligible general partner existed and had the legal authority to serve.

Soroban Capital Partners LP, TC Memo. 2025-52, Dec. 62,665(M)

2011 year end tax planning for individuals lacks some of the drama of recent years but can be no less rewarding.  Last year, individual taxpayers were facing looming tax increases as the calendar changed from 2010 to 2011; particularly, increased tax rates on wages, interest and other ordinary income, and higher rates on long-term capital gains and qualified dividends.

Thanks to legislation enacted at the end of 2010, tax rates are stable for 2011 and 2012, although the uncertainty will return as 2013 approaches, as political pressure in Washington builds to do something quickly for the economy. Ordinary income tax rates for individuals currently are 10, 15, 25, 28, 33 and 35 percent; capital gains rates are zero and 15 percent.

President Obama has proposed to preserve these tax rates for taxpayers with income below $200,000 (individuals) and $250,000 (married couples filing jointly) and to raise the rates for taxpayers in these higher-income brackets. If Congress is gridlocked and takes no action, everybody’s rates will rise, but again, not until 2013.

Expiring tax breaks

Unfortunately, not all is quiet on the tax front despite no dramatic rate changes until 2013. There are some specific tax provisions that will terminate at the end of 2011, unless Congress and the President agree to extend them. These include the tuition and fees above-the-line deduction for high education expenses, which can be as high as $4,000. Another expiring provision is the deduction for mortgage insurance premiums, which covers premiums paid for qualified mortgage insurance.

Several other benefits (“extenders”) are also scheduled to expire after 2011:

• The state and local sales tax deduction;
• The classroom expense deduction for teachers;
• Nonbusiness energy credits;
• The exclusion for distributions of up to $100,000 from an IRA to charity;
• A higher deduction limit for charitable contributions of appreciated property for conservation purposes.

Retirement accounts

An old standby that makes sense from year-to-year is maximizing contributions to an IRA. The contribution is deductible up to $5,000 ($6,000 for taxpayers over 50), depending on some specific taxpayer income levels and circumstances. Taxpayers in a 401(k) plan can reduce their income by contributing to their employer plan, for which the limit in 2011 is $16,500.

In 2010, it was particularly important to consider whether to convert a traditional IRA to a Roth IRA, because the income realized on conversion could be recognized over two years. While a conversion continues to be worthwhile to consider (because distributions from a Roth IRA are not taxable), there are no longer any special break to defer a portion of the income from the conversion.

 Alternative minimum tax

The AMT has been “patched” for 2011. The exemptions have been temporarily increased from the normal statutory levels to the “patched” levels:

• From $33,750 to $48,450 for single individuals;
• From $45,000 to  $74,450 for married couples filing jointly and surviving spouses; and
• From $22,500 to $37,335 for married couples filing separately.

The amounts return to the “normal levels” of $33,750/$45,000/$22,500, respectively, in 2012 unless Congress takes action to maintain the patch. Elimination of the AMT is a goal of long-term tax reform, but the loss of revenue has been considered too high in the past. Without  the “patch,” the Congressional Budget Office estimates that an additional 20 million middle-class taxpayers would suddenly become subject to an AMT once designed only for millionaires.

While planning for the AMT is difficult, taxpayers may want to consider realizing AMT income, such as capital gains, in 2011, when the patch is higher, rather than in 2012.

Conclusion

Taxpayers can take advantage of 2011 provisions to realize last-minute tax benefits. Some of these benefits may not be available in 2012.  It is worthwhile to look at these planning opportunities as part of an overall year-year financial strategy.

Many tax benefits for business will either expire at the end of 2011 or become less valuable after 2011. Two of the most important benefits are bonus depreciation and Code Sec. 179 expensing. Both apply to investments in tangible property that can be depreciated. Other sunsetting opportunities might also be considered.

Bonus depreciation

Bonus depreciation is 100 percent for 2011. A business can write-off, in the first year, the entire cost of its investment in new depreciable property. Under current law, bonus depreciation will decrease to 50 percent in 2012 and will terminate after 2012. (These deadlines are extended one year for certain transportation property and property with a longer production period). President Obama has proposed to extend 100 percent bonus depreciation through 2012. Normally, this would have a good chance of being approved, but with the focus on deficit reduction and the linking of tax benefits to tax increases, it is not at all clear what will happen.

So, if a business has income in 2011 and plans to invest in depreciable property, it is worthwhile to consider making that investment in 2011, while the available write-off is at its highest. Under normal depreciation rules, a business will still be able to claim accelerated write-offs, but this may be 50 percent or less of the cost of the property, with the balance written-off over several years, instead of all in one year.

Planning for bonus depreciation is important because the property must satisfy placed-in-service and acquisition date requirements. Property is placed in service when it is in a condition or state of readiness on a regular ongoing basis for a specifically assigned function in a trade or business. The acquisition date rules may vary. For 2011, property is acquired when the taxpayer incurs or pays its cost. This could occur when the property is delivered, but it could also be when title to the property passes. For 2012, property is acquired when the taxpayer takes physical possession of the property.

Code Sec. 179 expensing

Code Sec. 179 expensing (first-year writeoff) has been around for awhile, but at higher amounts more recently. While there is no limit on bonus depreciation, expensing is limited to a statutory amount. For 2011, this amount is $500,000. It is scheduled to drop to $125,000 in 2012 and to $25,000 after 2012 (adjusted for inflation). Moreover, the cap is reduced for the amount of total investment in Code Sec. 179 property. The phaseout threshold is $2 million for 2011, dropping to $500,000 for 2012 and $200,000 for 2013 and subsequent years. For businesses who want to invest in depreciable property, the payoff is definitely greater in 2011. Taxpayers taking advantage of expensing should write off assets that would otherwise have the longest recovery periods.

Other 2011 benefits

Some other important benefits expire at the end of 2011 or become less valuable. A significant benefit in 2011 is the 100 percent exclusion for small business stock. After 2012, the normal exclusion rate will drop to 50 percent, although it has been 75 percent in recent years. The exclusion is based on the year the stock is acquired; the stock must be held for five years before sold and satisfy other requirements.

Another important benefit is the 20 percent research credit. The credit has been extended one year at a time for a long period, so it is likely to be extended again. Nevertheless, until Congress acts, there is some uncertainty for research expenses incurred after 2011.

Conclusion

To maximize the benefits of 2011 year-end tax planning, a business must be proactive in determining what upcoming capital investments might be accelerated into this year and what investments become cost effective because of the immediate tax benefits that they offer. Some business-related tax benefits will be less valuable after 2011; for others, it is not clear what Congress and the administration will do in terms of surprising taxpayers with a year-end tax bill. Please contact this office if you have any questions over how year-end tax strategies that begin now and continue through December can help maximize tax benefits for your business.