L Barton Carson Jr CPA, LLC

About 830,000 taxpayers are having their tax refunds held up due to the move away from paper checks and Democratic leadership on the House Ways and Means Committee is seeking information on what the IRS is doing to expedite the issuance of those refunds.

House Ways and Means Subcommittee on Worker and Family Support Ranking Member Danny Davis (D-Ill.) and Subcommittee on Oversight Ranking Member Terri Sewell (D-Ala.), in a March 9, 2026, letter to IRS Acting Commissioner Scott Bessent, noted that to date 530,000 notices have been sent to individual taxpayers who did not include bank account information on their tax returns and are planning to send another 300,000 notices this week.

“As a result of President Trump’s Executive Order 14247 mandating electronic payments of tax refunds, these taxpayers could face more than a 10-week delay (over 2.5 months) in receiving their refunds by paper check,” the letter states, adding a National Taxpayer Advocate citation stating that more than 10 million individual taxpayers received their refunds by check.

They continued: “Having reviewed the IRS notice and called the IRS phone lines, we learned that there is no simple process for these taxpayers to request an immediate release of their refund by paper check without waiting at least 10 weeks. Effectively, the President, unilaterally through his Executive Order, is causing undue hardship on millions of Americans by delaying their paper refunds for months. This delay is not mandated by the Internal Revenue Code.”

The ranking members ask Bessent a series of questions, including how IRS taxpayers without an online account can apply for a paper check and immediate release of funds; how many notices have been sent and are expected to be released; how many tax payers have exceptions have been successfully filed; and how many paper checks have been mailed to date.

The representatives asked for answers by March 23, 2026.

By Gregory Twachtman, Washington News Editor

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The IRS has issued the luxury car depreciation limits for business vehicles placed in service in 2026 and the lease inclusion amounts for business vehicles first leased in 2026.

Luxury Passenger Car Depreciation Caps

The luxury car depreciation caps for a passenger car placed in service in 2026 limit annual depreciation deductions to:

$12,300 for the first year without bonus depreciation
$20,300 for the first year with bonus depreciation
$19,800 for the second year
$11,900 for the third year
$7,160 for the fourth through sixth year

Depreciation Caps for SUVs, Trucks and Vans

The luxury car depreciation caps for a sport utility vehicle, truck, or van placed in service in 2026 are:

$12,300 for the first year without bonus depreciation
$20,300 for the first year with bonus depreciation
$19,800 for the second year
$11,900 for the third year
$7,160 for the fourth through sixth year

Excess Depreciation on Luxury Vehicles

If depreciation exceeds the annual cap, the excess depreciation is deducted beginning in the year after the vehicle’s regular depreciation period ends.

The annual cap for this excess depreciation is:

$7,160 for passenger cars and
$7,160 for SUVS, trucks, and vans.

Lease Inclusion Amounts for Cars, SUVs, Trucks and Vans

If a vehicle is first leased in 2026, a taxpayer must add a lease inclusion amount to gross income in each year of the lease if its fair market value at the time of the lease is more than:

$62,000 for a passenger car, or
$62,000 for an SUV, truck or van.

The 2026 lease inclusion tables provide the lease inclusion amounts for each year of the lease.

The lease inclusion amount results in a permanent reduction in the taxpayer’s deduction for the lease payments.

Vehicles Exempt from Depreciation Caps and Lease Inclusion Amounts

The depreciation caps and lease inclusion amounts do not apply to:

cars with an unloaded gross vehicle weight of more than 6,000 pounds; or
SUVs, trucks and vans with a gross vehicle weight rating (GVWR) of more than 6,000 pounds.

So taxpayers who want to avoid these limits should "think big."

Rev. Proc. 2026-15

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The IRS has released guidance on the withdrawal of an election to be an excepted trade or business for the Code Sec. 163(j) business interest limitation for the 2022, 2023, and 2024 tax year. The election is made by filing an amended income tax return, amended Form 1065, or administrative adjustment request (AAR) on or before October 15, 2026, or applicable statute of limitation. The withdrawal allows a taxpayer to make depreciation adjustments or a late election not to deduct the additional first-year depreciation (bonus depreciation) for certain property in light of recent legislative changes.

The IRS has released guidance on the withdrawal of an election to be an excepted trade or business for the Code Sec. 163(j) business interest limitation for the 2022, 2023, and 2024 tax year. The election is made by filing an amended income tax return, amended Form 1065, or administrative adjustment request (AAR) on or before October 15, 2026, or applicable statute of limitation. The withdrawal allows a taxpayer to make depreciation adjustments or a late election not to deduct the additional first-year depreciation (bonus depreciation) for certain property in light of recent legislative changes. Guidance is also provided on the early election or revocation of a controlled foreign corporation (CFC) CFC group election.

Background

A taxpayer’s deduction of business interest expenses paid or incurred for the tax year is generally limited under section 163(j) to the taxpayer’s business interest income for that year and 30 percent of the taxpayer’s adjusted taxable income (ATI). The deduction limit does not apply to certain excepted businesses, including an electing real property trade or business, electing farming business, or regulated utility trade or business.

The election applies to the current tax year and all subsequent tax years. The election is irrevocable but may automatically terminate in certain circumstances. An electing real property trade or business or electing farming business that elects out of the section 163(j) limit must depreciate certain property using alternative depreciation system (ADS) and as a result cannot claim bonus depreciation for that property.

Election Withdrawal

An election to be an excepted trade or business for the section 163(j) business interest limit may be withdrawn for the 2022, 2023, and 2024 tax year. The withdrawal is made by attaching a statement to the taxpayer’s amended income tax return, amended Form 1065 , or administrative adjustment request (AAR) on or before October 15, 2026, or applicable statute of limitations per the IRS guidance.

A taxpayer that receives an amended Schedule K-1 as a result of an amended return or Form 1065 should similarly file an amended return, amended Form 1065, or AAR with a similar attached statement. If a taxpayer withdraws an election, the taxpayer will be treated as if the election had never been made.

Depreciation Adjustments

A taxpayer that is withdrawing an excepted trade or business interest election under section 163(j) must determine its depreciation deduction and basis for the property that is affected by the withdrawn election in accordance with Code Sec. 168. A taxpayer that makes the withdrawals may make a late election under Code Sec. 168(k)(7) to opt certain property out of bonus depreciation on the same amended Federal income tax return, amended Form 1065, or AAR filed for withdrawing the section 163(j) excepted trade or business election.

CFC Group Election

A taxpayer that is a designated U.S. person may revoke or make a CFC group election without regard to the 60-month limitation of § 1.163(j)-7(e)(5)(ii) for the first specified period of a specified group beginning after December 31, 2024. A taxpayer that chooses to revoke the election or make a new election must follow all procedures specified in the regulation other than the 60-month limit. In addition, the 60-month limitation applies to subsequent specified periods.

Rev. Proc. 2026-17

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Internal Revenue Service CEO Frank Bisignano highlighted the early successes of the tax provisions in the One Big Beautiful Bill Act before the House Ways and Means Committee while defending or deflecting critical commentary from the panel’s Democratic representatives.

In his opening statement during the March 4, 2026, hearing, Bisignano noted that the tax benefit to individuals under these provisions is “estimated to be $220 billion,” noting key aspects like the no tax on tips, no tax on overtime, and the Trump accounts helping to pave the way to the benefits.

He also highlighted the growth of 43 percent in usage of online tools, which he said is coinciding with a decrease in demand for phone service.

“Our goal is for taxpayers is our transformational efforts to create a seamless customer experience where taxpayers can interact with the IRS with the same ease they expect from the private sector,” Bisignano told the committee.

Bisignano during the hearing framed AI simply as a tool in the technology toolbox and stated that he didn’t simply want to “modernize” IRS systems because all that does is lead to future obsolescence, but framed information technology upgrades as “transforming” the systems to be able to evolve with technology, which “will increase compliance and increase simplification.”

He was put on the defensive on the subject of audit rates, with questions suggesting that the agency is not doing its job in terms of auditing high income and other wealthy taxpayers, which will lead to a greater tax gap.

Bisignano tried to interject that there was a $2 billion settlement reached but was not given an opportunity to expand upon the circumstances around the recovery, as Rep. Mike Thompson (D-Ca.) noted that “fewer audits of wealthy tax cheats and more scrutiny of working families” doesn’t build “trust among the American taxpayers.”

In answering a separate question regarding audit rates, he pushed back on the increase or decrease in audit rates, testifying that there has never been a standard audit rate that has been proven to be the right number and it could be more or less than where things are at now.

Bisignano defended the cutting of the National Treasury Employees Union contract, stating that by statute, federal employees already have “greater benefits that any union in the world can provide for their people,” including pay, health, and other benefits that are guaranteed by law. “So they are losing nothing,” he said.

He also defended the elimination of the Direct File program, citing its lack of utilization and its costs to operate the program, while promoting Free File as “well-received” and a well-used and trusted program.

Bisignano avoided any discussion regarding the IRS turning over taxpayer information to the Department of Homeland Security without proper authorization, noting that litigation on this issue was still ongoing. He confirmed that so far, no one has been fired or disciplined for this unauthorized information transmission.

He also would not commit to opening any of the closed Taxpayer Assistance Centers, noting that the current centers were experiencing increased activity, although he did add that there were no plans to close any of the existing centers.

Adoption Credit Update

Bisignano told the committee that the IRS will be implementing a provision that for tax year 2025, carry forward amounts of the adoption credit for prior years are refundable up to $5,000 per qualifying child, “and the IRS is implementing this policy as expeditiously as possible without disrupting the current filing season.”

He said there is will be information on this published “very soon” and that taxpayers “should continue to claim the credit as directed by the current tax forms and instructions during the tax season, since the IRS is pursuing post-filing remedies to solve this issue.”

By Gregory Twachtman, Washington News Editor

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The IRS has finalized regulations to include unmarked vehicles used by firefighters, members of rescue squads, or ambulance crews in the list of “qualified nonpersonal use vehicles” exempt from the IRC §274(d) substantiation requirements. The final rule adopts, with only minor, non-substantive changes, the text of the proposed regulations (NPRM REG-106595- 22) issued on December 3, 2024. The amendments ensure that specially equipped unmarked vehicles are subject to the same tax treatment as other emergency vehicles used by first responders.

Qualified Nonpersonal Use Vehicles

IRC §274(d) requires that taxpayers satisfy additional substantiation requirements when claiming certain business deductions including the business use of an automobile or other means of transportation. A qualified nonpersonal use vehicle is any vehicle that, by reason of its nature, is not likely to be used more than a de minimis amount for personal purposes. Reg. §1.274-5(k)(2)(ii) provides a list of such vehicles, which includes, in part: ambulances; clearly marked police, fire, public safety officer vehicles; and unmarked police vehicles.

Unmarked Emergency Vehicles

Recently, some municipalities have been providing unmarked vehicles to these first responders as a response to an increase in incidents of vandalism and harassment. These unmarked vehicles are typically equipped with special equipment such as lights and sirens, medical emergency equipment, communication radios, and personal protective equipment. Most fire and emergency response departments retain the title to these unmarked vehicles and have policies that limit the use of the vehicles for personal purposes.

The intent and use of these unmarked vehicles meet the definition of qualified nonpersonal vehicles provided in IRC §274(i). However, prior to the amendments, fire and emergency response departments had to substantiate the time the first responders spent using these unmarked vehicles for work related purposes. Personal use of these vehicles, no matter how minute, was required to be included in that employee’s income.

In addition to adding unmarked rescue to the list of qualified nonpersonal use vehicles provided in Reg. §1.274-5(k)(2)(ii), the amendments add Reg. §1.274-5(k)(7) which provides the definitions for “unmarked firefighter, rescue squad or ambulance crew vehicles”, “firefighter,” and “member of a rescue squad or ambulance crew.”

The amendments apply to tax years beginning on or after the date the final regulations are published in the Federal Register. However, taxpayers may rely on the guidance provided in the proposed regulations until that date.

T.D. 10043

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Proposed regulations under Code Sec. 530A, providing guidance on making an election to open a Trump account, and under Code Sec. 6434, relating to the Trump account contribution pilot program, have been issued. Comments are requested and should be submitted via the Federal eRulemaking Portal (indicate IRS and REG-117270-25 for comments related to Code Sec. 530A or IRS and REG-117002-25 for comments related to Code Sec. 6434). The proposed regulations are proposed to apply on or after January 1, 2026.

Background

Code Sec. 530A, as added by the One Big Beautiful Bill Act (P.L. 119-21) provides for the creation of a Trump account for an eligible individual. A Trump account is subject to certain special rules that do not apply to other types of individual retirement accounts during the growth period, which is the period that begins when an initial Trump account is established and ends on December 31st of the year in which the account beneficiary of the initial Trump account reaches the age of 17. Proposed regulations on the special rules that apply during and after the growth period are reserved and will be proposed at a later date.

In addition, Code Sec. 6434 was added, which provides for a one-time $1,000 pilot program contribution to the Trump account of an eligible child with respect to whom an election is made. The qualifications to be an eligible child are less restrictive than those to be an eligible individual. Finally, Code Sec. 128 allows for employer contributions to a Trump account of an employee or a dependent of an employee. These contributions must be made in accordance with the rules of a Code Sec. 128(c) Trump account contribution program. Guidance on this section is expected to be released in the future.

General Requirements and Election to Open an Account

A Trump account is either (1) an initial Trump account, created or organized by the Treasury Secretary for an eligible individual or (2) a rollover Trump account, which is an account created during the growth period and funded by a qualified rollover contribution from the account beneficiary's existing Trump account. An individual can only have one Trump account containing funds in existence at a time. The written governing instrument of a Trump account must generally meet the rules of Code Sec. 408(a)(1) through (6) and Code Sec. 530A (b)(1)(C)(i) through (iii). Any person approved by the IRS as of December 31, 2025, to be a nonbank trustee of an IRA would have automatic approval to act as a trustee of a Trump account. The written instrument must clearly identify the account as a Trump account at the time of creation.

An election to open an account can be made by either an authorized individual or by the Secretary. If a pilot program contribution election is made at the same as the election to open the initial account, the authorized individual would be the individual authorized to make (and making) the pilot program contribution election. If a pilot contribution program election is not being made, Prop. Reg. §1.530A-1(c)(1)(i)(B) provides an ordering rule to determine who the authorized individual is. In order of priority, the authorized individual would be a legal guardian, parent, adult sibling, or grandparent of the eligible individual. The election to open an initial Trump account is made on or before December 31st of the calendar year in which the eligible individual attains age 18. The election is made on Form 4547 or through an electronic application or webpage made available by the Secretary.

Contribution Pilot Program

A pilot program election with respect to an eligible child must be made by a pilot program-electing individual so that the Secretary can make the $1,000 pilot program contribution into the Trump account of en eligible child. An eligible child is a pilot program-electing individual's anticipated qualifying child, as defined in Code Sec. 152(c), for the tax year of the pilot program-electing individual in which the pilot program election is made; is born in 2025, 2026, 2027, or 2028; is a U.S. citizen; has been issued a social security number; and with respect to which no prior pilot program election has been made by any individual and processed by the Secretary.

A pilot program election is made with respect to the eligible child's "special taxable year" (defined in Prop. Reg. §301.6434-1(c)(1)), instead of with respect to any calendar based tax year for the eligible child's federal income tax liability. Once an election is processed, the eligible child is treated as making a $1,000 payment against a federal income tax liability for the eligible child's special taxable year, resulting in a $1,000 overpayment. The overpayment is then refunded by the Secretary as a pilot program contribution to the eligible child's Trump account. The overpayment is not refunded unless the eligible child has an established Trump account.

An election may be made on the day that a child becomes eligible, and the last day to make the election is December 31st of the calendar year in which the eligible child attains age 17. In addition, only the first pilot program contribution election processed by the IRS will result in a $1,000 contribution to the eligible child's Trump account. The pilot program contribution election is made on Form 4547.

Proposed Regulations, NPRM REG-117270-25

Proposed Regulations, NPRM REG-117002-25

IR 2026-31

IR 2026-33

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The IRS expects to delay the applicability date of proposed regulations on required minimum distributions (RMDs) until the distribution calendar year that would begin 6 months after the date the regulations are finalized. Specifically, the announcement relates to proposed amendments of Reg. §§1.401(a)(9)-4, 1.401(a)(9)-5, and 1.401(a)(9)-6, issued pursuant to NPRM REG–103529–23 .

Background

Prior to this announcement, provisions under NPRM REG–103529–23 (2024) were proposed to apply for determining RMDs for calendar years beginning on or after January 1, 2025. This ensured the provisions would begin to apply at the same time as final regulations under T.D. 10001 (2024).

Following a request for comments, concerns included difficulty to implement many provisions of future final regulations in a timely manner if the January 1, 2025, applicability date were to be retained in future final regulations.

Future Final Regulations

The IRS expects future final regulations that would amend Reg. §§1.401(a)(9)-4, 1.401(a)(9)-5, and 1.401(a)(9)-6, issued pursuant to NPRM REG–103529–23, to apply to determine RMDs for the distribution calendar year that would begin no earlier than six months after the date that any future final regulations would be issued in the Federal Register. For periods before the applicability date of such future final regulations, taxpayers must continue to apply a reasonable, good-faith interpretation.

Announcement 2026-7

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The IRS has issued a waiver for individuals who failed to meet the foreign earned income or deduction eligibility requirements of Code Sec. 911(d)(1) because adverse conditions in certain foreign countries prevented them from fulfilling the requirements for the 2025 tax year. Qualified individuals may elect to exclude from gross income their foreign earned income and to exclude or deduct the housing cost amount.

Relief Provided

The IRS, in consultation with the Secretary of State, has determined that war, civil unrest, or similar adverse conditions precluded the normal conduct of business in the following countries, effective from the dates specified: (1) Haiti – January 1, 2025; (2) Ukraine – January 1, 2025; (3) Democratic Republic of the Congo – January 28, 2025; (4) South Sudan – March 7, 2025; (5) Iraq – June 11, 2025; (6) Lebanon – June 22, 2025; and (7) Mali – October 30, 2025. An individual who left any of these countries on or after the respective dates will be treated as a qualified individual for the period during which the individual was a bona fide resident of, or was present in, the country. To qualify for relief, an individual must establish that, but for these adverse conditions, they would have met the requirements of Code Sec. 911(d)(1). Additionally, the waiver does not apply to individuals who first established residency or were physically present in any of these countries after the respective dates listed above. Taxpayers seeking guidance on how to claim this exclusion or file an amended return should refer to the Foreign Earned Income Exclusion section at https://www.irs.gov/individuals/international-taxpayers/foreign-earned-income-exclusion or contact a local IRS office.

Rev. Proc. 2026-16

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These days, both individuals and businesses buy goods, services, even food on-line. Credit card payments and other bills are paid over the internet, from the comfort of one's home or office and without any trip to the mailbox or post office.

Now, what is probably your biggest "bill" can be paid on-line: your federal income taxes.

There are three online federal tax payment options available for both businesses and individuals: electronic funds withdrawal, credit card payments and the Electronic Federal Tax Payment System. If you are not doing so already, you should certainly consider the convenience -and safety-- of paying your tax bill online. While all the options are now "mainstream" and have been used for at least several years, safe and convenient, each has its own benefits as well as possible drawbacks. The pros and cons of each payment option should be weighed in light of your needs and preferences.

Electronic Funds Withdrawal

Electronic funds withdrawal (or EFW) is available only to taxpayers who e-file their returns. EFW is available whether you e-file on your own, or with the help of a tax professional or software such as TurboTax. E-filing and e-paying through EFW eliminates the need to send in associated paper forms.

Through EFW, you schedule when a tax payment is to be directly withdrawn from your bank account. The EFW option allows you to e-file early and, at the same time, schedule a tax payment in the future. The ability to schedule payment for a specific day is an important feature since you decide when the payment is taken out of your account. You can even schedule a payment right up to your particular filing deadline.

The following are some of the tax liabilities you can pay with EFW:

Individual income tax returns (Form 1040)
Trust and estate income tax returns (Form 1041)
Partnership income tax returns (Forms 1065 and 1065-B)
Corporation income tax returns for Schedule K-1 (Forms 1120, 1120S, and 1120POL)
Estimated tax for individuals (Form 1040)
Unemployment taxes (Form 940)
Quarterly employment taxes (Form 941)
Employers annual federal tax return (Form 944)
Private foundation returns (Form 990-PF)
Heavy highway vehicle use returns (Form 2290)
Quarterly federal excise tax returns (Form 720)

For a return filed after the filing deadline, the payment is effective on the filing date. However, electronic funds withdrawals can not be initiated after the tax return or Form 1040 is filed with the IRS. Moreover, a scheduled payment can be canceled up until two days before the payment.

EFW does not allow you to make payments greater than the balance you owe on your return. Therefore, you can't pay any penalty or interest due through EFW and would need to choose another option for these types of payments. While a payment can be cancelled up to two business days before the scheduled payment date, once your e-filed return is accepted by the IRS, your scheduled payment date cannot be changed. Thus, if you need to change the date of the payment, you have to cancel the original payment transaction and chose another payment method. Importantly, if your financial institution can't process your payment, such as if there are insufficient funds, you are responsible for making the payment, including potential penalties and interest. Finally, while EFW is a free service provided by the Treasury, your financial institution most likely charges a "convenience fee."

Credit Card Payments

Do you have your card ready? The Treasury Department is now accepting American Express, Discover, MasterCard, and VISA.

Both businesses and individual taxpayers can make tax payments with a credit card, whether they file a paper return or e-file. A credit card payment can be made by phone, when e-filing with tax software or a professional tax preparer, or with an on-line service provider authorized by the IRS. Some tax software developers offer integrated e-file and e-pay options for taxpayers who e-file their return and want to use a credit card to pay a balance due.

However, there is a convenience fee charged by service providers. While fees vary by service provider, they are typically based on the amount of your tax payment or a flat fee per transaction. For example, you owe $2,500 in taxes and your service provider charges a 2.49% convenience fee. The total fee to the service provider will be $62.25. Generally, the minimum convenience fee is $1.00 and they can rise to as much as 3.93% of your payment.

The following are some tax payments that can be made with a credit card:

Individual income tax returns (Form 1040)
Estimated income taxes for individuals (Form 1040-ES)
Unemployment taxes (Form 940)
Quarterly employment taxes (Form 941)
Employers annual federal tax returns (Form 944)
Corporate income tax returns (Form 1120)
S-corporation returns (Form 1120S)
Extension for corporate returns (Form 7004)
Income tax returns for private foundations (Form 990-PF)

However, as is the case is with the EFW option, if a service provider fails to forward your payment to the Treasury, you are responsible for the missed payment, including potential penalties and interest.

Electronic Federal Tax Payment System

EFTPS is a system that allows individuals and businesses to pay all their federal taxes electronically, including income, employment, estimated, and excise taxes. EFTPS is available to both individuals and businesses and, once enrolled, taxpayers can use the system to pay their taxes 24 hours a day, seven days a week, year round. Businesses can schedule payments 120 days in advance while individuals can schedule payments 365 days in advance. With EFTPS, you indicate the date on which funds are to be moved from your account to pay your taxes. You can also change or cancel a payment up to 2 business days in advance of the scheduled payment date.

EFTPS is an ideal payment option for taxpayers who make monthly installment agreement payments or quarterly 1040ES estimated payments. Businesses should also consider using EFTPS to make payments that their third-party provider is not making for them.

EFTPS is a free tax payment system provided by the Treasury Department that allows you to make all your tax payments on-line or by phone. You must enroll in EFTPS, however, but the process is simple.

We would be happy to discuss these payment options and which may best suit your individual or business needs. Please call our office learn more about your on-line federal tax payment options.

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In order to be tax deductible, compensation must be a reasonable payment for services. Smaller companies, whose employees frequently hold significant ownership interests, are particularly vulnerable to IRS attack on their compensation deductions.

Reasonable compensation is generally defined as the amount that would ordinarily be paid for like services by like enterprises under like circumstances. This broad definition is supplemented, for purposes of determining whether compensation is deductible as an ordinary and necessary expense, by a number of more specific factors expressed in varying forms by the IRS, the Tax Court and the Circuit Courts of Appeal, and generally relating to the type and extent of services provided, the financial concerns of the company, and the nature of the relationship between the employee and the employer.

Why IRS Is Interested

A chief concern behind the IRS's keen interest in what a company calls "compensation" is the possibility that what is being labeled compensation is in fact a constructive dividend. If employees with ownership interests are being paid excessive amounts by the company, the IRS may challenge compensation deductions on the grounds that what is being called deductible compensation is, in fact, a nondeductible dividend.

Another area of concern for the IRS is the payment of personal expenses of an employee that are disguised as businesses expenses. There, the business is trying to obtain a business expense deduction without the offsetting tax paid by the employee in recognizing income. In such cases, a business and its owners can end up with a triple loss after an IRS audit: taxable income to the individual, no deduction to the business and a tax penalty due from both parties.

Factors Examined

The factors most often examined by the IRS in deciding whether payments are reasonable compensation for services or are, instead, disguised dividend payments, include:

The salary history of the individual employee
Compensation paid by comparable employers to comparable employees
The salary history of other employees of the company
Special employee expertise or efforts
Year-end payments
Independent inactive investor analysis
Deferred compensation plan contributions
Independence of the board of directors
Viewpoint of a hypothetical investor contemplating purchase of the company as to whether such potential investor would be willing to pay the compensation.

Failure to pass the reasonable compensation test will result in the company's loss of all or part of its deduction. Analysis and examination of a company's compensation deductions in light of the relevant listed factors can provide the company with the assurance that the compensation it pays will be treated as reasonable -- and may in the process prevent the loss of its deductions.

Note: In the case of publicly held corporations, a separate $1 million dollar per person cap is also placed on deductible compensation paid to the CEO and each of the four other highest-paid officers identified for SEC purposes. (Certain types of compensation, including performance-based compensation approved by outside directors, are not included in the $1 million limitation.)

The S Corp Enigma

The opposite side of the reasonable compensation coin is present in the case of some S corporations. By characterizing compensation payments as dividends, the owners of these corporations seek to reduce employment taxes due on amounts paid to them by their companies. In these cases, the IRS attempts to recharacterize dividends as salary if the amounts were, in fact, paid to the shareholders for services rendered to the corporation.

Caution. In the course of performing the compensation-dividend analysis, watch out for contingent compensation arrangements and for compensation that is proportional to stock ownership. While not always indicators that payments are distributions of dividends instead of compensation for services, their presence does suggest the possibility. Compensation plans should not be keyed to ownership interests. Contingent and incentive arrangements are also scrutinized by the IRS. The courts have frequently ruled that a shareholder has a built-in interest in seeing that the company is successful and rewarding him for increasing the value of his own property is inappropriate. Similar to the reasonable compensation test, however, this rule is not hard and fast. Accordingly, the rules followed in each jurisdiction will control there.

Conclusions

Determining whether a shareholder-employee's compensation is reasonable depends upon many variables, such as the contributions that employee makes to your business, the compensation levels within your industry, and whether an independent investor in your company would accept the employee's compensation as reasonable.

Please call our office for a more customized analysis of how your particular compensation package fits into the various rules and guidelines. Further examination of your practices not only may help your business better sustain its compensation deductions; it may also help you take advantage of other compensation arrangements and opportunities.

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If someone told you that you could exchange an apartment house for a store building without recognizing a taxable gain or loss, you might not believe him or her. You might already know about a very valuable business planning and tax tool: a like-kind exchange. In some cases, if you trade business property for other business property of the same asset class, you do not need to recognize a taxable gain or loss.

Not a sale

An exchange is a transfer that is not a sale. Essentially, it is a trade of like property.

In an exchange, property is relinquished and property is received. If the transaction includes money or property that is not of a like kind (referred to as "boot"), the transaction does not automatically become a sale. Any gain realized in the transaction, however, is recognized in that tax year to the extent of boot received.

In a like-kind exchange, the basis in the property received is the same as the basis in the property relinquished, with some adjustments. Any unrecognized gain or loss on the relinquished property is carried over to the replacement property. At a future time, the gain or loss will be recognized. If there is boot in the exchange and the gain is recognized, basis is increased by the amount of recognized gain.

The like-kind rules also require that property must be business or investment property. The taxpayer must hold both the property traded and the property received for productive use in its trade or business or for investment. Additionally, most stocks, bonds and other securities are not eligible.

Example

Jesse owns an office supply company and wants to expand his business. Carmen owns a restaurant and also wants to expand her business. Both individuals own parcels of land for investment that would benefit their respective expansion plans. The adjusted basis of both properties is $250,000. The fair market value of both properties is $400,000. Jesse and Carmen engage in a like-kind exchange. Neither Jesse nor Carmen would report any gain or loss.

More than two properties

Like-kind exchanges can involve more than two properties. While the rules are complicated, the basic approach is to combine properties into groups consisting of the same kind or class. If you are interested in a like-kind exchange involving more than two properties, we can help you.

Timing

The exchange does not have to take place at a given moment. If property is relinquished, the replacement property can be identified and received anytime within a specific period. Replacement property must be identified within 45 days after property is relinquished. The replacement property has to be received within 180 days after the transfer but sooner if the tax return is due before the 180 days are over (although the due date takes into account any extension that is permitted).

Reporting

A like-kind exchange must be reported to the IRS. The report must be made even if no gain is recognized in the transaction. Again, our office can help you make sure that everything that needs to be reported to the IRS is reported.

This is just a brief overview of like-kind exchanges. The rules are complicated and could trip you up without help from a tax professional. If you think a like-kind exchange is in your future, give our office a call. We'll sit down, review your plans and make sure your like-kind exchange meets all the complex IRS requirements.

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Whether a parent who employs his or her child in a family business must withhold FICA and pay FUTA taxes will depend on the age of the teenager, the amount of income the teenager earns and the type of business.

FICA and FUTA taxes

A child under age 18 working for a parent is not subject to FICA so long as the parent's business is a sole proprietorship or a partnership in which each partner is a parent of the child (if there are additional partners, the taxes must be withheld). FUTA does not have to be paid until the child reaches age 21. These rules apply to a child's services in a trade or business.

If the child's services are for other than a trade or business, such as domestic work in the parent's private home, FICA and FUTA taxes do not apply until the child reaches 21.

The rules are also different if the child is employed by a corporation controlled by his or her parent. In this case, FICA and FUTA taxes must be paid.

Federal income taxes

Federal income taxes should be withheld, regardless of the age of the child, unless the child is subject to an exemption. Students are not automatically exempt, though. The teenager has to show that he or she expects no federal income tax liability for the current tax year and that the teenager had no income tax liability the prior tax year either. Additionally, the teenager cannot claim an exemption from withholding if he or she can be claimed as a dependent on another person's return, has more than $250 unearned income, and has income from both earned and unearned sources totaling more than $800.

Bona fide employee

Remember also, that whenever a parent employs his or her child, the child must be a bona fide employee, and the employer-employee relationship must be established or the IRS will not allow the business expense deduction for the child's wages or salary. To establish a standard employer-employee relationship, the parent should assign regular duties and hours to the child, and the pay must be reasonable with the industry norm for the work. Too generous pay will be disallowed by the IRS.

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Luxury Passenger Car Depreciation Caps

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Excess Depreciation on Luxury Vehicles

Lease Inclusion Amounts for Cars, SUVs, Trucks and Vans

Vehicles Exempt from Depreciation Caps and Lease Inclusion Amounts

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Adoption Credit Update

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General Requirements and Election to Open an Account

Contribution Pilot Program

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