Background

In 2019, Congress added subsection (d) to 7508A, which granted an automatic extension for any “qualified taxpayer” in an area affected by a federally declared disaster. The extension began at “the earliest date of the incident specified in the declaration” and lasted to “the date which is 60 days after the latest incident so specified.” In 2021, Congress changed the language of subsection (d), which effectively changed the extension period to a maximum period of 60 days after the declaration was issued, not the end of the disaster itself. The 2025 amendment, and current version of the code, changed the extension time from 60 days after the declaration was issued to 120 days.

In the case of Kwong v. United States, the United States Court of Federal Claims effectively ruled that the 2019 version of section 7508A applies to all claims related to Covid-19 disasters because the 2021 amendment (and presumably the 2025 amendment) could only be applied to disasters declared after the amendment because the statute explicitly provided that it was only effective for disasters declared after the amendment was adopted.  As such, the court found that the extension period began on January 20, 2020, the start of the emergency declaration, and ended on July 10, 2023.

Implications of the Kwong Case

Under normal circumstances, taxpayers are subject to certain filing deadlines and failure to file by the applicable deadline will result in failure to file (and potentially failure to pay) penalties. The Code also imposes significant interest normally incurred from the applicable due date of the payment. The COVID disaster declaration granted an automatic extension for both filing tax returns and paying income tax. This is unique to the COVID declaration and does not normally occur in other federal disaster declarations.

This means that if a taxpayer filed a return late during the COVID disaster relief period believing the deadline was April 15^th, the taxpayer may be entitled to receive a refund of any interest and penalties paid during that period because their returns were not actually considered late as long as they were filed and any taxes were paid by July 10, 2023.

Remaining Uncertainty Around Kwong

The government appealed the Kwong decision on May 15, 2026, but as it currently stands, the relief period for qualified taxpayers to file timely refund claims may have extended to July 10, 2026. A refund claim is usually timely if the taxpayer files it within three years of the filing of a return or two years from the payment of taxes, whichever expires later. If the Kwong tolling period applies, taxpayers who filed returns or were required to file tax returns during the taxable years of 2019 through 2022, may be able to file a refund claim for any interest and penalties paid but only if the returns were filed before July 10, 2023 and the claim for refund is filed by July 10, 2026. Even though the Kwong case is currently being appealed and the case will likely not be finally resolved prior to the July 10, 2026 deadline, our recommendation is to file a protective claim for any refunds owed under these rules prior to the July 10, 2026 deadline.

There are many other legal issues to consider including whether a taxpayer is a “qualified taxpayer” entitled to extended relief, which is not addressed in this article. It is important for one to retain experienced tax counsel to navigate the refund process and to ensure one’s rights are protected.

For more information, or to seek counsel from our Taxation practice group, please reach out to request a consultation or call us at 216-696-1422. McCarthy Lebit would like to thank law clerk Logan B. Kijewski for his work in assisting with the preparation of this legal advisory for The More Report.

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This information is provided for general informational purposes only and should not be construed as legal advice. Readers should consult with qualified legal counsel regarding their specific circumstances before taking any action based on the information presented.

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For children born between January 1, 2025, and December 31, 2028, the federal government provides a $1,000 initial contribution. Parents may still open a Trump Account for any U.S. citizen under age 18, even if the child is not eligible for this initial contribution. Parents may contribute up to $5,000 annually, and employers may also contribute to an employee’s child’s account, with those contributions counting toward the same annual limit. There is no income or means testing limitations on the child’s family, so the accounts are open to all minors who meet the age requirements.

Prior to the child attaining age 18, funds must be invested in low-fee, passively managed mutual funds or exchange-traded funds (“ETFs”), with fees capped at 0.1% of the account balance. While these limitations are intended to control costs and encourage diversification, they also restrict investment flexibility, including the ability to use age-based or target-date strategies. On January 1 of the year the child turns 18, the account automatically converts to a traditional individual retirement account (“IRA”) and is no longer subject to the investment limitations.

When evaluating whether a Trump Account makes sense, it is important to understand how these accounts function in practice.

Key Financial Features of Trump Accounts

Trump Accounts allow for tax-deferred growth, meaning contributions are not taxed until withdrawn. Withdrawals may be made penalty free at the same age-requirements imposed upon traditional IRA rules. If withdrawals are taken before such time, a 10% early withdrawal penalty applies. However, unlike traditional IRAs, Trump Accounts provide exceptions to the 10% early withdrawal penalty for certain uses, including qualified education expenses and up to $10,000 for a first-time home purchase. These exceptions are broader than those available under custodial IRAs. However, even when the penalty is waived, withdrawals are still subject to ordinary income tax.

Broader Financial Considerations

Funds held in a Trump Account may be considered when determining eligibility for certain federal assistance programs, such as SNAP. After the account converts to a traditional IRA at age 18, it becomes subject to the rules governing IRAs, including early withdrawal penalties in most circumstances.

There are still a number of unanswered questions regarding how Trump Accounts will operate in practice. One of the most significant uncertainties is whether the $5,000 annual contribution limit will be treated as a gift subject to the annual federal gift tax exclusion.

In addition, the strict withdrawal requirements associated with a Trump Account significantly limit access to funds during the child’s minority as these are meant to be a tool primarily used for retirement planning. Because withdrawals are generally not permitted before age 18 and the account automatically converts to a traditional IRA on January 1 of the year the child turns 18, contributions may be effectively inaccessible for many families’ planning purposes.

Finally, families whose primary goal is to save for education expenses may prefer to consider a Section 529 plan. While both accounts offer tax-advantaged growth, qualified withdrawals from a Section 529 plan for education expenses are generally tax-free at the federal level (and often at the state level as well). By contrast, even when Trump Account withdrawals are used for qualified education expenses, they remain subject to federal, state, and local income taxes.

For more information, or to seek counsel from our Taxation or Trusts & Estates practice groups, please reach out to request a consultation or call us at 216-696-1422.

*Please note that on April 30, 2026, Trump signed an executive order and made a reference in his announcement to a new retirement account he called the “Trump IRA”. There is no such thing as a Trump IRA.

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This information is provided for general informational purposes only and should not be construed as legal advice. Readers should consult with qualified legal counsel regarding their specific circumstances before taking any action based on the information presented.

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The Growing IRS Focus on Digital Creators

For IRS purposes, an influencer is an individual monetizing digital following through (1) platform payouts and ad revenue; (2) brand sponsorships and partners; (3) affiliate marketing commissions; (4) merchandise and digital products; (5) subscriptions and memberships; and (6) speaking and appearance fees. In an IRS audit, there are three critical areas where the IRS or state agency will audit (1) whether the influencer is engaging in a trade or business or being an influencer as a hobby; (2) whether the influencer is an employee or independent contractor; and (3) whether the influencer is conducting a combined business or conducting separate ventures.

The Importance of Recordkeeping

The bottom line is that the IRS and state tax agencies are generally skeptical about influencers’ deductions because there is a concern that influencers may be disguising personal vacation expenses as tax-deductible business expenses, or improperly deducting wardrobe costs, or deducting home office expenses that were personal in nature and turning personal meals into deductible business expenses. The IRS and state tax agencies alike will be successful in challenging these deductions unless the influencer maintains appropriate documentation and records establishing that all their deductions are business expenses and therefore deductible.

Social Media as an Audit Tool

Make no mistake that the IRS will also be scrutinizing the income reported by influencers. The IRS will be looking at the influencer’s social media profile to determine whether the lifestyle that is portrayed in the profile is properly reflected on the influencer’s tax return. Just as with the student athletes discussed in our first installment, cash is not the only thing that results in income. The influencer must report the FMV of all goods and services received in connection with its influencer business. Many influencers run into problems because they receive free products from companies or all expenses paid trips to hotels in exchange for a few posts about the product or hotel. These items are taxable and if the FMV of these items are not properly reported, the influencer may create significant tax issues for themselves.

When to Seek Professional Guidance

In conclusion, it is imperative that digital content creators consider the financial and tax implications of running their respective businesses and select the appropriate business structure to suit their needs. Mistake of law is never a defense in the course of a civil tax audit and if the IRS feels that a taxpayer has willfully failed to report income to the IRS or inflated its tax deductions, these taxpayers could find themselves facing criminal charges for tax fraud in addition to being slapped with civil liabilities.

For more information, or to seek counsel from our Taxation practice group, please reach out to request a consultation or call us at 216-696-1422.

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This information is provided for general informational purposes only and should not be construed as legal advice. Readers should consult with qualified legal counsel regarding their specific circumstances before taking any action based on the information presented.

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Why It’s Important

Although the releases do not change the tax law, they are important because they dictate how and when taxpayers can receive written guidance, including letter rulings, determination letters, and technical advice.

Revenue Procedure 2026-1: Letter Rulings and Determination Letters

Rev. Proc. 2026-1 explains the revised procedures for requesting letter rulings, determination letters, and information letters on federal tax issues issued by the Large Business and International Division, Small Business/Self-Employed Division, Wage and Investment Division, and the Tax Exempt and Government Entities Division. This procedure also outlines which IRS offices handle specific requests, the information required for submission, user fee information, and circumstances under which the IRS may decline to issue guidance.

Revenue Procedure 2026-2: Technical Advice

Rev. Proc. 2026-2 discusses Technical Advice Memoranda (TAMs), which can arise during IRS audits or examinations where IRS personnel request guidance from the National Office on how the law applies to a specific set of facts. The updated procedure explains when advice can be requested by the taxpayer, how to participate in the process, how the results are issued, and the rights a taxpayer has when a field office requests a TAM.

Revenue Procedure 2026-3: Domestic “No-Rule” Areas

Rev. Proc. 2026-3 addresses areas of domestic tax law in which the IRS does not issue letter rulings. These areas generally involve issues that are otherwise unsuitable for guidance. If a topic appears on a “no-rule” list, the IRS will typically decline to rule, though in some cases they may choose to provide information letters on the subject.

Revenue Procedure 2026-4: Tax-Exempt, Government Entities, and Employee Plans

Rev. Proc. 2026-4 addresses procedures for government entities, tax-exempt organizations, and employee benefit plans. This procedure supports Rev. Proc. 2026-1 by addressing the considerations that apply to these entities.

Revenue Procedure 2026-5: Exempt Organizations

Rev. Proc. 2026-5 focuses on determination letters for exempt organizations specifically. This includes applications for tax-exempt status and other exempt organization issues. It also addresses remedies available under Internal Revenue Code Section 7428, which grants specific organizations the right to seek a declaratory judgment from certain U.S courts regarding their tax-exempt status. It provides a procedure to resolve disputes over qualifications and aims to protect from litigation.

Revenue Procedure 2026-7: International “No-Rule” Areas

Rev. Proc. 2026-7 mirrors the domestic “no-rule” list from Rev. Proc. 2026-3, however this applies to international and cross-border matters.

Overall, the updates presented by the IRS in its Annual Revenue Procedure for 2026 don’t represent a substantive shift in law or policy, rather just an annual update. As with previous years and anything presented by the IRS, it’s important for taxpayers to understand these changes and when, how, and under what circumstances a taxpayer may seek guidance from the IRS. It’s important to consult your tax professional for guidance on how these updates can impact you.

For more information or to seek counsel from our Taxation group, please reach out to request a consultation or call us at 216-696-1422.

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[1] https://www.irs.gov/irb/2026-01_IRB

This information is provided for general informational purposes only and should not be construed as legal advice. Readers should consult with qualified legal counsel regarding their specific circumstances before taking any action based on the information presented.

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New Limitations and Rules

The OBBB changed the rules for charitable deductions for both itemizing and non-itemizing taxpayers. Beginning January 1, 2026, itemizing taxpayers are now subject to a charitable deduction floor of 0.5% of their adjusted gross income and will continue to be subject to a 60% cap on cash contributions made to public charities. Additionally, the new rules cap the tax benefit of itemized charitable deductions at 35% for those in the 37% marginal tax bracket.  These rules will also impact charitable deduction carryovers for such taxpayers. For taxpayers that do not elect to itemize, taxpayers filing individually are now eligible to deduct charitable contributions up to $1,000 and taxpayers filing jointly are now eligible for a maximum $2,000 charitable deduction. Previously, charitable deductions were only available to itemizing taxpayers.

Similar to itemizers, a new floor applies to C-Corporations, which means donations are only deductible in excess of 1% of the company’s taxable income. The existing 10% taxable income ceiling for C-Corporations is unchanged.

Impact on Charitable Foundations

While these legislative changes are driven by a number of factors, the real-world impact on those affected is often overlooked. According to a new research report by Indiana University Lilly Family School of Philanthropy, the OBBB is projected to reduce charitable giving by roughly $5.69 billion annually (roughly 1%). That total is estimated based on the following:

• An increase of $4.39B of gifting by those non-itemizing taxpayers now motivated to give because of the new above-the-line deduction available to them.
• A decrease of $2.43B of gifting due to the 0.5% floor for itemizing taxpayers.
• A decrease of $6.1B of gifting due to the 35% cap on value of the deductions for those in the highest tax bracket.
• A decrease of $1.55B by C-Corporation gifting due to the 1% floor on corporate charitable gifting.

These effects may not be fully seen until one full year after the law is in effect.

Increase in Donor-Advised Funds

Based off the projected impacts of the OBBB, there has been a rise in the use of a Donor Advised Fund (DAF). DAFs are charitable giving accounts that allow donors to make a large deductible contribution in one year and then give to their chosen charities over a span of time as they choose.

Ultimately, the OBBB signals a notable shift in how taxpayers approach charitable giving. As these changes take effect, taxpayers and charitable organizations should reevaluate their strategies. While new thresholds and reduced incentives may limit immediate tax advantages, there are tools that exist that can play an important role in maximizing tax efficiency and charitable giving impact.

For more information, or to seek counsel from our Taxation group, please reach out to request a consultation or call us at 216-696-1422.

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This information is provided for general informational purposes only and should not be construed as legal advice. Readers should consult with qualified legal counsel regarding their specific circumstances before taking any action based on the information presented.

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The NIL Rule Change & Its Tax Impact

In July 2021, the NCAA changed its rules and began allowing student athletes to profit from their NIL. These student athletes are now permitted to enter endorsement deals, appear in advertisements, sell merchandise, and receive compensation for social media content. Student athletes are generally young adults between the ages of 18 and 22 who may not have any experience with filing their own taxes, as they are often claimed on their parents’ tax returns as dependents while they are in college. However, this change in their ability to profit from their NIL deals will have significant financial and tax implications that neither they nor their parents may fully understand or are prepared to handle.

What Counts as NIL Income?

For example, a student athlete does not always realize that NIL income is more than just cash. It includes non-cash compensation like merchandise, gift cards, cars, and other benefits, such as expense paid trips. The fair market value (“FMV”) of goods and services is considered taxable income. Student athletes must track all income, whether it comes in cash, goods, or services, and every dollar must be accounted for on their tax filings. When the IRS or state tax agency audits them, the IRS often finds out during their audit that the student athlete or the family have not reported the FMV of all of the goods and services the student athlete and/or their family received in connection with the student athlete’s business.

Common Deduction Mistakes & Risks

Additionally, a student athlete and their families may not fully understand what a student athlete may deduct on their returns. Some student athletes and their families have gotten themselves into predicaments with the IRS and state tax agencies because they have deducted exorbitant amounts in expenses without the required documentation to support the expenses. As a general rule, expenses must be ordinary and necessary expenses paid or incurred in the carrying on of a trade or business. Ordinary expenses are those that are common and accepted in your type of business, and necessary expenses are those that are helpful and appropriate for your business. However, reimbursable expenses for which the taxpayer has the ability to be reimbursed by a third party for those expenses are never deductible by the taxpayer.

Planning Ahead to Avoid Consequences

In conclusion, it is imperative that student athletes and their families, if applicable, consider the financial and tax implications of running their respective businesses and select the appropriate business structure to suit their needs. Mistake of law is never a defense in the course of a civil tax audit and if the IRS feels that a taxpayer has willfully failed to report income to the IRS or inflated its tax deductions, these taxpayers could find themselves facing criminal charges for tax fraud in addition to being slapped with civil liabilities.

For more information on this topic or to seek counsel from our Taxation group, please reach out to request a consultation or call us at 216-696-1422.

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This information is provided for general informational purposes only and should not be construed as legal advice. Readers should consult with qualified legal counsel regarding their specific circumstances before taking any action based on the information presented.

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The following information details the list as announced by the IRS. The official notice for this year’s “Dirty Dozen” can be found on the IRS website.

(1) Email Phishing Scams

The IRS continues to see a barrage of email and text scams targeting taxpayers and others. Taxpayers and tax professionals should be alert to fake communications from entities posing as legitimate organizations in the tax and financial community, including the IRS, state tax agencies and tax software companies. These messages arrive in the form of unsolicited texts or emails to lure unsuspecting victims into providing valuable personal and financial information that can lead to identity theft. There are two main types:

• Phishing: An email sent by fraudsters claiming to come from the IRS. The email lures the victims into the scam with a variety of ruses such as enticing victims with a phony tax refund or threatening them with false legal or criminal charges for tax fraud.
• Smishing: A text or smartphone SMS message where scammers often use alarming language such as, “Your account has now been put on hold,” or “Unusual Activity Report,” with a bogus “Solutions” link to restore the recipient’s account. The promise of unexpected tax refunds is another potential tactic used by scam artists.

As a reminder, never click on any unsolicited communication claiming to be from the IRS as it may surreptitiously load malware. This may also be a way for malicious hackers to load ransomware that keeps the legitimate user from accessing their system and files.

The IRS has special information available to help people understand and report email scams.

(2) Bad Social Media Advice

Another growing concern in 2025 continues to involve incorrect tax information on social media that can mislead honest taxpayers with bad advice, potentially leading to identity theft and tax problems. Social media platforms routinely circulate inaccurate or misleading tax information, including on TikTok where people share wildly inaccurate tax advice. Some involve urging people to misuse common tax documents like Form W-2.

The IRS and CASST warn people not to fall for these scams, and urge them to follow trusted social media advice from the IRS, tax professionals and other reputable sources. The IRS reminds taxpayers who knowingly file fraudulent tax returns that they could potentially face significant civil and criminal penalties.

(3) IRS Individual Online Account Help from Scammers

Swindlers can pose as a “helpful” third party and offer to help create a taxpayer’s IRS Individual Online Account at IRS.gov. In reality, no help is needed, and the agency offers tips on how to sign up and avoid scams. The IRS Individual Online Account provides taxpayers with valuable personal tax information. But watch out: Third parties making these offers will try to steal a taxpayer’s personal information and try to submit fraudulent tax returns in the victim’s name to get a big refund.

(4) Fake Charities

Bogus charities are a perennial problem that can intensify whenever a crisis or natural disaster strikes. Scammers set up these fake organizations to take advantage of the public’s generosity. They seek money and personal information, which can be used to further exploit victims through identity theft.

Taxpayers who give money or goods to a charity might be able to claim a deduction on their federal tax return if they itemize deductions, but charitable donations only count if they go to a qualified tax-exempt organization recognized by the IRS.

(5) False Fuel Tax Credit Claims

A major concern during the past year involved taxpayers who were misled into believing they were eligible for the Fuel Tax Credit. The credit is meant for off-highway business and farming use and is not available to most taxpayers. However, unscrupulous tax return preparers and promoters, including people on social media, continue enticing taxpayers into inflating their refunds by erroneously claiming the credit. The IRS has seen an increase in the promotion of filing certain refundable credits using Form 4136, Credit for Federal Tax Paid on Fuels. The IRS urges people to get more information and ensure they are properly claiming this credit.

(6) Credits for Sick Leave and Family Leave

This specialized credit is available for self-employed individuals for 2020 and 2021 during the pandemic; the credit is not available for later tax years. The IRS is seeing repeated instances where taxpayers are using Form 7202, Credits for Sick Leave and Family Leave for Certain Self-Employed Individuals, to incorrectly claim a credit based on income earned as an employee and not as a self-employed individual.

(7) Bogus Self-Employment Tax Credit

Social media advice continues to circulate about a non-existent “Self-Employment Tax Credit” that’s misleading taxpayers into filing false claims. Promoters market it as a way for self-employed people and gig workers to get big payments for the COVID-19 pandemic period. Similar to misleading marketing around the Employee Retention Credit, there is inaccurate information being circulated that suggests many people qualify for the tax credit and payments of up to $32,000 when they actually do not.

In reality, the underlying credit being referred to in social media is not called the “Self-Employment Tax Credit,” it’s a much more limited and technical credit called the Credits for Sick Leave and Family Leave. Many people simply do not qualify for these credits, and the IRS is closely reviewing claims coming in under this provision, so taxpayers filing claims do so at their own risk.

(8) Improper Household Employment Taxes

Taxpayers “invent” fictional household employees and then file Schedule H (Form 1040), Household Employment Taxes, to claim a refund based on false sick and family medical leave wages they never paid.

(9) The Overstated Withholding Scam

This is a recent scheme circulating on social media encouraging people to fill out Form W-2, Wage and Tax Statement, or other forms like Form 1099-NEC and other 1099s with false income and withholding information.

In this overstated withholding scheme, scam artists suggest people make up large income and withholding amounts as well as the fictional employer supplying those amounts. Scam artists then instruct people to file the bogus tax return electronically in hopes of getting a substantial refund due to the large amount of fraudulent withholding.

If the IRS cannot verify the wages, income or withholding credits entered on the tax return, the tax refund will be held pending further review. Taxpayers should always file a complete and accurate tax return. They should only use legitimate information returns, such as an employer issued Form W-2, to complete returns correctly.

There are multiple variations of the overstated withholding credit scheme, including those involving Forms W-2 and W-2G; Forms 1099-R, 1099-NEC, 1099-DIV, 1099-OID and 1099-B; as well as the Alaskan Dividend Fund, Schedule K-1 with Withholding Reported, and Unspecified Source of Withholding Credit Claimed.

(10) Misleading Offers in Compromise

The Offers in Compromise (OIC) program is an important program that helps people settle their federal tax debts when they are unable to pay in full. But “mills” can aggressively promote Offers in Compromise in misleading ways to people who clearly don’t meet the qualifications, frequently costing taxpayers thousands of dollars. A taxpayer can check their eligibility for free using the IRS Offer in Compromise Pre-Qualifier tool.

(11) Ghost Tax Return Preparers

Most tax preparers provide outstanding and professional service. However, people should be careful of shady tax professionals and watch for common warning signs, including charging a fee based on the size of the refund. A major red flag or bad sign is when the tax preparer is unwilling to sign the return. Avoid these “ghost” preparers, who will prepare a tax return but refuse to sign or include their IRS Preparer Tax Identification Number (PTIN) as required by law. Taxpayers should never sign a blank or incomplete return. Instead, the IRS reminds taxpayers to turn to a trusted tax professional for help.

(12) New Client Scams and Spear Phishing

In 2025, the IRS continues to see the “new client” scam, which involves spear phishing attempts that target tax pros. Cybercriminals impersonate new, potential clients to trick tax professionals and other businesses into responding to their emails. Once the tax pro responds, the scammer sends a malicious attachment or URL that can compromise the preparer’s computer systems and allow the attacker to access sensitive client information.

Phishing is a term given to emails or text messages designed to get users to provide personal information, and spear phishing is a phishing attempt tailored to a specific organization or business. Tax professionals frequently find themselves a target of this type of scam. Spear phishing holds greater potential for harm because a successful spear phishing attack can ultimately steal client data and the tax pro’s identity, allowing the thief to file fraudulent returns using the stolen information.

Businesses and individuals, including tax pros, should always be cautious and look out for any suspicious requests or unusual behavior before sharing any sensitive information or responding to an email. Warning signs include poorly constructed sentences and unusual word choices. Be aware that by gaining access to a hacked email account, scammers can locate a genuine email from a previous victim’s email account sent to their tax professional.

The IRS emphasizes that beyond the “Dirty Dozen,” there are numerous other abusive schemes and false tax avoidance strategies that can be deceiving. For more information on past schemes, taxpayers can visit the dedicated “Dirty Dozen” section on IRS.gov. This list serves as a critical alert to both taxpayers and tax professionals about potential scams and schemes to watch out for.

For more information or to seek counsel from our Taxation group, please reach out to request a consultation or call us at 216-696-1422.

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This information is provided for general informational purposes only and should not be construed as legal advice. Readers should consult with qualified legal counsel regarding their specific circumstances before taking any action based on the information presented.

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Qualified Small Business Stock

The allure of IRC Section 1202 is that, when all of the requirements are met, 100% of the gain recognized on the sale or exchange of Qualified Small Business Stock (QSBS) is excluded from income. I know what you’re thinking, no tax on the sale of stock, sign me up!

As federal income tax isn’t always that straightforward (which ensures I remain employed), the requirements for the exclusion from income are somewhat stringent.

Let’s start with the basic idea that the sale of stock is generally the sale of a capital asset subject to capital gain tax rates.  With regular talks on capital gains tax rates increasing, avoiding any tax is always a plus.

In this analysis, we only care about the sale of QSBS. Therefore, it’s important to distinguish QSBS from all those other kinds of stock.

Three Key Qualified Small Business Stock Requirements

QSBS is stock that meets three (3) requirements:

1. Small Business;
2. Original Issuance;
3. And Active Trade or Business.

The C Corporation Factor

The “small business” requirement is where I’ll lose a good chunk of you. The reason is that QSBS stock must be issued by a C Corporation, a legal entity that is separate from its owners, with cash and other assets totaling $50,000,000 or less immediately after the stock is issued.

It’s not often the dollar amount that gets people; it’s the fact that people do not like to hold an interest in a C Corporation.  You may have heard of the dreaded “double tax” in a C Corporation and that a “pass-through” entity is often more appealing to business owners.  However, for the right investor (one likely targeting a realization event as opposed to a stream of income) the C Corporation has a unique appeal.  Further, with the 2017 reduction in the corporate income tax rate from 35% to 21%, there has been some resurgence in the elusive C Corporation.

Original Issuance Requirement

The “original issuance” requirement is another hurdle. The owner of the QSBS must acquire the stock as an original issue in exchange for money/property or as compensation. Therefore, the purchase of an existing shareholder’s shares will not satisfy the original issuance requirement. The key here is planning at the outset of a new venture.  There are limited exceptions to the original issuance requirement, however, a transferee can preserve QSBS status if the transferee acquired the stock by gift, at death, or in a qualifying partnership distribution.

Active Trade or Business Requirement

If you’ve made it this far, the “active trade or business” requirement is, arguably, less stringent. Under the active business requirement, at least 80% of the corporation’s assets must be used in a “qualified” trade or business during the shareholder’s holding period.

A qualified trade or business has certain exclusions, namely:

• Services in the fields of health, law, engineering, architecture, accounting, etc.;
• Banking, insurance, finance, leasing, investing, or similar;
• Farming;
• The production/extraction of certain products subject to depletion;
• Hotel, motel, restaurant, or similar.

The exclusions from a qualified trade or business often become a fact analysis on a case-by-case basis.

Five-Year Holding Period: Patience Pays Off

Assuming the above requirements are met, congratulations – you have QSBS. To reap the benefits of income exclusion under Section 1202, you must hold that QSBS for at least five (5) years before it is sold. The five-year holding period starts from the date the stock is issued to the shareholder. If the QSBS is sold before the five-year holding period, only a portion, if any, of the gain will be excluded.

Now that you’ve got QSBS after holding it for five years, what happens now? The benefits from Section 1202 are only realized when the shareholder eventually sells the QSBS (i.e., sorry, not asset sales!). This matters because, typically, buyers prefer to purchase assets.

Understanding the Section 1202 Exclusion Limits

Too good to be true? The IRS thought so, too. The Section 1202 exclusion is limited to the greater of: (i) $10,000,000 and (ii) ten times the aggregate basis of stock sold. While basis can be a confusing concept for some, the following example should shed some light on this limitation. 

Assume that in 2015 you purchased QSBS for $3,000,000. In 2020, you sell the stock for $15,000,000, realizing a gain of $12,000,000 (i.e., $15M – $3M). The maximum excluded gain is $30,000,000 (the greater of $10M and ten times a basis of $3M). As a result, the entire $12,000,000 gain would be excluded (not a bad day!).

Is Qualified Small Business Stock Right for You? Key Takeaways

As in all good tax planning, if the narrative fits, the opportunities can be worthwhile. The key is to know what you’re looking for. So, if you find yourself considering investing in a particular C Corporation, at original issuance, that’s engaged in an active trade or business for five years, don’t forget about good ol’ Section 1202.

For more information or to seek counsel from our Taxation group, please reach out to request a consultation or call us at 216-696-1422.

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This information is provided for general informational purposes only and should not be construed as legal advice. Readers should consult with qualified legal counsel regarding their specific circumstances before taking any action based on the information presented.

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Year-round tax planning allows you to not only react to tax deadlines but to actively manage your financial affairs in a way that maximizes tax efficiency. Below are some key benefits of adopting a proactive approach to your taxes throughout the year.

Prevent Surprises

High-income individuals often experience fluctuations in income due to bonuses, stock sales, rental property income, or capital gains from investments. Without careful planning, these variations can lead to unexpected tax bills, penalties, or underpayment of taxes.

We are subject to a progressive income tax system, and high earners may find themselves in the top tax brackets.  Year-round tax planning assures that you’re withholding the correct amount of state and federal taxes based on your evolving income throughout the year. Regularly reviewing your financial situation with a tax professional can help you avoid underpayment penalties and spread tax obligations more evenly.

Maximize Available Deductions and Credits

A primary advantage of year-round tax planning is the ability to maximize available deductions and credits. Taxpayers who wait until the end of the year may miss out on valuable opportunities to reduce their taxable income. Through proactive planning, you can take full advantage of deductions related to charitable giving, healthcare costs, mortgage interest, and retirement contributions.

For example, Ohio taxpayers can benefit from the Ohio CollegeAdvantage 529 savings plan, which offers a deduction of up to $4,000 per beneficiary per year (with unlimited carryforward). Consistently contributing to this plan year-round, instead of making a lump-sum payment at the end of the year, helps you maximize this deduction while also growing tax-free savings for educational expenses. Similarly, reviewing your charitable contributions early on allows you to strategize how much you can give to maximize your tax benefits while supporting causes important to you.

Plan for Retirement

Tax planning and retirement planning are deeply intertwined. High-income earners can benefit from year-round tax planning to maximize contributions to tax-advantaged retirement accounts such as IRAs, 401(k)s, and Roth IRAs. While these accounts provide valuable tax-deferred or tax-free growth, the key to maximizing their benefits lies in making regular contributions throughout the year, rather than waiting until year-end.

Contributing to traditional retirement accounts can reduce your taxable income today, which is especially valuable for those in higher tax brackets. Alternatively, if you anticipate being in a lower tax bracket during retirement, converting some of your traditional IRA assets into a Roth IRA may be an advantageous strategy. A Roth IRA allows for tax-free growth and withdrawals, but this conversion needs to be planned to avoid triggering a large tax bill all at once.

Estate Planning Strategies

For those looking to preserve wealth for future generations, year-round tax planning is critical for effective estate and gifting strategies. Although Ohio does not have an estate tax, federal estate taxes may apply to larger estates. Proactive tax planning throughout the year allows you to take advantage of the annual gift tax exclusion ($18,000.00 in 2024) and reduce the size of your taxable estate while providing financial support to loved ones.

In addition, establishing trusts or family-limited partnerships can help you protect your assets and minimize future tax burdens. These strategies require careful planning and ongoing adjustments to remain in compliance with tax laws and the preservation of your wealth.

Align Goals with Taxes

Lastly, year-round tax planning helps align your overall financial strategy with your tax goals. Whether you’re focused on building wealth, saving for retirement, or funding a business venture, a proactive tax plan helps you identify opportunities for tax savings that support your broader financial aspirations. For high-income earners, these strategies are essential in maintaining financial growth while minimizing the tax burden.

Tax planning is not just a once-a-year exercise; it’s a year-round process that offers significant benefits for high-income earners. By staying ahead of tax obligations and working with financial professionals who understand the ever-changing tax laws, you can maximize deductions, avoid penalties, and ensure your financial goals are met in the most tax-efficient way possible. Proactive planning is key to keeping more of what you earn and building a secure financial future.

For more information or to seek counsel from our Taxation group, please reach out to request a consultation or call us at 216-696-1422.

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This information is provided for general informational purposes only and should not be construed as legal advice. Readers should consult with qualified legal counsel regarding their specific circumstances before taking any action based on the information presented.

The post The Benefits of Year-Round Tax Planning appeared first on McCarthy Lebit - A Cleveland/Ohio Law Firm.

A CP59 letter is IRS correspondence that states the IRS believes a taxpayer has not filed an individual income tax return. The IRS sends these letters based on information submitted on information returns (i.e., W2 or 1099s). Effectively, the IRS compares the information returns to whether an individual filed an individual tax return (i.e., Form 1040). If a taxpayer has not filed a return, then the IRS may attempt to bring a taxpayer into compliance by issuing a CP59 letter.  The initiative relates to tax years between 2017 and 2021.

Receiving a CP59 letter may necessitate the expertise of a tax attorney to effectively address the issue. Receiving a CP59 letter in the mail indicates that the IRS believes a taxpayer may have not filed any tax returns. If you have received such a letter you need to take immediate action to avoid stronger enforcement measures. Two issues arise from not filing a yearly tax return:

1. The statue of limitations do not begin to run; and
2. The IRS may file a substitute return for the taxpayer.

Both avenues present challenges for taxpayers. In both instances, the taxpayer not only faces the potential accumulation of penalties and interest but also risks relinquishing control over the voluntary reporting of tax liabilities. This loss of control can have far-reaching consequences, impacting the overall financial standing of the individual. Therefore, it is imperative to recognize the role a tax attorney can advise in such circumstances, extending beyond the just management of penalties and interest.

Engaging a tax attorney to advocate on behalf of a taxpayer is a valuable resource. The IRS has many tools at its disposal to encourage tax compliance. First, if a taxpayer repeatedly does not file tax returns, then the IRS may pursue criminal prosecution, or levy additional penalties and interest. Second, filing a federal return does not eliminate state and local tax issues. Without filing a federal return, taxpayers have increasing difficulty in complying with state and local tax reporting requirements. As such, a tax attorney’s role extends to managing the taxpayer’s narrative, which includes accounting for potential issues in criminal, state, and local tax.

Consulting an attorney promptly after receiving a CP59 letter offers considerable advantages for taxpayers. For high-income taxpayers who have not filed returns, engaging legal representation before any IRS contact is crucial. Consulting with an experienced tax attorney will assist you in developing a strategy to bring you into compliance with the tax laws. The guidance of an experienced advisor in dealings with the IRS is an invaluable tool. In both scenarios, having tax counsel is an asset that helps taxpayers in navigating their case before the IRS.

If you receive a CP59 Notice, have questions about legal options relating to tax compliance, or to seek counsel from our Taxation practice group, please reach out to request a consultation or call us at 216-696-1422.

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This information is provided for general informational purposes only and should not be construed as legal advice. Readers should consult with qualified legal counsel regarding their specific circumstances before taking any action based on the information presented.

The post What to Do if You Receive a CP59 Notice? appeared first on McCarthy Lebit - A Cleveland/Ohio Law Firm.