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IRS Extends Due Dates for Filing Tax Returns and Making Tax Payments to February 3, 2025, for Victims of Hurricane Beryl

The IRS has extended (IR-2024-191) the due dates for filing individual and business tax returns and making tax payments to February 3, 2025, for taxpayers affected by Hurricane Beryl.

The extension applies to taxpayers, including tax-exempt organizations, that reside or have a business in the federally declared disaster areas throughout the state of Texas. Taxpayers that are not located in the disaster area but have records there may also qualify for the extension. Taxpayers without a recorded address in the disaster area may still qualify for penalty abatement resulting from a late filing or payment notice. Affected taxpayers should contact the IRS to determine if their circumstances and situation give rise to penalty abatement.

The postponement until February 3, 2025, applies to various individual and business filings and payments, including:

Individuals, businesses and tax-exempt organizations with an extension to file their 2023 federal tax return (payments are not eligible for the February 3, 2025 extended time as they were due on the original due date)

Quarterly estimated tax payments normally due on September 16, 2024, and January 15, 2025

Quarterly payroll and excise tax returns normally due on July 31, 2024, October 31, 2024, and January 31, 2025

The IRS will also abate penalties on payroll and excise tax deposits due on or after July 5, 2024 and before July 22, 2024, so long as payment is made by July 22, 2024.

Taxpayers in the federally declared disaster area may claim uninsured or unreimbursed disaster-related casualty losses on their 2023 or 2024 federal income tax return. Taxpayers claiming a disaster loss due to Hurricane Beryl should include the FEMA declaration number (4798-DR) on the top of the first page of any return claiming a loss.

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Is it a Trade or Business? Or a Hobby or Investment?

Whether a revenue-generating activity constitutes a trade or business is usually straightforward — until it isn't. The most common confusion on this issue occurs around hobbies that generate revenue and investments that contain a degree of personal involvement. Many of these are difficult to distinguish from trades or businesses. For these activities, having the status of a trade or business can allow certain tax deductions, dictate filing methods and responsibilities, and impose additional taxes.

While numerous provisions refer to an activity's status as a trade or business, nowhere in the Code or regula-tions is it defined.

The Supreme Court concluded: "To be engaged in a trade or business, the taxpayer must be involved in the activity with continuity and regularity and … the taxpayer's primary purpose for engaging in the activity must be for income or profit. A sporadic activity, a hobby, or an amusement diversion does not qualify."

A presumption exists that, generally, any activity with greater revenue than deductions in at least three out of the five consecutive years ending with the tax year is engaged in for profit, but the IRS often employs a corollary, more than three out of five years as loss, when challenging the profit motive of an activity. Once challenged, the final determination of a profit motive looks to the nine nonexclusive relevant factors indicated in Regs. Sec. 1.183-2(b):

1. The manner in which the taxpayer carries on the activity;
2. The expertise of the taxpayer or their advisers;
3. The time and effort expended by the taxpayer in carrying on the activity;
4. The expectation that assets used in the activity may appreciate in value;
5. The success of the taxpayer in carrying on other similar or dissimilar activities;
6. The taxpayer's history of income or losses with respect to the activity;
7. The amount of occasional profits, if any, that are earned;
8. The taxpayer's financial status; and
9. Elements of personal pleasure or recreation.

If no profit motive is deemed present, not only does the activity fail to qualify as a trade or business, but de-ductions are limited to gross income from the activity, and the deductions must be included among miscellaneous deductions under Sec. 67(b), which are suspended for tax years 2018 through 2025 and in other years are allowed only to the extent they exceed 2% of adjusted gross income.

Charitable Contributions

With respect to charitable donations, you may receive a larger tax benefit by donating appreciated assets, such as stock, to a charity. Generally, the higher the appreciated value of an asset, the bigger the potential value of the tax benefit. Donating appreciated assets not only entitles the taxpayer to a charitable contribution deduction but also avoids the capital gains tax that would otherwise be due if the taxpayer sold the stock.

It's important to also keep in mind that tax deductions for contributions of appreciated long-term capital gain property may be limited to a certain percentage of adjusted gross income depending on the amount of the contribution and the type of property contributed.

A special provision allows taxpayers age 70 1/2 and older to make a charitable contribution of up to $100,000 directly from their IRAs to a charity. Beginning in 2023, such taxpayers may make a one-time, $50,000 distribution to a "split-interest entity" (i.e., a charitable gift annuity, charitable remainder unitrust, or charitable remainder annuity trust). Making a charitable contribution directly from an IRA has several benefits. First, since charitable contributions deductions are usually only available to individuals who itemize, a taxpayer who takes the standard deduction can benefit from this rule.

Second, by making a contribution directly to a charity, the donation counts towards the taxpayer's required minimum distribution but that amount is not included in income and thus reduces taxable income and adjusted gross income (AGI). A lower AGI is advantageous because it increases the taxpayer's ability to take medical expense deductions that might not otherwise be available. In addition, the reduction in AGI decreases the amount of the taxpayer's social security income subject to income tax and possibly the 3.8 percent net investment income tax if the taxpayer has a lot of investment income.

Guidance Issued on Applicability and Calculation of New Corporate AMT

The IRS intends to issue proposed regulations governing the corporate alternative minimum tax (AMT) under Sec. 55 as amended by the Inflation Reduction Act of 2022, P.L. 117-169, the Service said in Notice 2023-64.

The notice provides interim guidance, on which taxpayers can rely until the proposed regulations are issued, that advises corporations on when they are subject to corporate AMT, which financial statements are applicable financial statements, how to calculate adjusted financial statement income (AFSI) and the corporate AMT foreign tax credits, and other aspects of the corporate AMT.

The Inflation Reduction Act imposed a 15% minimum tax based on book income rather than taxable income on corporations with AFSI over $1 billion (and foreign-parented companies must meet an additional $100 million income threshold) beginning after Dec. 31, 2022. The Sec. 6655 requirement to pay estimated tax applies to taxpayers that owe the Sec. 55 corporate AMT. However, earlier this year, in Notice 2023-42, the Service waived the Sec. 6655 estimated tax penalty with respect to a corporation's Sec. 55 corporate AMT liability for tax years beginning after Dec. 31, 2022, and before Jan. 1, 2024.

IRS steps up ERC claim enforcement

The IRS and Treasury are looking at new ways to fight rampant fraud in employee retention credit (ERC) claims, including possible congressional action to move up the claim filing deadline and stricter oversight of tax preparers, IRS Commissioner Danny Werfel said Tuesday at a special roundtable session of tax professionals in Atlanta.

Werfel stated that, having cleared the backlog of valid ERC claims, the agency is intensifying compliance work and putting in place additional procedures to deal with fraud in the program.

According to Werfel, the IRS has increased audit and criminal investigation work on these claims, looking into both promoters and businesses filing dubious claims. The IRS has trained auditors examining the claims that pose the greatest risk of fraud, and the IRS Criminal Investigation division is identifying promoters of fraudulent claims, he said.

"The further we get from the pandemic, we believe the percentage of legitimate claims coming in is declining," Werfel said. Instead, the IRS is receiving more and more questionable claims, which the IRS is addressing by intensifying its compliance work, he said.
Businesses typically can file claims for the ERC until April 15, 2025. But those extra months are raising concerns for a credit that has generated a staggering amount of misleading marketing, Werfel stated.

"A terrible scenario is unfolding that hurts everyone involved — except the promoters," he said at the IRS Nationwide Tax Forum. "We will work with Treasury to explore legislative solutions we can share with Congress to help address fraud and error, including potentially putting an earlier ending date for business to claim the credit" and increasing IRS oversight of tax preparers.

Over 2.5 million ERC claims have been filed for the credit, which was available from March 13, 2020, to Dec. 31, 2021. The IRS has cleared most of the backlog, with 99% of claims about three months old as of mid-July, Werfel said. This progress has helped move along refunds to businesses that made legitimate claims, he said.

The Augusta Rule

To understand the premise, you first have to understand the Augusta Rule. The August Rule is another name for an exclusion found in section 280A of the tax code. Under that section, if you rent your personal residence for fewer than 15 days, you do not report any of the rental income and do not deduct any expenses as rental expenses. However, if you rent your home for 15 days or more during the year, you would include all your rental income in your income.

Private-Duty Nurses are Employees

The classification of workers can be a big deal from a tax viewpoint. If a worker is classified as an employee, the employer must withhold federal income tax and the employee’s half of Social Security and Medicare taxes (F**A). The employer must pay half of the F**A tax, the federal unemployment tax (FUTA) and must issue Form W-2 and W-3 for the wages and send a copy to the IRS.

If a worker qualifies as an independent contractor, the employer doesn’t have to worry about federal income tax withholding, F**A or FUTA.

Although there are no absolute rules for determining the status of workers, the IRS has established certain guidelines. Generally, workers don’t qualify as independent contractors if they perform services that are controlled by the employer. Independent contractors must operate independently. In the event the IRS contests a classification, however, an employer may be able to fall back on a special safe-harbor rule.

Section 530 relief: Under this provision, which refers to a section in a 1978 law, an employer is exempt from employment tax liability if it meets the following requirements:
The employer hasn't treated the worker as an employee for any period and doesn’t treat workers in similar positions as employees.
All federal returns that are required to be filed by the employer (including information returns) consistently treat the worker as an independent contractor.
The employer has a "reasonable basis" for not treating the worker as an employee. For example, the claim may be based on past cases or rulings, an IRS audit or the longstanding practice of a significant segment of the same industry.

A firm headquartered in Houston, Texas provided a group of nurses for private services in the homes of clients. The firm exercised significant control over the nurses. For instance, it supervised the nurses, set their work schedules, trained them, provided all of their supplies and paid insurance for them. The firm could fire these workers at will. Furthermore, the clients paid the firm directly for the nursing services—not to the nurses themselves.

When the firm treated some of the workers as independent contractors, rather than employees, the IRS disagreed. Ultimately, the Tax Court sided with the IRS based on the level of control exerted by the firm over the workers.

Alternatively, the firm tried to rely on Section 530 relief, but it didn’t measure up to the standards. The firm didn’t treat all workers in similar situations as independent contractors, nor did it file 1099s for the disputed workers. Finally, the Tax Court determined that it didn’t have a reasonable basis for treating the nurses as contractors instead of employees. Result: Section 530 relief was denied.