2023 Marcum Year-End Tax Guide

THE MARCUM YEAR-END TAX GUIDE

2023

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ABOUT MARCUM LLP Marcum is a national accounting and advisory services firm dedicated to helping entrepreneurial, middle market companies and high net worth individuals achieve their goals. CLIENT-DRIVEN Understanding our clients’ businesses, helping them identify their needs and meet their challenges, and uncovering opportunities that propel them towards success is Marcum’s mission. COMMITMENT TO EXCELLENCE

Since 1951, clients have chosen Marcum for our insightful guidance in helping them forge pathways to success, whatever challenges they’re facing. Marcum offers a complete spectrum of tax, assurance and advisory services, as well as an extensive portfolio of industry-focused practices with specialized experience for both privately held and publicly registered companies, and nonprofit and social sector organizations.

From the way we service clients to the training and development of our professionals, Marcum is committed to excellence in every aspect of our operation. Visit www.marcumllp.com for a complete list of our services.

Marcum provides a comprehensive range of professional services including accounting and advisory, technology solutions, wealth management, and executive and professional recruiting. These organizations include:

TALENT SOLUTIONS

TABLE OF CONTENTS

71. Strategic Accounting

109. From Tax Credits to Jobs: The Inflation Reduction Act’s First-Year Impact 111. Top 6 Enterprise Cybersecurity Challenges for 2024 117. 3 Easy Trades 120. Five Proven Strategies to Tackle Estate Taxes 129. Cost of Living Updates 2023-2024

04. Letter From Our Tax Leader 05. Marcum 2023 Federal Tax Year in Review 23. Key Considerations for 2024 Corporate Tax Planning, Including Capitalizing Technology Expenditures, and the IRS’ Use of Artificial Intelligence 27. The Migration of High-Net Strategies: Maximizing Your Estate and Gift Exemptions 36. Untapped Potential: Why Companies Overlook Millions in State Incentives 39. States’ Effort to Find and Collect Unclaimed Property is on the Rise 41. The Hidden Costs of Non-Compliance: The Importance of Sales & Use Tax 43. A Year in Review: SALT Trends and Highlights 51. State Tax Considerations for NFTs 54. Navigating the Complexities of US Tax Law: Strategies for Cross-Border Fees and Service Arrangements 58. Multinationals Beware: The Worth Individuals to Low- Income Tax Jurisdictions 30. Comprehensive Tax

Methods for Businesses: Identifying Opportunities to Defer Income and Save on Taxes

75. The C-corporation

Advantage: Qualified Small Business Stock (QSBS) Gain Exclusion 79. The IRS Presses the Pause Button on the ERTC Program – What’s Next? 81. Courts Challenge IRS in 2023: What Could This Mean for Taxpayers in 2024 84. Decoding PTET: The IRS- Approved SALT Deduction Workaround for Pass-Through Entities 88. 2023: The Year Of Modern Families 91. Research and Development: Tax Credit Benefits and Capitalization Considerations 95. Navigating Interest Rates, Depreciation, & Tax Changes: A Real Estate Year-End Overview 99. Tax Planning Considerations for Competitive Construction Companies 102. Donor-Advised Funds in the Crosshairs: Legislation Aims to Close Tax Code Loopholes 103. Tips on Maintaining Your Hospital’s Tax-Exempt Status

Surge in Transfer Pricing Regulations and Enhanced IRS Oversight

106. From Depreciation to

Discounts: Understanding Book-Tax Differences in the Food & Beverage Industry

67. What the New FASB

Disclosure Rules Could Mean for Your Company

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LETTER FROM OUR TAX LEADER

We are committed to growing alongside our clients, and with that in mind, we have expanded our services and solutions. We have launched a new Energy Practice that enables individuals and businesses to tap into available credits. We now offer a comprehensive Managed Tax Service that includes ASC 740, complete tax division outsourcing, and extensive tax department support. Moreover, under the leadership of JoAnna Fellon, we’re delighted to reintroduce our bespoke Private Client Service offerings. Addressing the economic landscape: while last year’s forecast hinted at a looming recession, we remain in a period of stability. Higher interest rates than we’ve seen in recent decades present both challenges and opportunities. This environment calls for a sharper focus on investment strategies to minimize risks while optimizing tax efficiency. Similarly, innovative tax strategies, like QPRTs and SLATs (call us if you do not know what they are), emerge as intriguing avenues to explore. However, the landscape isn’t without pitfalls. Ensuring timely tax payments and effectively managing overpayments can lead to maximizing the return on your cash. Also, you may need to optimize your interest expense, especially when experiencing decreasing profits, which may impose limits on the business interest deduction. These are just some of the potential landmines we can help you sidestep. We hope our guide sparks ideas and catalyzes conversations as the year draws to a close. Know that your Marcum team stands ready and eager to help you surpass your goals. Because in your success, we find our own – delivering unparalleled service tailored just for YOU.

Reflecting on my years with Marcum and how long we have issued this tax guide, I’m struck by how time has flown. Without revealing too much, know I penned my first article for this annual tax guide well before the birth of my six grandchildren. Like many of you, family is my cornerstone. I know that effectively managing the complexities of wealth transition, estate tax planning, or shepherding a family business from one generation to the next is paramount. Navigating such terrain requires more than technical expertise; it demands a depth of experience, strategic thinking, and the ability to anticipate and adapt. At Marcum, our team thrives on guiding our clients with personal and professional insights, always keeping your goals at the forefront. Our mission is clear: to consistently exceed our clients’ expectations. This may seem like a lofty ambition. Yet, our team’s unwavering enthusiasm, experience, and deep-seated core values drive us in relentless pursuit of this very goal. To that end, we sought feedback from you – our valued clients. The overwhelmingly positive responses, coupled with constructive insights, have reinforced our commitment to client service and continuous improvement. As part of our mission, we made progress on several fronts as a tax team. We focused on technical and soft skills training for our associates and partners. We are creating more tools for you to interact with our teams, enhancing our ability to communicate complex tax strategies. I hope you take advantage of the many webinars, Tax Flashes, newsletters, and more designed to keep you well-informed. As we continue to grow, we’re constantly adding new opportunities to help you stay ahead of the curve.

Joseph J. Perry, National Tax and Business Services Leader on behalf of the entire Marcum Tax team

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MARCUM 2023 FEDERAL TAX YEAR IN REVIEW BY MICHAEL D’ADDIO

We have been eagerly waiting for tax legislation to address various tax provisions impacting both individuals and businesses all year. On the business side, there are three main provisions we are watching:

1. The elimination of the requirement to capitalize specified research & experimentation expenses under IRC sec 174 2. The removal of the phase-out of bonus depreciation 3. The inability to add-back depreciation and amortization in computing the base for determining if business interest expense is deductible under IRC sec 163(j) While we are hoping that the provisions are repealed (which generally would be prospectively), since some of these rules impacted 2022, the hope is that they would be repealed retroactively. Although there was a consensus between members of Congress to modify the tax provisions, the issue couldn’t be resolved due to the disagreement on certain individual tax changes that some members wanted to include in the overall tax package. These changes comprised restoring higher child tax credits and earned income tax credits and changing the limitation on the deductibility of state and local taxes (SALT). The SALT provision was especially critical for members from states with high taxes.

As of the date of this article, we have not had significant tax legislation passed. We must see if a new bill can pass before year-end. Given the narrow margins in both the House of Representatives and the Senate, the outlook is dim that these parties can reach a compromise. However, despite the lack of a large tax bill, it has been a busy tax year with a large amount of IRS guidance and many tax-related cases decided by the courts. Below, we review some of the most significant cases and administrative guidance that may impact your businesses or individual taxes. Some of these will be discussed in greater detail in other articles in this year-end guide. EMPLOYEE RETENTION TAX CREDIT (ERTC) This is the year of the employee retention tax credit. You could not watch television or listen to the radio without being confronted by a barrage of commercials for the ERTC. In response, this year saw the IRS (The Service) issue warnings and initiate several programs to combat what the Service sees as abusive claims for the credit. The Employee Retention Tax Credit is a refundable tax credit created under the Coronavirus Aid, Relief,

and Economic Security Act (CARES Act) for businesses and tax-exempt organizations that had employees and were impacted by the COVID-19 pandemic. The credit applies to qualified wages paid after March 12, 2020. The requirements are complex and differ depending on the year of the credit. The credit was amended three times since its enactment by the Consolidated Appropriations Act of 2021, the American Rescue Plan Act, and the Infrastructure Investment and Jobs Act. For most eligible employers, the ERTC applies to eligible wages paid through September 30, 2021, though the credit can apply to wages paid in the 4th quarter of 2021 for a Recovery Startup Business. To qualify for the credit, an employer must have suffered a significant decline in gross receipts when comparing a covered quarter in 2020 or 2021 to a comparable quarter in 2019, or the trade or business was fully or partially suspended due to a government order. The measure of significant decline in gross receipts differs for a quarter in 2020 and 2021. In determining if either test applies, certain related entities must be aggregated and treated as a single employer.

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“The SALT provision was especially critical for members from states with high taxes.”

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While the credit is generally beneficial, there is a partial offsetting cost. The income tax deduction for salaries in 2020 or 2021, which are used for the credit, must be reduced by the amount of the credit. For those claiming the credit after filing the initial income tax return for the affected tax year, this rule requires an amendment of that income tax return to adjust the deduction. The Service’s position is that the deduction adjustment cannot be made on the return for the year the ERTC payment is received. The test measuring the decline in gross receipts is mathematical, and an employer can generally be more assured of meeting the ERTC requirements under this test. However, the partial or full suspension test is more subjective, and there isn’t specific statutory guidance. The availability of the credit has seen the creation of what the Service calls “ERTC mills.” This refers to promoters who aggressively market the applicability of the ERTC to employers, sometimes on general grounds, including the overall economic impact of the pandemic and supply chain disruptions. Eventually, the IRS called the mass marketing of the ERTC a “tax scam.” guidelines carefully before making ERTC claims. They highlighted that employers making improper claims may be required to repay the refund, along with penalties and interest. This can include a 20% accuracy-related In March, the Service warned employers to review the ERTC

penalty, a 75% civil fraud penalty, and potential criminal liability. After payment of the promoter’s contingent fee, the employer may be worse off by making the claim. In July, the IRS issued a legal memorandum discussing “supply chain disruption” as a basis for an employer claiming it had experienced a partial shutdown. The Service discussed several scenarios, noting that to support a partial shutdown, the employer must be able to demonstrate that: 1. The supply disruption was directly related to a government order and not due to factors like worldwide economic issues or port restrictions. 2. The disruption did not continue past the duration of identified government orders. 3. The employer did not have sufficient inventory to permit business continuation. 4. There were no alternate supplies (even at a higher cost). 5. Businesses could not continue their operations, even by offering fewer products. In September, the Service announced a pause in processing new ERTC claims for the balance of 2023. This action does not impact previously submitted claims, as they will continue to be processed. The suggestion is that the IRS is looking more skeptically at new claims as they may be the result of more aggressive positions on qualification, placing pressure on employers to

make more questionable claims. The release also indicates that the Service will be developing a settlement program for those who received improper refunds to avoid the imposition of penalties and other compliance action. It should be noted that the pause in processing new claims does not prevent the submission of proper ERTC refund claims for 2020 or 2021. Employers have until April 15, 2024, to file ERTC claims for quarters in 2020 and April 15, 2025, to file claims for quarters in 2021. However, one should review the basis of the claim carefully. For those who may have filed a questionable refund ERTC claim, the Service announced the details of a special withdrawal procedure to notify the IRS that the claim should be withdrawn. It applies to employers whose refund request has not yet been processed by the Service and payment has not been received. The release also provides that the procedure can apply to those who have received a refund check but have yet to cash it. More details can be found on the IRS website IRS.gov/withdrawmyerc. In other ERTC-related guidance: 1. The IRS concluded that the ERTC does not apply to a federal credit union for quarters in 2020 due to the ban on the credit for the United States government, a state, a political subdivision, or an agency or instrumentality thereof. Based on Rev Rul 57-128, the Service says that a federal credit

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union should be treated as an instrumentality of the US, and consequently, the ERTC does not apply. However, this exclusion to the credit did not apply to 2021, so a federal credit union could receive the ERTC if it is otherwise a qualified employer paying qualified wages for a quarter of this year. 2. The Service stated that a refund claim for an eligible employer made by a third-party payor, a Professional Employer Organization (PEO), or a Certified Employer Organization (CPEO) can be applied against other taxes due by such filing organization. The refund claim will not be paid directly to the employer. It is a contractual matter between the employer, on whose behalf the refund claim is being made, and the filing organization regarding the receipt of the dollars covered by the claim. SECTION 174 SPECIFIED RESEARCH & EXPERIMENTATION EXPENSES The Tax Cuts and Jobs Act (TCJA) significantly changed the rules involving the deduction for research and experimentation costs under IRC sec 174. Under pre-TCJA regulations, taxpayers could deduct research and experimentation expenses in the year paid or incurred. A taxpayer was allowed to elect to capitalize and amortize the costs over a period not less than 60 months, beginning with the year of its first use.

Alternatively, one could capitalize the cost. Most taxpayers expensed the costs and probably did not distinguish them from the other operating costs on its books. If the costs were capitalized under either of the last two methods described, the taxpayer could apply the cost to determine gain or loss on the sale, exchange, or disposition of the property related to the research. Additionally, a deduction was allowed if the research was abandoned. IRS and the Code treated the capitalized costs as an increase to the basis of related property. To satisfy the budget requirements to pass under the reconciliation process, the TCJA included a significant change in the treatment of “specified research and experimentation expenses” (SREE). For tax years beginning January 1, 2022, and later, a taxpayer is required to capitalize SREE and to amortize it over a designated period (5 years for domestic research and 15 years for foreign research) beginning with the mid-point of the year paid or incurred under new IRC sec 174(a). The current law also states that if property related to research expenses is disposed of, no deduction will be allowed for those expenses, and the amortization will continue. It may have been the expectation of the legislators that this provision would have been changed before it became effective. However, a change to the law has not yet occurred, and we are forced to work with the law as written.

For 2022, the new SREE rule raised several questions about its operation and its interaction with other Code provisions. The Service provided some preliminary guidance in Notice 2023-63, which suggested rules that would be included in upcoming regulations. These regulations would be effective for tax years ending after September 8, 2023, and, consequently, would not apply to most 2022 tax returns. However, the IRS says taxpayers could rely on the guidance provided for years before the effective date. The Service requests comments from interested parties electronically by November 24, 2023, though it will probably consider comments received after that date. It is unclear whether the Notice’s provisions will survive the comment process. Some of the issues addressed in the Notice include: • Can capitalized costs be included in determining the gain on a sale of related property? The argument in favor of this position is that applying basis to bring one’s gain to zero is not a “deduction,” and the statute only bars a deduction on a sale or disposition. The Notice concludes that these costs cannot be applied. However, if the taxpayer is a corporation that is liquidated, the Notice would permit a deduction for the balance of the unamortized SREE costs in certain circumstances. The Notice does not extend this result to a liquidation of a partnership and requests comments on whether the same or different rule should apply.

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• How to calculate the percentage of completion for long-term contracts using the IRC section 460 percentage of completion method. This method determines taxable income based on the percentage of costs incurred to date over the total expected costs to be incurred over the contract’s life. The Notice indicates that new regulations must be issued under sec 460 and the numerator should only include the amortized portion of the SREE to determine the gross revenue for the year. The Notice notes that new regulations would need to be issued under sec 460 and indicates that the numerator should include only the amortized portion of the SREE to determine the gross revenue for the year. However, it is silent as to what portion of these costs should be included in the denominator and that the deduction is limited to the amortized deduction. The initial part of the original draft concerned the position that amounts incurred would be used for both the numerator and the amount allowed as a deduction, which produces a significantly different result. • The treatment of contract research providers was uncertain under the new amortization rule. While the contract research recipient must amortize what it pays for the SREE performed by the contract research provider, must the service provider also amortize its costs related to the research services? The result would cause both parties

to amortize SREE costs. The Notice indicates that where the contract research provider bears no economic risk for the services and has none of the benefits related to the research produced, it will not be subject to the amortization rule and can deduct its costs. The Notice also provides guidance on what items constitute SREE and methods for allocating indirect costs to SREE, which must be capitalized. Several issues were not addressed, including whether for the IRC sec 199A qualified business income deduction (QBID), if W-2 wages (which can affect the amount of the QBID allowed) are affected if they relate to SREE, which is not 100% deductible in the current year. Since the final guidance will be issued late this year or in 2024, the IRS may defer the application of the rules it develops until the 2024 tax year. We will need to keep monitoring developments in this area. All businesses must consider the applicability of the new IRC sec 174(a) to its operations. Even if a company has not taken a research and development credit under IRC sec 41 in the current or prior year, it must analyze its operations to determine what activities constitute research and experimentation. It should be noted that the SREE costs are more extensive than those eligible for the R&D credit. If one has taken the credit previously, it may be difficult to argue that all research activities have ceased. The expectation is that when the Service starts auditing returns, which

are covered by the new capitalization rule, this will constitute an area of the examiner’s audit program. ESTATE AND GIFT TAX Due to increased inflation, effective January 1, 2023, there was a significant change in the federal gift/estate tax exemption and the generation-skipping tax (GST) exemption from $12,060,000 in 2022 to $12,920,000 in 2023. This is an increase of $860,000 per gift donor or estate. For a married couple, the combined exemptions for both spouses are $25,840,000 for 2023, up $1,720,000 from 2022. This creates a significant amount of available exemption, which can be used to shelter gift tax on transfers made before the end of 2023. Additionally, the federal gift tax annual exclusion for transfer of a present interest gift per donee has increased from $16,000 in 2022 to $17,000 in 2023. For a married couple, this amount is doubled. Estate and gift tax planning for 2023 should be done knowing that a potential reduction in the federal gift and estate tax lifetime exemption and GST exemption looms for periods after December 31, 2025. Most estimate the exemption amount will be reduced to around $7 million per person. The potential for making gifts before year-end should be explored. Furthermore, given the higher interest rate environment, certain planning devices become increasingly attractive. These include Qualified Personal Residence Trusts (QPRTs) and Charitable Remainder Trusts (CRTs).

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There was also significant IRS guidance issued, and cases decided during the year. • The IRS issued guidance stating that property held in an Intentionally Defective Grantor Trust (IDGT) is not eligible for a tax basis increase if it is not included in the decedent’s taxable estate. Some argue that a basis increase should occur since the IDGT is disregarded for income tax purposes and the grantor holds the trust assets. The argument is that there is a deemed transfer of asset to a new trust after death on the change of trust status to a regarded entity. However, the Service focused on the language in IRC sec 1014(b)(1), which applies to property acquired by bequest, devise, or inheritance, and determined that the shift in trust status does not qualify for a basis increase. This ruling aligns with the majority opinion but may surprise taxpayers who expected a basis increase in an IDGT program. • The Third Circuit Court of Appeals upheld the Tax Court seven uncashed checks were includible in the decedent’s estate and were not completed gifts under Pennsylvania law. It is important to note that when in the Estate of Demuth v. Commissioner, holding that

making year-end gifts by check, the check should be cashed before year-end. The Service takes the position that the donor has the right to cancel the check before it is deposited, which constitutes a retained right that can make the gift incomplete. • The Kalkow v. Commissioner case notes the importance of understanding the governing terms of a trust before entering into any agreements with the Service. In this case, over $6.5 million of income was not distributed from a Qualified Terminable Interest Property (QTIP) Trust to the spouse at the time of the spouse’s death as required under the trust terms. Since the assets of the QTIP Trust (which had used a marital deduction to cause its assets not to be taxed on its formation) were includible in the deceased spouse’s taxable estate, the advisors probably thought that this unpaid amount had no impact. However, the Service claimed that the $6.5 million receivable was a separate asset of the estate included in the spouse’s taxable estate. When the estate claimed there should be an offsetting liability in valuing the trust, the Tax Court did not allow the reduction since there was a prior stipulation concerning the value of the QTIP trust.

• In the Estate of Spizzin v. Commissioner , the Tax Court held that without any other credible explanation, payments over five years to seven women and the taxpayer’s daughter and stepdaughter were taxable gifts. The court noted that no Form W-2 or Form 1099 was issued to characterize the transfers as being something other than gifts. The Tax Court did issue a taxpayer friendly decision in the Estate of Cecil v. Commissioner. The court upheld “tax affecting” in valuing S corporation shares for gift tax purposes. Previously, the Tax Court had considered tax affecting on a case-by-case basis. Both the Service and the taxpayer’s valuation experts agreed that tax affecting projected earnings was appropriate in this case. However, the court clarified that this decision does not establish a rule that tax affecting is always suitable for valuing an S corporation. Additionally, the court ruled that a higher valuation based on an asset approach could not be used for a minority interest when the minority shareholder had no control over the sale of assets and a disposition was unlikely. The court allowed discounts of 20% for lack of control and 19.27% for lack of market.

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CHARITABLE CONTRIBUTIONS There were several judicial decisions and administrative guidance dealing with the charitable contribution deduction. Several cases dealt with the substantiation rules resulting in a denial of charitable contributions deductions. The Service has programs that ensure compliance with the appropriate substantiation rules, and failure to comply will cause the deduction to fail — even if the Service agrees that the contribution was made and on the likely value of the property contributed. In Bass v. Commissioner, the Tax Court denied a charitable deduction for clothing that the taxpayer donated to several charities over 173 separate trips. While he had contemporaneous written acknowledgment for each donation, the taxpayer needed a qualified appraisal to be eligible for the deduction. IRC sec 170(f)(11) requires that property donations in excess of $5,000 can be disallowed if there is no qualified appraisal of the contributed property. For this purpose, items of like property must be aggregated to determine if the $5,000 threshold is satisfied. While an exception to the qualified appraisal requirement applies

to a “publicly traded security,” the Service concluded in Chief Counsel Advice (CCA) 202302012 that this exception does not apply to a donation of cryptocurrency. While one would think that the reason for the exception is that there is a market that can be referenced to determine the value of a “publicly traded security” and that a comparable market exists to value cryptocurrency, the Service noted that cryptocurrency does not fall with the definition of a “publicly traded security.” Under prior IRS guidance, cryptocurrency is treated like property and falls under similar appraisal requirements. Since cryptocurrency does not fall within this definition, a person contributing more than $5,000 will need to obtain a qualified appraisal. The CCA also addressed the “reasonable cause” exception to the Service’s ability to disallow the deduction for failure to get a qualified appraisal. Reasonable cause was found not to exist since the taxpayer self-prepared the tax return on which the deduction was taken. Most cases that find reasonable cause involve taxpayer reliance on the advice of a qualified professional in taking a position found on the return. The CCA states that the consistent mention of the word “appraisal,” “appraiser,” and

“appraised” on Form 8283 should have provided notice that substantial noncash donations need to be

supported by an appraisal. The Tax Court in Braen v. Commissioner noted that, in determining the amount of a

charitable contribution donation, all consideration received by the donor must be considered. In this case, a charitable deduction for a property transfer to a town at a discount from fair market value was disallowed since the deduction did not consider the settlement of longstanding zoning litigation on donor property. The court held that this was additional consideration received by the donor for the transfer. During the year, there were developments concerning syndicated conservation easements, a popular target for attack by the IRS. • In Green Rock LLC v. Commissioner , the Alabama Federal District Court joined the Sixth Circuit and the Tax Court in holding that the labeling by the Internal Revenue Service of syndicated conservation easement programs as an abusive tax transaction did not violate the notice and comments requirements of the Administrative Procedures Act.

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• The US Supreme Court has refused to review the Sixth Circuit decision in Oakbrook Land Holding LLC v. Commissioner , which supports the Service’s regulations on conservation easements on the extinguishment clause as not violating the APA. This circuit court agrees with the Tax Court but conflicts with the Eleventh Circuit Court holding in Hewitt v. Commissioner. However, it is unclear in the Hewitt case whether the regulation is considered invalid in total or only for the transfer documents before the court. • The Service issued Notice 2023-30 under the direction of the SECURE 2.0 Act, which instructed Treasury to provide safe harbor language dealing with the Extinguishment Clause and the Boundary Line Adjustment Clause for conservation easements. The Service offered safe harbor language and allowed those who had transferred eligible conservation easements to take advantage of these provisions by correcting prior deeds and having the corrected deeds signed by both donor and recipient and recorded by July 29, 2023. Concerning the Extinguishment Clause language, the safe harbor language follows the existing regulation, which provides that upon a subsequent transfer of the property (due to it being incapable of use for its original conservation purpose), the charity must get a pro rata

share of the proceeds based on the relative values of the interests determined on the date of contribution. CRYPTOCURRENCY In addition to the Chief Counsel Advance dealing with the contribution of cryptocurrency being subject to the qualified appraisal rules (discussed above), there were some other developments relating to cryptocurrency. In Rev Rul 2023-14, the IRS provided formal guidance on the taxation of cryptocurrency staking. The consequences were uncertain after the Jarrett case. In that case, the taxpayers filed an amended return claiming a $3,793 refund caused by eliminating $9,407 of income reported from cryptocurrency staking. When the IRS did not respond to the refund claim, the taxpayer filed a complaint in the US District Court of Tennessee. The Service ultimately issued a check for the refund based on the direction of the Tax Division of the US Department of Justice, but the taxpayers refused to accept the payment. Since the Service had paid the claim, the court found that there was no longer a live controversy and dismissed the case. The taxpayer appealed to the Sixth Circuit Court of Appeals, but Congress asked the IRS to provide guidance. The Service issued this notice in response. Building on its position that cryptocurrency is essentially property, the IRS determined that

the holder staking cryptocurrency is receiving a reward that constitutes an accumulation of wealth meeting the traditional definition of income. The amount received for staking is more than an increase in value to previously owned property. It is additional property. However, the ruling does note that if there are restrictions on the ability of the holder to sell, exchange, or otherwise dispose of any of the units received, the taxation event should be deferred until these limitations are gone. In Chief Counsel Advice 202302011, the hypothetical scenario was considered where cryptocurrency had little value at year-end (e.g., $01 per coin). The Service says that no loss is allowed under these circumstances since the taxpayer still owns the cryptocurrency, so there has been no identifiable event to establish a loss. Under the facts discussed under the CCA, there would be no abandonment since no action was taken to demonstrate this action. However, even if there were an abandonment, the Service concludes that this would need to be reported as a miscellaneous itemized deduction, which is not allowed under the TCJA for 2018 through 2025. PARTNERSHIPS In an interesting case, the Tax Court held that in a tiered structure, a partner could receive a profits interest in the upper-tier entity even though services were performed only for the lower-tier entity, ES NPA Holding LLC v. Comr. The

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court said that the profits interest rule, producing no taxable income to the service provider on receipt of the interest under Rev Rul93-27 applied. The court did not accept the Service’s argument that the holder of the interest had to provide services to the partnership, which issued the interest, and the provision of services to a subsidiary partnership was sufficient. It is not entirely clear that the Tax Court would have decided the same way on other facts. In this case, the capital structure of the upper tier mirrored that of the lower tier precisely. The IRS is apparently expecting additional reporting of liability allocations to partners on the partnership income tax return. In a meeting of the American Bar Association Section of Taxation, Adrienne Mikolshek, IRS Deputy Associate Chief Counsel for Pass Throughs and Special Industries, indicated that additional information will be required on schedule K-1 in the recourse liability section for the 2023 tax year. She suggested that the partnership must separately report recourse liabilities allocated to a partner related to a deficit restoration obligation and the portion pertaining to partner debt guarantees. This is evidently to provide partners with information concerning their potential economic risks for partnership debt. The draft of Form 1065 for 2023 issued in July adds a new question to the liability section, asking whether liabilities include amounts subject to a guarantee of partnership debt or a deficit restoration obligation. These amounts do not

need to be separately stated on the draft of Schedule K-1. However, the form references instructions, which have yet to be released. These instructions may require an attachment setting out these amounts. The draft Form 1065 also contains new questions concerning sec 754 adjustments, including whether the substantial built-in loss rules apply and whether the partnership has used or disposed of digital assets (similar to that found on the Form 1040 individual tax return). A case is scheduled to be heard by the Tax Court to consider the ’RS’ attempt to treat a limited partner as having self-employment income based on the partner’s activity on behalf of the partnership done through a corporate general partner. A common structure is to have a limited partnership be owned 99% by an individual as a limited partner and 1% by a corporate general partner, which is 100% owned by the same individual. Under the tax law, a limited partner usually is not subject to self-employment tax. However, the IRS has attacked this treatment and prevailed in situations where the purported limited partner is active in the partnership’s business. These cases have generally involved limited liability companies, where such activity does not threaten state law liability protection. In the case to be heard, the Service is arguing that services not performed directly by the individual in the capacity as a partner but through another entity should cause the self-employment tax to apply. We must keep our eyes on this case.

INFORMATION REPORTING The Service published final regulations for electronic filing requirements under the Taxpayer First Act of 2019. These rules are effective for covered returns and information returns required to be filed on or after January 1, 2004 – which applies to 2003 returns. The new rules require more returns to be filed electronically by severely limiting the small taxpayer exception. Under prior rules, electronic filing was required for information returns if one met a 250-return threshold. This was determined per return type. The new rules reduce the threshold to only ten returns. Furthermore, returns of different types must be aggregated to determine if the threshold is satisfied. The new electronic filing requirements will apply to: • Partnership returns • Corporate income tax returns (the prior exception for corporate income tax returns which report total assets of under $10 million at the end of the tax year is eliminated) • Unrelated Business Income Tax returns • Withholding tax returns • Certain information returns • Actuarial reports

• Certain excise tax returns • Registration statements • Disclosure statements

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The IRS reminded filers that beginning January 1, 2024, Form 8300 (used to report cash payments over $10,000) must be filed electronically with the Financial Criminal Enforcement Network (FinCEN). When applicable, Form 8300 must be filed within 15 days of the transaction. Since it may be difficult to know at any time during the year whether the 10-return threshold is satisfied, filers may want to file electronically. Businesses filing Form 8300 with FinCEN must set up an account with their BSA E-Filing System. New rules will apply to filing Form 1099-K for third-party settlement organizations (TPSO) like Venmo. Under prior rules, the payor was required to file Form 1099-K, where payments were made to a payee of over $200,000 for over 200 transactions. The American Rescue Plan (ARP) changed the threshold to require filing an information form where payments to a payee exceed $600, with no minimum number of transactions. While the new filing limits were to apply to 2022 returns (filed in 2023), in Notice 2023-10, the Service delayed implementation for one year. The old rules applied to 2022 forms, but the lower threshold will apply to 2023 forms 1099-K to be filed in 2024. The new filing rules raise a couple of practical problems. If a business utilizes a TPSO to pay a service provider for its business, the recipient may receive a Form 1099 MISC from the business and a Form 1099-K from the TPSO for the same payment. The recipient must be careful not to report the income

twice. Additionally, the Service may expect both payments on the individual’s tax return. New reporting rules were instituted under the Infrastructure Investment and Jobs Act of 2023 for reporting by “brokers” of transactions involving digital assets. Fortunately, the Service deferred implementation of these reporting rules for the sale of assets on or after January 1, 2025. This provides those covered under these rules additional time to institute procedures to record covered transactions. RETIREMENT PLANS Catch-Up Contributions: The IRS issued administrative guidance that ignores a technical glitch in the SECURE 2 Act, which appeared to eliminate catch-up contributions to 401(l), SIMPLE IRAs, and SEP plans beginning in 2024 for lower-earning taxpayers. The Internal Revenue Code permits those who are 50 or older as of the end of a tax year to make additional annual “catch-up” contributions to these retirement plans. The SECURE 2 Act provides that for 2024 and later years, these catch-up contributions would be required to be made as designated Roth account contributions for those earning $145,000 or more. Due to a drafting error, the text of the law eliminated language permitting catch-up contributions for those earning under $145,000. It appeared that a legislative solution would be required. Many plan administrators objected that more time was needed to apply the Roth catch-up rule for those making $145,000 or more.

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“Due to a drafting error, the text of the law eliminated language permitting catch-up contributions for those earning under $145,000.”

In Notice 2023-62, the IRS grants a two-year transition period through 12/31/2025, where catch up contributions for those earning $145,000 can be made to non-Roth accounts. More significantly, the Service is interpreting the law to allow pre-tax catch-up contributions for those making less than $145,000 Inherited IRAs: The Service provided additional relief for beneficiaries of inherited IRAs of participants who had reached their required beginning date before death. Under the SECURE Act, most designated beneficiaries of inherited retirement plan accounts must take a total payout from the plan by the end of the tenth calendar year following the year of death. Special rules apply to certain “eligible designated beneficiaries” – i.e., the participant’s spouse, a minor child, a disabled or chronically ill beneficiary, or an individual not more than ten years younger than the participant. Most practitioners believed that a beneficiary could defer taking any payments from the qualified plan account until the end of the tenth year following the participant’s death in all circumstances. However, the Service issued proposed regulations which provided that if required minimum distributions had begun for the deceased participant prior to death, the non-eligible designated beneficiary had to be paid at least as rapidly as payments would be made

to the participant during the 10-year period. Then, any balance would be payable in the tenth year after death. The Service deferred the application of this rule previously for 2021 and 2022. The Service has extended this rule for the 2023 tax year. The penalty for failure to make a required minimum distribution will not apply. Additionally, this will not constitute an operational failure of the plan. Plan Forfeitures: The Service also issued guidance dealing with the treatment of plan forfeitures in proposed regulations, which are intended to apply to plan years beginning on or after January 1, 2024. Plan can rely on these regulations for prior periods. • Defined Benefit Plans: Old rules require forfeitures to be used as soon as possible to reduce employer contributions under reg sec 1.401-7(a). This no longer accords with the new minimum funding standard. The proposed regulations provide that forfeitures are considered part of the reasonable actuarial assumptions in determining the amount of contributions made under the plan. The plan must expressly provide that forfeitures cannot be used to increase the benefit of any employee before termination of the plan or if the plan is frozen. This could require a plan amendment.

• Defined Contribution Plans. A common practice has been to put forfeited amounts into a suspense account, which accumulates over the years. IRS has previously indicated that this is not explicitly permitted under the Code. The proposed regulations state that the plan should describe how funds should be used. Suggestions are: 1) to pay plan administration expenses; 2) reduce employer contributions under the plan; or 3) increase the benefits of other participant accounts per plan terms. While not all uses are required, the regulations indicate there can be an operational problem with the plan if the forfeited funds are not absorbed within twelve months after the end of the plan year of forfeiture. Consequently, it may be advisable to permit all of these uses. Under the regulations, forfeitures incurred in a plan year that begins before 1/1/2023 will be treated as being incurred in the plan year beginning on or after 1/1/2024, CORPORATE TRANSPARENCY ACT Starting January 1, 2024, the new Corporate Transparency Act (CTA) requires certain “reporting companies” to file a report of “beneficial owners” with FinCEN. A reporting company is either (a) a

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domestic reporting company – a corporation, limited liability company, limited partnership, or similar entity created by the filing of a document with any state, territory, or Indian tribe; or (b) a foreign reporting company – a non-US entity that registers to do business with a US state, territory or Indian tribe. • For reporting companies formed before January 1, 2024, the first beneficial ownership reporting form is due January 1, 2025. • The first beneficial ownership reporting form is due ninety days after formation for reporting companies formed between January 1, 2024, and December 31, 2024. The time for reporting this category of company was thirty days. FinCEN provided an extension of the deadline to 90 days. • For reporting companies formed on January 1, 2025, and later, the first beneficial ownership reporting form is due thirty days after formation. After the initial report, there is no required annual or quarterly filing. However, if there is any change to the reported information, an amendment must be filed within 30 days after such beneficial ownership change. There are 23 listed exemptions for the CTA reporting requirements, which include: i) large operating companies (i.e., which have more than 20 full-time US employees;

reported more than $5 million of US sourced income for the prior year; and have an operating physical presence in the US; ii) non-profit entities and political organizations; iii) certain public companies, insurance companies, banks, registered investment companies, and certain entities already under oversight. Unfortunately, small businesses will be primarily subject to these rules. This may place an additional administrative burden on these companies, which they may not be currently prepared to track. FinCEN has issued a guide, which includes checklists, to determine the applicability of the filing requirement and who is considered a beneficial owner. A beneficial owner is an individual who directly or indirectly owns or controls at least 25% of the ownership interests or exercises substantial control over the entity. Information must also be reported for up to two Company Applicants for a reporting company formed on or after January 1. 2024. This is a person who directly files the documents creating the entity or is primarily responsible for controlling such filing. A substantial amount of information must be provided for each beneficial owner and company applicant, including i) the individual’s full legal name, ii) date of birth, iii) current residential address, or Business address if a company applicant is in the business of forming entities; iv) an identifying

number; and v) an image of the individual (e.g., passport photo, US driver’s license, US identification card, or, if there is no US issued document, a foreign passport) HOBBY LOSS RULES Several developments occurred this year involving activities entered into without a profit motive, commonly referred to as the “hobby loss” rules. Deductions are limited to the income generated for these activities, and a loss cannot be created. In audit situations where the IRS attempts to apply this limitation, it is essential to demonstrate a reasonable expectation of profit, including asset appreciation. The cases and administrative guidance point out the importance of handling the operations in a business-like manner to maximize the position that one is engaged in a for-profit activity. In Woodries v. Commissioner, the Tax Court determined joint return filers to be engaged in a for-profit activity. The court noted that they carried on the activity in a professional manner; one spouse had decades of ranching experience, and the taxpayers had a reasonable expectation that the ranch would increase in value. The taxpayer did not fare as well in Avery v. Commissioner. In that case, an attorney’s “business” expenses, which exceeded $300,000, were not treated to be in connection with an activity entered into for profit. The races were held in states distant from the attorney’s practice.

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