Tax News You Can Use - May 2024

Tax items you need to know from the past month

Welcome to Tax News You Can Use, a new monthly edition within Tom Talks Taxes designed to inform you about significant developments impacting tax professionals in active practice. Starting next month, this will be a paid subscriber feature, so if you want to receive this content monthly, please upgrade your subscription.

Big Tax Changes for Marijuana Taxation

The Drug Enforcement Agency is on the verge of reclassifying marijuana from Schedule I to Schedule III. If this occurs, §280E will no longer apply to the legal cannabis industry, and it will be entitled to claim the same deductions and credits as any other §162 trade or business activity.

The Congressional Research Service issued a report titled “Legal Consequences of Rescheduling Marijuana” that goes beyond the tax impacts of this change.

Can the IRS Assess Form 5471 Penalties?

In April 2023, the Tax Court held in Farhy, 160 T.C. No. 6 (2023), that the IRS lacked the statutory authority to assess §6038(b) penalties for failing to file Form 5471, Information Return of U.S. Persons With Respect To Certain Foreign Corporations. The minimum penalty is $10,000 per year, and continuation penalties can go up to $50,000 per year. Without assessment authority, the IRS must file a civil suit in federal district court to collect the §6038(b) penalty.

Fast forward to May 2023, and a three-judge D.C. Circuit Court of Appeals panel reversed the Tax Court’s decision. Farhy could request that the D.C. Circuit review the case en banc or appeal the decision to the Supreme Court. It is safe to assume there will be further litigation on this issue.

Clean Vehicle Credit Final Regulations Issued

The Treasury Department issued final regulations for the revised §30D clean vehicle credit and the new §25E previously-owned clean vehicle credit.

There are no surprises that are inconsistent with the previous guidance. Two items of particular note concerning the election to transfer the credit to the dealer:

1. The taxpayer can transfer their credit to the dealer regardless of their tax liability, making the credit de facto refundable if the election is made. If the taxpayer’s attestation is incorrect, and the taxpayer ultimately does not qualify for the credit, the taxpayer, not the dealer, must recapture the credit.

2. Each taxpayer can make up to two credit transfer elections per year; on a joint return, each spouse may make two transfer elections for four per year.

Energy Credit Transfer Final Regulations Issued

The Treasury Department issued final regulations for the clean energy credit transfer provisions under §6418, a new Code section from the Inflation Reduction Act of 2022.

The final regulations maintain that the transferred credits will generally be §469 passive credits to the transferee since they did not materially participate in the business that generated them, which limits their use to the tax imposed on passive income unless a §469 exception applies.

The following is from the preamble to the final regulations related to individuals utilizing transferred credits:

Lastly, commenters wanted confirmation that an individual transferee taxpayer can use eligible credits acquired as a result of a transfer election to offset passive income tax liability if the approach from the proposed regulations is adopted. The Treasury Department and the IRS confirm that if an individual transferee taxpayer does not materially participate (within the meaning of §§1.469-5 and 1.469-5T) in the activity that generates a specified credit portion, a transferred specified credit portion will be treated to the transferee taxpayer as arising in connection with a passive activity.

Foreign Trust and Gift Proposed Regulations Issued

The Treasury Department issued proposed regulations regarding foreign trust reporting under §§6048 and 6677 and foreign gift and inheritance reporting under §6039F. These regulations relate to the items on Form 3520, Annual Return To Report Transactions With Foreign Trusts and Receipt of Certain Foreign Gifts.

It is important to note that many taxpayers face significant penalties for non-compliance with these reporting requirements simply due to ignorance. For example, the vast majority of inheritances have no IRS reporting requirement because they are excluded from gross income under §102, but if the inheritance is from a nonresident alien exceeds $100,000, it must be reported on Form 3520, and failure to file can lead to a penalty of 25% of the inheritance.

If you have had clients severely impacted by these reporting requirements, I recommend you submit comments to the IRS to recommend changes in this area.

Interest Rates Stay at 8%

In Revenue Ruling 2024-11, the IRS announced that the interest rates for the 3rd quarter of 2024, starting on July 1, 2024, will be 8% for overpayments (7% in the case of a corporation), 8% for underpayments, 10% for large corporate underpayments, and 5.5% for the portion of a corporate overpayment exceeding $10,000.

2025 HSA Amounts Announced

In Rev. Proc. 2024-25, the IRS announced the maximum health savings account (HSA) deduction in 2025 will be $4,300 for self-only coverage and $8,550 for family coverage. Please note the family amount is not double the self-only amount.

For 2024, the maximum HSA deduction is $4,150 for self-only coverage and $8,300 for family coverage.

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