The House Ways and Means Committee recently offered a window into what the legislative body is working on when it comes to developing legislation to govern the taxation of digital assets, highlighting six bills and a discussion draft covering a range of topics.

The House Ways and Means Committee recently offered a window into what the legislative body is working on when it comes to developing legislation to govern the taxation of digital assets, highlighting six bills and a discussion draft covering a range of topics.

As part of the development, the committee held a June 9, 2026, hearing to solicit commentary from industry on the bills, during which committee Chairman Jason Smith (R-Mo.) called the “digital asset status quo is untenable. America needs clear tax rules of the road to remain the crypto capital of the world.”

Smith stated that cryptocurrency has “a market capitalization of over $2 trillion. That’s a massive industry by any measure, and nearly all other industries of a similar size enjoy clear tax policies.”

Chairman Smith noted that more and more people own cryptocurrency and “nearly a quarter of cryptocurrency holders earn less than $75,000 and the average crypto holder is nearly as likely to work in construction, manufacturing, or food service as tech or finance.”

The bills and discussion draft include:

• The Applying Existing Tax Anti-Abuse Rules to Digital Assets Act (H.R. 9172)
• The Charitable Deductions for Digital Donations Act (H.R. 9173)
• The Digital Assets Voluntary Disclosure Program Act (H.R. 9174)
• The Tax Clarity for Mining and Staking Act (H.R. 9175)
• The Providing Analogous Rules for Digital Assets Act (H.R. 9176)
• The Less Tax Paperwork for Digital Asset Owners Act (H.R. 9178)
• The End Digital Assets Tax Shelters Act (Discussion Draft)

The proposed legislation address “three key gaps in the current tax regime that make it harder for Americans to fully participate in the digital asset ecosystem,”

First, he said, “common digital transactions like mining and staking do not fit clearly into existing tax law. In other places, the tax code is silent as to the treatment of digital assets. The ambiguity creates an opening for taxpayers to exploit the law and avoid paying taxes in some circumstances and creates unfair tax burdens on others.

Second, Smith stated that “digital assets do not receive the tax benefit nor the protection from anti-abuse rules long granted to traditional financial assets. The imbalance between digital assets and traditional financial assets creates a two-tier system that unintentionally favor certain assets over others.”

Third, “crypto owners face burdensome tax compliance that makes using digital assets in ordinary commerce almost impossible.” Smith noted that “31 percent of crypto owners would like to buy a cup of coffee at the local shop, yet each $5 cup of coffee bought with a digital asset generates two new pieces of tax paperwork,” which adds a significant burden to both the IRS and the taxpayer.

Ranking Member Richard Neal (R-Mass.) had mixed reviews on the bills. He described his initial observation as some of the bills being “quite sensible, providing clear rules of the road for taxpayers looking to comply with the law. Other provisions sought the common sense goal of alleviating burdensome paperwork requirements, especially in situations where it’s highly unlikely that there would be any tax associated with those transactions, and indeed there are provisions that would close loopholes that are specific to the digital asset industry.”

However, Neal also noted that “it appears there are some provisions that deviate substantially from general tax principles, providing a distinct advantage that are beyond some other investments. We want to be careful about putting a thumb on the scale, and as we all know, it’s much easier to put something into the tax code than it is to take it out.”

Lawrence Zlatkin, Coinbase vice president of tax, testified during the hearing that the bills “represent the most comprehensive effort to modernize digital asset taxation that we have seen to date. Most importantly, this legislation recognized a fundamental reality: market structure and tax policy go hand-in-hand.”

In particular, Zlatkin highlighted H.R. 9178, which he testified “is an important step forward towards making stablecoin payments practical while reducing unnecessary reporting noise,” as well as H.R. 9173, which “provides long-needed clarity for mining and staking rewards, helping ensure taxpayers are not forced into tax obligations before they’ve generated liquidity though an actual sale.”

Mike Kaercher, deputy director of the Tax Law Center at New York University, cautioned that as the bills move through the process, “I encourage policymakers to consider three tax policy principles most closely: parity, administrability, and guardrails to prevent abuse. Some of the provisions in these bills would make improvements consistent with these principles.”

Among those, Kaercher testified that for example, “one of the bills would extend anti-abuse regimes, like wash sale rules and constructive sale rules, to digital assets. That’s a good idea. Another example is the de minimis provision on qualifying stablecoins – a targeted approach with guardrails can reduce paperwork and compliance burdens without creating substantial hidden tax subsidies for digital assets, but the rule should remain targeted because a broader de minimis provision risks abuse and would favor investments in digital assets over those in traditional finance.”

On the provision of deferring tax on mining and staking rewards, Kaercher testified that deferral “isn’t just the distortive subsidy, it could also undermine administrability. Deferral increases complexity for taxpayers and makes it harder for the IRS to do its job.”

He also warned about the possibility of government bailouts if guardrails and policy are not correctly developed.

“I think one thing for policymakers to consider on this is that if digital assets become a larger part of retirement accounts and the assets remain highly volatile, or in a worst-case scenario, crash, that would have an enormous impact on households’ retirement savings, and if that were to happen, I think policymakers would have to think about whether to respond with something like a bailout.”

The Treasury Department, Department of Labor, and Department of Health and Human Services finalized regulations implementing the independent dispute resolution (IDR) process established under the No Surprises Act (P.L. 116-260). The regulations provide new disclosure and administration requirements for group health plans and health insurance issuers related to surprise billing protections. Although the final rules are generally effective August 3, 2026, several provisions have delayed applicability dates.

The Treasury Department, Department of Labor, and Department of Health and Human Services finalized regulations implementing the independent dispute resolution (IDR) process established under the No Surprises Act (P.L. 116-260). The regulations provide new disclosure and administration requirements for group health plans and health insurance issuers related to surprise billing protections. Although the final rules are generally effective August 3, 2026, several provisions have delayed applicability dates.

The final rules require plans and issuers to use claim adjustment reason codes (CARCs) and remittance advice remark codes (RARCs), as specified in guidance, when providing any paper or electronic remittance advice to an entity that does not have a contractual relationship with the plan or issuer. These disclosures must be included along with the initial payment or notice of denial of payment for certain items and services subject to the surprise billing protections in the No Surprises Act.

The regulations also make several procedural updates to the federal IDR process. These include refinements to the open negotiation period, the formal initiation of the IDR process, and the dispute eligibility review procedures. Further, the rules address the payment and collection of administrative fees as well as certified IDR entity fees.

The agencies also finalized the definition of bundled payment arrangements, amended requirements related to batched items and services, and amended the rules for extensions of timeframes due to extenuating circumstances. Additionally, the regulation finalizes provisions that require plans and issuers to register in the federal IDR portal.

T.D. 10049

The IRS has published the inflation adjustment factor and reference prices for determining the credit for renewable electricity production for calendar year 2026 sales of kilowatt hours of electricity produced in the U.S. or a U.S. possession from qualified energy resources.

The IRS has published the inflation adjustment factor and reference prices for determining the credit for renewable electricity production for calendar year 2026 sales of kilowatt hours of electricity produced in the U.S. or a U.S. possession from qualified energy resources.

The inflation adjustment factor for qualified energy resources is 2.0570. The reference price for facilities producing electricity from wind is 3.17 cents per kilowatt hour. The reference prices for facilities producing electricity from closed-loop biomass, open-loop biomass, geothermal energy, solar energy, municipal solid waste, qualified hydropower production and marine and hydrokinetic renewable energy have not been determined for calendar year 2026.

Phaseout Limits

For electricity sold during the calendar year 2026, the renewable electricity production credit is not subject to a phaseout under Code Sec. 45(b)(1) for electricity produced from wind. This is because the 2026 reference price for electricity produced from wind, 3.17 cents per kilowatt hour, does not exceed 8 cents multiplied by the inflation adjustment factor (2.0570). The phase-out of the credit also does not apply to electricity sold in 2026 and produced from closed-loop biomass, open-loop biomass, geothermal energy, solar energy, municipal solid waste, qualified hydropower production and marine and hydrokinetic renewable energy.

Credit Amount Adjustments

The credit for renewable electricity production for calendar year 2026 under Code Sec. 45(a) is 3.1 cents per kilowatt hour on the sale of electricity produced from the qualified energy resources of wind, closed-loop biomass and geothermal energy. The credit is 1.5 cents per kilowatt hour on the sale of electricity produced in open-loop biomass facilities, landfill gas facilities, trash facilities, qualified hydropower facilities and marine and hydrokinetic renewable energy facilities.

Notice 2026-37

The IRS updated guidance relating to the energy community provisions in:

• Code Sec. 45 production tax credit for electricity produced from certain resources;
• — the resource-neutral Code Sec. 45Y clean electricity production credit that largely replaces the Code Sec. 45 credit for property placed in service after 2024;
• — the Code Sec. 48 business energy investment credit for investments in property that produces electricity from certain resources; and
• — the resource-neutral Code Sec. 48E clean energy investment credit that largely replaces the Code Sec. 48 credit for property placed in service after 2024.

The IRS updated guidance relating to the energy community provisions in:

• — the Code Sec. 45 production tax credit for electricity produced from certain resources;
• — the resource-neutral Code Sec. 45Y clean electricity production credit that largely replaces the Code Sec. 45 credit for property placed in service after 2024;
• — the Code Sec. 48 business energy investment credit for investments in property that produces electricity from certain resources; and
• — the resource-neutral Code Sec. 48E clean energy investment credit that largely replaces the Code Sec. 48 credit for property placed in service after 2024.

Annual Statistical Area Category and Coal Closure Category Update

Notice 2026-39 publishes information taxpayers may use to determine whether they meet certain requirements under the Statistical Area Category or the Coal Closure Category for purposes of qualifying for energy community bonus credit amounts or rates.

• (1) Appendix 1 lists counties and county-equivalents that qualify as energy communities because they meet the Fossil Fuel Employment threshold and the unemployment rate requirement for calendar year 2025.
• (2) Appendix 2 lists newly identified census tracts with either a coal mine closure or a coal-fired electric generating unit retirement, and census tracts directly adjoining those tracts.
• (3) Appendix 3 lists census tracts that newly qualify as coal closure census tracts because of location-data corrections issued since the publication of Notice 2025-31.

Notice 2026-39

The Treasury Department and the IRS have announced plans to issue proposed regulations under Code Sec. 4960 expanding the definition of a covered employee for purposes of the excise tax on excessive compensation paid by applicable tax-exempt organizations (ATEOs). The guidance follows amendments made by section 70416 of the One, Big, Beautiful Bill Act and applies to taxable years beginning after December 31, 2025.

The Treasury Department and the IRS have announced plans to issue proposed regulations under Code Sec. 4960 expanding the definition of a covered employee for purposes of the excise tax on excessive compensation paid by applicable tax-exempt organizations (ATEOs). The guidance follows amendments made by section 70416 of the One, Big, Beautiful Bill Act and applies to taxable years beginning after December 31, 2025.

Before the legislative change, a covered employee generally was one of an ATEO’s five highest-compensated employees for the tax year at issue or an individual who previously held that status. The amended law broadens the definition to include any employee of an ATEO and certain former employees for taxable years beginning after 2025. However, individuals who were not covered employees under the pre-2026 rules will not become covered employees solely because they worked for an ATEO before 2026.

The forthcoming regulations are expected to eliminate references to the five highest-compensated employees standard and make conforming changes. The agencies intend to retain exceptions similar to the current limited-hours and non-exempt funds exceptions, but discontinue the limited-services exception because its rationale no longer applies. Until proposed regulations are issued, ATEOs may rely on Notice 2026-36. The Treasury Department and the IRS requested comments on the proposed rules by August 4, 2026.

Notice 2026-36

IR 2026-73

The IRS has issued the 2025 Data Book detailing the agency’s activities during fiscal year 2025. The report provided an overview of the agency’s operations to meet statutory responsibilities. The revenue collected by the Service exceeded $5.3 trillion.

The IRS has issued the 2025 Data Book detailing the agency’s activities during fiscal year 2025. The report provided an overview of the agency’s operations to meet statutory responsibilities. The revenue collected by the Service exceeded $5.3 trillion.

“Fiscal Year 2025 was a pivotal year, as we began the process of implementing tax relief for hardworking Americans enacted as part of the Working Families Tax Cuts Act (WFTC),” said IRS CEO Frank J. Bisignano. “The numbers in the Data Book tell the story of an organization that serves as a key partner in the administration’s mission,” he added. The CEO also highlighted efforts to transform the IRS into a digital-first agency. These efforts would reduce paper processing through the “zero paper” initiative.

During the 2026 filing season, around 45 percent of individual tax returns claimed one or more of the new tax benefits from the WFTC. The average refund on a return claiming one of these deductions was over $3,200, as of May 27.

Further, online tools, including the IRS Online Account were upgraded to expand access and add new features. Expanded technology and advanced analytics would allow the Service to identify high-risk areas of non-compliance and tax fraud. Finally, more information can be found here.

IR 2026-74

The IRS announced the release of a new calculator to determine interest rates for large, multi-year construction and manufacturing projects. The calculator is named Percentage-of-Completion Method (PCM) Look-Back Interest Calculator and is MS Excel based. It supports calculations for Form 8697, Interest Computation Under the Look-Back Method for Completed Long-Term Contracts. However, it does not address all fact patterns or complexities associated with look-back interest calculations.

The IRS announced the release of a new calculator to determine interest rates for large, multi-year construction and manufacturing projects. The calculator is named Percentage-of-Completion Method (PCM) Look-Back Interest Calculator and is MS Excel based. It supports calculations for Form 8697, Interest Computation Under the Look-Back Method for Completed Long-Term Contracts. However, it does not address all fact patterns or complexities associated with look-back interest calculations.

“The IRS is focused on improving and enhancing how we serve taxpayers,” said IRS Chief Executive Officer Frank J. Bisignano. “We are transforming the IRS into a digital-first agency that provides the best possible experience for taxpayers, and tools like this calculator are an important step in that effort,” he added.

The look-back interest is determined using a three-step process:

• Hypothetically reallocating income to prior tax year based on actual revenues and costs;
• Computing hypothetical tax overpayments or underpayments of tax; and
• Calculating interest on tax underpayments or overpayments.

Taxpayers and tax practitioners may submit feedback about the calculator, by emailing Stakeholder Liaison and including "Look-Back Interest Workbook Feedback" in the subject line. More information can be found here.

IR 2026-70

Every year the IRS publishes a list of projects that are currently on its agenda. For example, the IRS may indicate through this list that it is working on a new set of procedures relating to claiming business expenses. The new 2014–2015 IRS Priority Guidance Plan, just released this September, has indicated that IRS is working on guidance relating to whether employer-provided meals offered on company premises are taxable as income to the employee. In the Priority Guidance Plan’s Employee Benefits Section B.3, the IRS listed: "Guidance under §§119 and 132 regarding employer-provided meals" in its list of projects for the upcoming year.

Every year the IRS publishes a list of projects that are currently on its agenda. For example, the IRS may indicate through this list that it is working on a new set of procedures relating to claiming business expenses. The new 2014–2015 IRS Priority Guidance Plan, just released this September, has indicated that IRS is working on guidance relating to whether employer-provided meals offered on company premises are taxable as income to the employee. In the Priority Guidance Plan’s Employee Benefits Section B.3, the IRS listed: "Guidance under §§119 and 132 regarding employer-provided meals" in its list of projects for the upcoming year.

This could be significant for many employees who could potentially have to report as taxable income what they formerly thought were free meals provided by their employer. Currently, an employer may offer meals to employees on the work premises as a tax-free perk, if the meals are provided for the employer’s convenience. The question of whether the meals are provided for the convenience of the employer is determined, however, on the basis of all the facts and circumstances. Clearer guidance from the IRS may signal that in the future, examiners will pay closer attention to meals provided by employers.

Background

A growing trend among employers is to provide free gourmet meals to their employees. Employers argue this is for their convenience, which if true would make the meals non-taxable. But in some instances the IRS and others have posited that such meals more closely resemble income.

The Tax Code currently sets forth some basic guidelines for how to determine whether meals are being provided “for the convenience of the employer.” First of all, an employment contract or state statute are not determinative of whether the meals are intended as compensation. Secondly, the meals must be provided for a substantial noncompensatory business reason.

Factors indicating that meals are furnished for the convenience of the employer include:

• A short time available for lunch due to legitimate business reasons and not just to shorten the work day;
• The need for availability of employees for emergencies;
• Insufficient other eating facilities nearby; and
• A standard charge for meals regardless of whether they are eaten.

The IRS has also noted in its existing regulations that meals provided simply to promote morale or goodwill of employees, to attract new employees or as a means of providing additional compensation are not considered to be furnished for the convenience of the employer.

Examples

The IRS’s current regulations contain examples of meals that the IRS has considered to be legitimately provided to employees, tax-free, because they are provided for the employer’s conveniences. These include:

• Meals provided by a bank to its bank tellers to retain them on the premises during the lunch hour because the bank's peak workload occurs during the normal lunch period; and
• Meals provided to casino workers, who are required to eat their meals on the premises in order to minimize the security searches they undergo as they come and go, and to ensure that staff does not succumb to the temptations of nearby casinos rather than promptly returning to work.

Conversely, meals provided by a restaurant to a waitress on her days off are not tax-free because they are perks and not for the employer’s convenience.

Taxpayers who are self-employed must pay self-employment tax on their income from self-employment. The self-employment tax applies in lieu of Federal Insurance Contributions Act (FICA) taxes paid by employees and employers on compensation from employment. Like FICA taxes, the self-employment tax consists of taxes collected for Social Security and for Medicare (hospital insurance or HI).

Taxpayers who are self-employed must pay self-employment tax on their income from self-employment. The self-employment tax applies in lieu of Federal Insurance Contributions Act (FICA) taxes paid by employees and employers on compensation from employment. Like FICA taxes, the self-employment tax consists of taxes collected for Social Security and for Medicare (hospital insurance or HI).

The self-employment tax is levied and collected as part of the income tax. The tax must be taken into account in determining an individual's estimated taxes. The self-employed taxpayer is responsible for the self-employment tax, in effect paying both the employer's and the employee's share of the tax. The tax is calculated on Schedule SE, filed with the individual's income tax return, and is then reported on the Form 1040.

Self-Employment Tax Rate

The self-employment tax rate is 15.3 percent of self-employment income. This is the same overall percentage that applies to an employee's compensation. The rate combines the 12.4 percent Social Security tax and the 2.9 percent Medicare tax. Self-employed individuals can deduct one-half of the self-employment tax. (For 2011 and 2012, the Social Security tax rate was reduced from 12.4 to 10.4 percent.) If the individual's net earnings from self-employment are less than $400 (or $100 for a church employee), the individual does not owe self-employment tax.

Like FICA taxes, the 12.4 percent Social Security tax only applies to earning up to a specified threshold. For 2013, this threshold was $113,700; for 2014, the threshold is $117,000. There is no ceiling for applying the 2.9 percent Medicare tax.

Self-Employment

The tax applies to net earnings from self-employment. This is the taxpayer's gross income for the year from operating a trade or business, minus the deductions allowable to the trade or business, plus the taxpayer's distributive share of income or loss from a partnership.

A person is self-employed if he or she carries on a trade or business as a sole proprietor or independent contractor. A general partner of a partnership that carries on a trade or business is also considered to be self-employed. Self-employment does not include the performance of services by an employee. However, an employee who also carries on a separate business part-time can be self-employed with respect to the business.

Additional Medicare Tax

Effective for 2013 and subsequent years, both employees and self-employed individuals must pay an additional 0.9 percent Medicare tax if their FICA wages or self-employment income exceeds specified thresholds $250,000 for joint filers; $125,000 for married filing separately; and $200,000 for all other taxpayers. This tax is determined on Form 8959.

The current likelihood that your business will become involved in an employment tax audit or an employment-related income tax audit has increased: the IRS is aggressively attempting to reduce the "tax gap" of uncollected revenues in a time of increasing budget austerity. Employment tax noncompliance is estimated by the IRS to account for approximately $54 billion of the tax gap. Under-reporting of FICA makes up $14 billion; under-reporting of self-employment tax accounts for $39 billion; and under-reporting of unemployment tax accounts for $1 billion in lost revenue. Add to that total amount over $50 billion in estimated employment-associated income tax lost that is the result of missteps in withholding obligations, tip reporting, and proper fringe benefit classification . . . and employers are forewarned. The IRS is stepping up its auditing in these areas and has been conducting studies to maximize the best use of its agents' time to do so.

Latest audit survey

The IRS is conducting an intensive audit of 6,000 employment tax returns to obtain an up-to-date picture of taxpayers' employment tax practices. This will enable the IRS to better devote its compliance resources to the most important areas of noncompliance and to the taxpayers most likely not to be in compliance.

Based on these audits, the IRS's Chief of Employment Tax Policy has spotlighted several areas of concern that the IRS will focus on. These areas include backup withholding, tip reporting, worker classification, and fringe benefit reporting.

Backup withholding. Backup withholding is the number one problem uncovered in the audits. The IRS can impose backup withholding on income reported on Forms 1099 that is not ordinarily subject to withholding, such as interest, dividends, and nonemployee compensation. Failure to provide a taxpayer identification number (TIN) on the Form 1099, an incorrect TIN, or a TIN that does not match the name on the form can trigger backup withholding. A taxpayer's failure to report the income can also trigger backup withholding.

Tip reporting. Tip reporting is a major concern of the IRS. The IRS considers noncompliance a widespread problem, especially for small businesses that are not aware of the issues. The IRS has been focusing on educating employers, and is not auditing employment tax returns filed before 2014. An important issue is the failure to differentiate between service charges and tips. A payment that is automatically added to a bill may be a service charge. A service charge is characterized as Social Security wages, rather than Social Security tips. The distinction is important, because employers can claim a Social Security credit for FICA obligations attributable to tips that exceed the minimum wage, but cannot claim a credit for taxes paid on service charges.

Worker misclassification. To avoid FICA and FUTA taxes and income tax withholding, some employers intentionally classify employees as independent contractors. This has been a longstanding concern for the IRS, and the recent audits have shown that the problem continues. The agency regularly conducts employment tax audits to reclassify workers as employees. To facilitate reclassification to employee status, the IRS has two settlement programs for employers: the Classification Settlement Program (CSP) for taxpayers under audit, and the Voluntary Classification Settlement Program (VCSP) for companies that are not under an employment tax audit and meet other requirements. The IRS has received 1,550 applications under the VCSP and has reclassified approximately 25,000 workers. Companies that agree to prospectively treat workers as employees generally pay reduced taxes and may get audit protection for past years.

Fringe benefit reporting. Fringe benefits can be cash or noncash benefits provided in addition to regular wages. As a compliance matter, fringe benefits are taxable and must be included in the recipient's income, unless the Tax Code specifically excludes the benefit from taxable income. Moreover, if the recipient is an employee, the value of the benefit is additional compensation subject to employment taxes. Fringe benefits can be a particular problem for small companies, where owners seek to reduce their taxable income by taking noncash benefits, such as the use of company vehicles. A bargain sale of a house to an employee could also generate taxable income subject to employment taxes.

Conclusions

Employment taxes present an increasing risk to employers as the IRS steps up focuses on what it suspects is a heretofore largely untapped source of revenue. The IRS is certain to use the data now being harvested through its latest audit surveys. Many employers may do well to review how their employment tax compliance now measures up to this new degree of scrutiny.

In January, the U.S. Tax Court threw a curve ball in many retirement planning strategies. The court held that a taxpayer could make only one nontaxable rollover contribution within each one-year period regardless of how many IRAs the taxpayer has. The court found that the one-year limitation under Code Sec. 408(d)(3)(B) is not specific to any single IRA owned by an individual but instead applies to all IRAs owned by a taxpayer. The court's decision was a departure from a long-time understanding of IRS rules and publications and, for several weeks after, it was unclear what approach the IRS would take. Now, the IRS has announced that it will follow the court's decision and revise its rules and publications. Everyone contemplating an IRA rollover needs to be aware of this important development.

Rollovers

Individuals have traditionally enjoyed flexibility in moving their retirement savings from one type of retirement plan to another type of plan. A rollover is a transfer of a distribution received from an IRA or other retirement plan by the recipient to another IRA or type of retirement plan owned by the same recipient. A rollover has important tax considerations. The amount distributed is not included in the recipient's income if the distribution is transferred to an eligible arrangement within 60 days after it is received. In certain cases, the 60-day period may be extended by the IRS.

Generally, only the owner of the IRA may roll over an amount. A surviving spouse who receives a distribution after the death of the account owner can make rollovers to the same extent as the account owner could have. There are also special rules for Roth IRAs and other retirement arrangements.

Tax Court case

In Bobrow, TC Memo. 2014-21, a married couple received distributions from more than one IRA in 2008. The couple claimed that they could make more than one tax-free rollover. The Tax Court disagreed.

The court found that Code Sec. 408(d)(3)(B) limits the frequency with which a taxpayer may make a nontaxable rollover contribution. The one-year limitation is not specific to any single IRA a taxpayer has but instead applies to all of the taxpayer's IRAs. If Congress had intended to allow individuals to take nontaxable distributions from multiple IRAs per year, the court found that Code Sec. 408(d)(3)(B) would have been worded differently.

Immediately after the decision, many benefits professionals pointed out that the IRS's rules and publications appeared to be contrary to the court's decision. In particular, many taxpayers noted that IRS Publication 590, Individual Retirement Plans, seemed to say that multiple rollovers were permissible if taken from different accounts.

IRS action

The IRS intends to amend the existing rules and revise Publication 590 to clarify that it will adopt the court's decision. Additionally, many IRA trustees, the IRS explained, may need time to make changes to reflect Bobrow. Therefore, in a relief measure, the IRS will not apply the Tax Court's decision to any rollover that involves an IRA distribution occurring before January 1, 2015.

Trustee-to-trustee transfers

A rollover must be distinguished from a trustee-to-trustee transfer. The Tax Court explained in its opinion that individuals who maintain more than one IRA may make multiple direct rollovers from the trustee of one IRA to the trustee of another IRA without triggering the one-year limit under Code Sec. 408(d)(3)(B). Transferring funds directly between trustees, the court found, does not result in a distribution within the meaning of Code Sec. 408(d)(3)(A). Since the funds are not within the direct control and use of the participant, they are not considered to be rollovers.

Planning

The court's decision and the IRS's action may impact your retirement planning. Keep in mind also that trustee-to-trustee transfers are not affected by the court's decision, which leaves some flexibility intact for planning. If you have any questions about IRA rollovers, please contact our office.

The health care reform package (the Patient Protection and Affordable Care Act and the Health Care and Education Reconciliation Act of 2010) imposes a new 3.8 percent Medicare contribution tax on the investment income of higher-income individuals. Although the tax does not take effect until 2013, it is not too soon to examine methods to lessen the impact of the tax.

Net investment income

"Net investment income" includes interest, dividends, annuities, royalties and rents and other gross income attributable to a passive activity. Gains from the sale of property not used in an active business and income from the investment of working capital are also treated as investment income. Further, an individual's capital gains income will be subject to the tax. This includes gain from the sale of a principal residence, unless the gain is excluded from income under Code Sec. 121, and gains from the sale of a vacation home. However, contemplated sales made before 2013 would avoid the tax.

The tax applies to estates and trusts, on the lesser of undistributed net income or the excess of the trust/estate adjusted gross income (AGI) over the threshold amount ($11,200) for the highest tax bracket for trusts and estates, and to investment income they distribute.

However, the tax will not apply to nontaxable income, such as tax-exempt interest or veterans' benefits.

Deductions

Net investment income is gross income or net gain, reduced by deductions that are "properly allocable" to the income or gain. This is a key term that the Treasury Department expects to address in guidance, and which we will update on developments. For passively-managed real property, allocable expenses will still include depreciation and operating expenses. Indirect expenses such as tax preparation fees may also qualify.

For capital gain property, this formula puts a premium on keeping tabs on amounts that increase your property's basis. It also focuses on investment expenses that may reduce net gains: interest on loans to purchase investments, investment counsel and advice, and fees to collect income. Other costs, such as brokers' fees, may increase basis or reduce the amount realized from an investment. As such, taxpayers may want to consider avoiding installment sales with net capital gains (and interest) running past 2012.

Thresholds

The tax applies to the lesser of net investment income or modified AGI above $200,000 for individuals and heads of household, $250,000 for joint filers and surviving spouses, and $125,000 for married filing separately. MAGI is your AGI increased by any foreign earned income otherwise excluded under Code Sec. 911; MAGI is the same as AGI for someone who does not work overseas.

Example. Jim, a single individual, has modified AGI of $220,000 and net investment income of $40,000. The tax applies to the lesser of (i) net investment income ($40,000) or (ii) modified AGI ($220,000) over the threshold amount for an individual ($200,000), or $20,000. The tax is 3.8 percent of $20,000, or $760. In this case, the tax is not applied to the entire $40,000 of investment income.

Exceptions to the tax

Certain items and taxpayers are not subject to the 3.8 percent Medicare tax. A significant exception applies to distributions from qualified plans, 401(k) plans, tax-sheltered annuities, individual retirement accounts (IRAs), and eligible 457 plans. There is no exception for distributions from nonqualified deferred compensation plans subject to Code Sec. 409A. However, distributions from these plans (including amounts deemed as interest) are generally treated as compensation, not as investment income.

The exception for distributions from retirement plans suggests that potentially taxable investors may want to shift wages and investments to retirement plans such as 401(k) plans, 403(b) annuities, and IRAs, or to 409A deferred compensation plans. Increasing contributions will reduce income and may help you stay below the applicable thresholds. Small business owners may want to set up retirement plans, especially 401(k) plans, if they have not yet established a plan, and should consider increasing their contributions to existing plans.

Another exception is provided for income ordinarily derived from a trade or business that is not a passive activity under Code Sec. 469, such as a sole proprietorship. Investment income from an active trade or business is also excluded. However, SECA (Self-Employment Contributions Act) tax will still apply to proprietors and partners. Income from trading in financial instruments and commodities is also subject to the tax.

The additional 3.8 percent Medicare tax does not apply to income from the sale of an interest in a partnership or S corporation, to the extent that gain of the entity's property would be from an active trade or business. The tax also does not apply to business entities (such as corporations and limited liability companies), nonresident aliens (NRAs), charitable trusts that are tax-exempt, and charitable remainder trusts that are nontaxable under Code Sec. 664.

Income tax rates

In addition to the tax on investment income, certain other tax increases proposed by the Obama administration may take effect in 2011. The top two marginal income tax rates on individuals would rise from 33 and 35 percent to 36 and 39.6 percent, respectively. The maximum tax rate on long-term capital gains would increase from 15 percent to 20 percent. Moreover, dividends, which are currently capped at the 15 percent long-term capital gain rate, would be taxed as ordinary income. Thus, the cumulative rate on capital gains would increase to 23.8 percent in 2013, and the rate on dividends would jump to as much as 43.4 percent. Moreover, the thresholds are not indexed for inflation, so more taxpayers may be affected as time elapses.

Please contact our office if you would like to discuss the tax consequences to your investments of the new 3.8 percent Medicare tax on investment income.

Keeping the family business in the family upon the death or retirement of the business owner is not as easy as one would think. In fact, almost 30% of all family businesses never successfully pass to the next generation. What many business owners do not know is that many problems can be avoided by developing a sound business succession plan in advance.

Keeping the family business in the family upon the death or retirement of the business owner is not as easy as one would think. In fact, almost 30% of all family businesses never successfully pass to the next generation. What many business owners do not know is that many problems can be avoided by developing a sound business succession plan in advance.

In the event of a business owner's demise or retirement, the absence of a good business succession plan can endanger the financial stability of his business as well as the financial security of his family. With no plan to follow, many families are forced to scramble to outsiders to provide capital and acquire management expertise.

Here are some ideas to consider when you decided to begin the process of developing your business' succession plan:

Start today. Succession planning for the family-owned business is particularly difficult because not only does the founder have to address his own mortality, but he must also address issues that are specific to the family-owned business such as sibling rivalry, marital situations, and other family interactions. For these and other reasons, succession planning is easy to put off. But do you and your family a favor by starting the process as soon as possible to ensure a smooth, stress-free transition from one generation to the next.

Look at succession as a process. In the ideal situation, management succession would not take place at any one time in response to an event such as the death, disability or retirement of the founder, but would be a gradual process implemented over several years. Successful succession planning should include the planning, selection and preparation of the next generation of managers; a transition in management responsibility; gradual decrease in the role of the previous managers; and finally discontinuation of any input by the previous managers.

Choose needs over desires. Your foremost consideration should be the needs of the business rather than the desires of family members. Determine what the goals of the business are and what individual has the leadership skills and drive to reach them. Consider bringing in competent outside advisors and/or mediators to resolve any conflicts that may arise as a result of the business decisions you must make.

Be honest. Be honest in your appraisal of each family member's strengths and weaknesses. Whomever you choose as your successor (or part of the next management team), it is critical that a plan is developed early enough so these individuals can benefit from your (and the existing management team's) experience and knowledge.

Other considerations

A business succession plan should not only address management succession, but transfer of ownership and estate planning issues as well. Buy-sell agreements, stock gifting, trusts, and wills all have their place in the succession process and should be discussed with your professional advisors for integration into the plan.

Developing a sound business succession plan is a big step towards ensuring that your successful family-owned business doesn't become just another statistic. Please contact the office for more information and a consultation regarding how you should proceed with your business' succession plan.

If you are considering selling business property that has substantially appreciated in value, you owe it to your business to explore the possibility of a like-kind exchange. Done properly, a like-kind exchange will allow you to transfer your appreciated business property without incurring a current tax liability. However, since the related tax rules can be complex, careful planning is needed to properly structure the transaction.

If you are considering selling business property that has substantially appreciated in value, you owe it to your business to explore the possibility of a like-kind exchange. Done properly, a like-kind exchange will allow you to transfer your appreciated business property without incurring a current tax liability. However, since the related tax rules can be complex, careful planning is needed to properly structure the transaction.

Like-kind exchanges: The basics

The tax law permits you to exchange property that you use in your business or property that you hold for investment purposes with the same type of property held by another business or investor. These transactions are referred to as "like-kind" exchanges and, if done properly, can save your business from paying the taxes that normally would be due in the year of sale of the appreciated property.

Instead of an immediate tax on any appreciation in the year of sale, a like-kind exchange allows the appreciated value of the property you're transferring to be rolled into the working asset that you'll be receiving in the exchange. Mixed cash and property sales, multi-party exchanges, and time-delayed exchanges are all possible under this tax break.

What property qualifies?

In order to qualify as a tax-free like-kind exchange, the following conditions must be met:

• The property must be business or investment property. You must hold both the property you trade and the property you receive for productive use in your trade or business or for investment. Neither property may be property used for personal purposes, such as your home or family car.
• The property must not be held primarily for sale. The property you trade and the property you receive must not be property you sell to customers, such as merchandise.
• Most securities and instruments of indebtedness or interest are not eligible. The property must not be stocks, bonds, notes, chooses in action, certificates of trust or beneficial interest, or other securities or evidences of indebtedness or interest, including partnership interests. However, you can have a nontaxable exchange of corporate stocks in certain circumstances.
• There must be a trade of like property. The trade of real estate for real estate, or personal property for similar personal property is a trade of like property.

Examples:

Like property:

• An apartment house for a store building
• A panel truck for a pickup truck

Not like property:

• A piece of machinery for a store building
• Real estate in the U.S. for real estate outside the U.S.

• The property being received must be identified by a specified date. The property to be received must be identified within 45 days after the date you transfer the property given up in trade.
• The property being received must be received by a specified date.The property to be received must be received by the earlier of:
  1. The 180th day after the date on which you transfer the property given up in trade, or
  2. The due date, including extensions, for your tax return for the year in which the transfer of the property given up occurs.

Dealing with "boot" received

If you successfully make a straight asset-for-asset exchange, as discussed earlier, you will not pay any immediate tax with respect to the transaction. The property you acquire gets the same tax "basis" (your cost for tax purposes) as the property you gave up. In some circumstances, when you are attempting to make a like-kind exchange, the properties are not always going to be of precisely the same value. Many times, cash or other property is included in the deal. This cash or other property is referred to as "boot." If boot is present in an exchange, you will be required to recognize some of your taxable gain, but only up to the amount of boot you receive in the transaction.

Example:

XYZ Office Supply Co. exchanges its business real estate with a basis of $200,000 and valued at $240,000 for the ABC Restaurant's business real estate valued at $220,000. ABC also gives XYZ $35,000 in cash. XYZ receives property with a total value of $255,000 for an asset with a basis of $200,000. XYZ's gain on the exchange is $55,000, but it only has to report $35,000 on its tax return - the amount of cash or "boot" XYZ received. Note: If no cash changed hands, XYZ would not report any gain or loss on its tax return.

Using like-kind exchanges in your business

There are several different ways that like-kind exchanges can be used in your business and there are, likewise, a number of different ways these exchanges can be structured. Here are a couple of examples:

Multi-party exchanges. If you know another business owner or investor that has a piece of property that you would like to acquire, and he or she only wants to dispose of the property in a like-kind exchange, you can still make a deal even if you do not own a suitable property to exchange. The tax rules permit you to enter into a contract with another business owner that provides that you are going to receive the property that he or she has available in exchange for a property to be identified in the future. This type of multi-party transaction can also be arranged through a qualified intermediary with unknown third (or even fourth) parties.

Multiple property exchanges. Under the like-kind exchange rules, you are not limited in the number of properties that can be involved in an exchange. However, the recognized gain and basis of property is computed differently for multiple property exchanges than for single property-for-property exchanges.

Trade-ins. You could also structure a business to business trade-in of machinery, equipment, or vehicles as a like-kind exchange.

There are many ways that you can advantageously use the like-kind exchange rules when considering disposing of appreciated business assets. However, since the rules are complicated and careful planning is critical, please contact the office for assistance with structuring this type of transaction.

Starting your own small business can be hectic - yet fun and personally fulfilling. As you work towards opening the doors, don't let the onerous task of keeping the books rain on your parade. With a little planning upfront and a promise to "keep it simple", you can get an effective system up and running in no time.

Starting your own small business can be hectic - but also personally fulfilling. As you work towards opening the doors, don't let the onerous task of keeping the books rain on your parade. With a little planning upfront, you can get an effective system up and running quickly.

The IRS requires all businesses to keep adequate books and records but accurate financial records can be used by the small business owner in many other ways. Good records can help you monitor the progress of your business, prepare financial statements, prepare your tax returns, and support items on your tax returns. The key to accurate and useful records is to implement a good bookkeeping system.

The most important thing that you as a busy business owner should remember when planning your bookkeeping system is that simple is better. Bookkeeping should not interfere with the daily operations of your business or impede the progress of your business' goals in any way.

Decisions, decisions....

Probably the hardest part about bookkeeping for any small business is getting started. There are so many decisions to make that the business owner may seem overwhelmed. Single or double entry? Manual or computerized system? Should I try to do it myself or hire a bookkeeper?

Here are some good questions to ask yourself as you are making some very important upfront decisions:

• • Single or double entry (manual bookkeeping systems). While a single entry system can be simple and straightforward (especially when you are just starting out a small business), a double entry system has built-in checks and balances that can help assure accuracy and control.

• • Manual or computerized. Will a manual system quickly become overwhelmed with the expected volume of transactions from your business? Will your efforts be less if a certain element of your transactions were automated? If you plan on doing your books yourself, do you have the time/patience to learn a new software program?

• • Self-prepare or outsource. How much time will you or your employees have to allocate to recordkeeping activities each day? Do you have any accounting experience or at least a good head for numbers? Does your budget allow for the additional expense of an outside bookkeeper? If outsourcing was an option, would it make sense to outsource some of it and do some yourself (e.g. use a payroll processing service but do your own daily transaction input and bank reconciliation)?

As you sit down to make these fundamental decisions regarding your bookkeeping system, here are a few things to keep in mind:

Be realistic. Be honest with yourself and realistic about the amount of time and energy you will be able to devote to the bookkeeping task. As a new small business owner, you will be pulled in a hundred different directions - make sure that you take on only as much of the bookkeeping task as you feel you can do without making yourself crazy.

Do your homework. Before you commit to any bookkeeping decision, it makes sense to find out what resources are available and at what cost. For example, you may find out that having your payroll processed by an outside company costs much less than you imagined or that a bookkeeping software package you thought was difficult is actually very straightforward. An informed decision is a good decision.

Ask for references and recommendations. Other successful small business owners have a wealth of knowledge surrounding all aspects of running a business, including bookkeeping. Ask them about their experiences with recordkeeping and find out what has (and what has not) worked for their companies. If they know of a good, reasonably priced bookkeeper or they've had a good experience with a software package, take notes.

See the forest for the trees. Translation: Give the minutia only as much attention as it needs and concentrate on the big picture of your business' finances. Implementing a bookkeeping system - on your own or with outside help - that is simple and reliable will give you the opportunity to step back and evaluate how effectively your business is operating.

There are many important decisions to make when you start your own business, including ones that seem mundane - such as recordkeeping - but that can have a significant impact on your ability to successfully operate your business. Before you make any of these decisions, we encourage you to contact the office for a consultation.

Once you have decided on the type of bookkeeping system to use for your new business, you will also be faced with several other accounting and tax related decisions. Whether to use the cash or accrual method of accounting, for example, although not always a matter of choice, is an important decision that must be carefully considered by the new business owner.

Generally, there are two methods of accounting used by small businesses - cash and accrual. The basic difference between the two methods is the timing of how income and expenses are recorded. Your method of accounting is chosen when you file your first tax return. If you ever wish to change your accounting method after that, you'll need to file for IRS approval, which can be a time-consuming process.

While no single accounting method is required of all taxpayers, you must use a system that clearly shows your income and expenses, and maintain records that will enable you to file a correct return. If you do not consistently use an accounting method that clearly shows your income, your income will be figured under the method that, in the opinion of the IRS, clearly shows your income.

Cash method

Most small businesses use the cash basis method of accounting, which is based on real time cash flow. Under the cash method, income is recorded when it is received, and expenses are reported when they are paid. For example, if you receive a check in the mail, it becomes a cash receipt (and is recorded as income). Likewise, when you pay a bill, you record the payment as an expense. The word "cash" is not meant literally - it also covers payments by check, credit card, etc.

Accrual method

Under the accrual method, you record income when it is earned, not necessarily when it is received. Likewise, you record your expenses when the obligation arises, not necessarily when you pay the bills. In short, the accrual method of accounting matches revenue and expenses when they occur whether or not any cash changes hands. For example, suppose you're hired as a consultant and complete a job on December 29^th, but you haven't been paid for it. You would still recognize all expenses you incurred in relation to that engagement regardless of whether you've been paid yet or not. Both the income and the expenses are recorded for that year, even if payment is received and bills are paid the following January.

Businesses are required to use the accrual method of accounting in several instances, including:

• If the business has inventory.
• If the business is a C corporation with gross annual sales exceeding $5 million (with certain exceptions for personal service companies, sole proprietorships, farming businesses, and a few others).

If you operate two or more separate and distinct businesses, you can use a different accounting method for each if the method clearly reflects the income of each business. The businesses are considered separate and distinct if books and records are maintained for each business. If you use the accounting methods to create or shift profits or losses between the businesses (for example, through inventory adjustments, sales, purchases, or expenses) so that income is not clearly reflected, the businesses will not be considered separate and distinct.

Other methods of accounting

In addition to the cash and accrual methods of accounting, there are other ways that your business can account for your income and expenses (e.g., hybrid, long-term contract). These methods are beyond the scope of this article but may be available for your business.

As stated previously, you choose your method of accounting when you file your first tax return. Because there are advantages and disadvantages to each of the accounting methods, it is important that you make the right decision. If you need assistance in determining the best accounting method for your business, please contact the office.

As you open the doors of your new business, the last thing on your mind may be the potential for loss of profits through employee oversight or theft - especially if you are the only employee. However, setting up some basic internal controls to guard against future loss before you hire others can save you headaches in the future.

As you open the doors of your new business, the last thing on your mind may be the potential for loss of profits through employee oversight or theft - especially if you are the only employee. However, setting up some basic internal controls to guard against future loss before you hire others can save you headaches in the future.

Soon after you start making money and the world realizes that they cannot live without your goods or service, you will probably need to hire employees. Although necessary for your growing company, hiring employees increases your risk of loss through errors, oversights and theft.

Implementing internal controls to help you monitor your business can decrease the need for constant supervision of your employees. Internal controls are checks and balances to prevent fraud, limit financial losses and reduce errors or oversights by employees. For example, the most basic internal control concept requires that certain tasks be handled by different people. This process, called "separation of duties", can greatly decrease the probability of loss.

The following basic internal control checklist includes suggestions that, once implemented, can help you and your employees avoid concerns about fraud or theft in the workplace:

As your company grows, you may want to become less and less involved with the day-to-day operations of the business. The internal controls you put into place now will help keep the profits up, the losses down, and help you sleep better at night. If you need any assistance with setting up internal controls for you business, please feel free to contact our office.

The rise of paperless processing and remote access to computer systems has made increased computer security imperative. Establishing an effective password system can help keep your data secure while allowing you greater control over the access to your company's vital information.

The rise of paperless processing and remote access to computer systems has made increased computer security imperative. Establishing an effective password system can help keep your data secure while allowing you greater control over the access to your company's vital information.

Your best weapon to combat illegal access is a password system. Once it is installed, take the following steps to support it and ensure its effectiveness:

Create password guidelines. Clearly worded and easily accessible password guidelines can nip a computer security problem in the bud. Keep in mind that an outside hacker does only 15 percent of computer break-ins - 85% of such security breaches comes from inside, usually from disgruntled employees.

Create a clear access rights policy and be sure everyone knows what it is. Certain levels and certain positions will have rights to specified parts of the system. Review log-in registers to see if a change in pattern pops up. Investigate anything suspicious immediately.

Control remote access. An off-the-shelf program, such as a firewall or encryption program, will add the security you need. A firewall system will allow access only to specific programs from the outside. Unfortunately, it's often the protected information your workers need. Encryption programs use codes to "scramble" data. Although persistent hackers can crack codes, these programs can make your information relatively safe.

If you take these steps to better your company's data security, you can be certain that the investment will pay off in the end. If you have any further questions, please feel free to contact our office.