Federal tax planning: A guide for tax year 2024

Section 199A of the Internal Revenue Code (IRC) allows taxpayers to deduct up to 20% of their qualified business income (QBI), which generally includes most types of trade or business income reported on an individual’s tax return—often income attributable to an owner’s share of pass-through income. Notably, foreign source, investment, and specified service trade or business income does not qualify for the deduction. Income classified as QBI effectively reduces the top tax rate from 37% to 29.6%.

The TCJA limited the individual taxpayer deduction for state and local tax (SALT) payments to $10,000 a year ($5,000 for a married person filing a separate return). Consequently, the owners of pass-through entities subject to state taxes are now responsible for these expenses, which from a practical standpoint have become nondeductible.

In response to the issue, a growing number of states have adopted workarounds intended to enable the entity (and its owners) to generate a deduction for these state tax obligations.

Historically, purchasers of partnership interests were able to generate additional depreciation deductions through step-up elections; however, these step-ups were not eligible for bonus depreciation, as they generally represented the indirect purchase of a used asset. The TCJA, however, changed this rule to allow bonus depreciation for purchases of used assets. Final rules issued by the IRS clarify how the changes affect step-up depreciation generated by the acquisition of an interest in an existing partnership and similar transactions.

Individuals, closely held C corporations and personal service corporations are generally restricted in their ability to deduct losses from passive activities. Passive losses include losses from rental activities and other business activities in which the taxpayer is not actively involved.

However, taxpayers who can demonstrate the necessary level of participation may be able to generate a current deduction for these losses and realize significant income tax savings. (See discussion below regarding excess business losses for an additional loss limitation.)

The excess business loss (EBL) limitation provides an additional hurdle for taxpayers seeking to deduct losses from their business activities. Originally enacted as part of the TCJA, the provision was subsequently extended by both the CARES Act and the Inflation Reduction Act of 2022 to tax years beginning before Jan. 1, 2029. The provision limits noncorporate taxpayers to a $305,000 ($610,000 for married couples) aggregate loss from their business activities for tax year 2024 (indexed for inflation).

Most businesses consider their entity structure only once—at the time of formation. However, passage of the TCJA, along with the potential for further changes, has led many C corporations, partnerships, limited liability companies (LLCs) and S corporations to reconsider their choice of entity.

The Treasury Inspector General for Tax Administration (TIGTA) released a report in August 2021 assessing IRS efforts to identify underreporting of compensation paid to S corporation shareholders—specifically, the risk of S corporations disguising shareholder compensation as distributions. The report sought to determine whether IRS policies, procedures and practices ensure that compensation is considered during the IRS examination process.

The report determined that the IRS was not identifying the issue as frequently as it should. The report also made several recommendations to surface the issue more often during the audit process. In its response, the IRS rejected most of TIGTA’s recommendations, but the collective focus on this issue is clear. 

Several U.S. Tax Court decisions, in conjunction with other forms of guidance—including long-standing and controversial proposed regulations—have created an unclear picture as to the treatment of members of LLCs and limited liability partnerships (LLPs) under the self-employment tax rules.

The IRS has taken aggressive positions in this area. Recent decisions indicate that in certain cases LLCs may want to consider modifying their governance rules to substantiate the fact that certain portions of income are exclusively a return of capital (and not compensation for personal services), or consider adopting a limited partnership structure. However, several cases are pending before the courts in 2024 in which the IRS appears to be challenging even limited partnership structures. 

The recent decision in Soroban Capital Partners LP et al. v. Commissioner has injected further uncertainty into the application of self-employment tax to limited partners in a state law limited partnership. 

The TCJA added a new provision affecting the treatment of carried interest, defined generally as partnership interest received in exchange for services in certain specified businesses in the investment and real estate industries. This provision has the practical impact of converting long-term capital gain income into short-term capital gain income in certain circumstances.

Over the last few years, the IRS has subjected partners and S corporation shareholders to expanded reporting requirements. Notably, S corporation shareholders have, for a number of years, been required to include a basis schedule with their tax return when receiving a distribution, selling stock, recognizing a loss or receiving a loan payment.

The IRS standardized this disclosure in early 2022 with the issuance of Form 7203. Accordingly, for 2021 tax returns and later, shareholders are now required to include Form 7203 with their return filings when the shareholder receives a distribution, sells stock, recognizes a loss or receives a loan payment.

Meanwhile, partnerships are required to report the beginning and ending tax basis capital for each partner. In 2019, this partnership reporting was required only if either amount was negative; beginning in 2020, this rule applies to all partners and partnerships.

A business environment of higher interest rates on debt has created cash flow issues for many companies, forcing them to restructure or refinance existing debt obligations.

Prior to restructuring debt, it is critical that businesses evaluate their options and the corresponding debt restructuring tax implications. With effective analysis and planning, companies can maximize available tax benefits, such as net operating losses (NOLs), and mitigate tax costs associated with issues such as cancellation of debt income (CODI). Businesses facing economic hardship should proactively maximize company value through proper planning.

Additionally, companies that have refinanced debt should evaluate whether any previously unamortized debt issuance costs are eligible for accelerated tax deduction during the current year. Companies should also assess whether certain fees paid to lenders as part of a refinancing or issuance of new debt constitute an original issue discount (OID), which is amortized over the debt’s life and may be subject to the business interest deduction limitation under Internal Revenue Code (IRC) section 163(j).

Due to the current environment, taxpayers should consider disposing of struggling subsidiaries. Consolidated taxpayers with an insolvent subsidiary should also evaluate whether they may claim a deduction for worthless stock. Claiming the deduction may require liquidating the insolvent subsidiary, converting it into a limited liability company or disposing of it.

The 1% excise tax on certain stock repurchases

As part of the Inflation Reduction Act, Congress imposed a new 1% tax on certain corporations that repurchase (buy back) their stock from their shareholders at a value exceeding $1 million per year. The corporations subject to this tax are domestic corporations traded on an established securities market and certain foreign corporations. The tax applies to buybacks occurring after Dec. 31, 2022.

In June 2024, the IRS and Treasury Department issued regulations interpreting the stock buyback tax. The regulations clarify the filing requirements for this tax, as well as its application and calculation.

The corporate alternative minimum tax

Congress also imposed a corporate alternative minimum tax (CAMT) of 15% on the “adjusted financial statement income” of certain large corporations that meet a $1 billion average annual adjusted financial statement income test ($100 million in the case of certain U.S. corporations that are members of a foreign-parented multinational group—provided the multinational group also meets the $1 billion threshold). Related entities may be required to aggregate their income to determine whether they are subject to the CAMT. The CAMT is effective for taxable years beginning after Dec. 31, 2022.

The Tax Cuts and Jobs Act of 2017 amended IRC section 174 for tax years beginning after Dec. 31, 2021. Under the new rule, specified research and experimental expenditures (section 174 costs) are no longer deductible but are chargeable to a capital account and amortized over a five-year period (15-year period for foreign research expenditures).

Taxpayers generally cannot write off unamortized section 174 costs merely because the project or activity is disposed of or abandoned. If disposing of the entirety of their business in a mergers and acquisitions (M&A) transaction, however, some taxpayers have taken the position that they can write off such costs.

The IRS issued interim guidance in this area in September 2023 but has not yet issued regulations. Because this IRS guidance is limited and leaves questions unanswered, we recommend taxpayers assess the treatment of section 174 costs in the context of an M&A transaction on a case-by-case basis.

Section 382 closing-of-the-books election

Corporations should carefully monitor changes in stock holdings that occur during the year to identify whether the corporation may have undergone a section 382 ownership change. If so, the company may make a closing-of-the-books election, which may result in significant tax benefits.

If it files a closing-of-the-books election with its timely filed tax return, the corporation closes its books on the date of change for section 382 purposes, thereby specifically measuring income and deductions pre- and post-change. Without the election, under the default rule, the corporation applies daily proration of the entire year's items of income and deductions.

Accelerating IRC section 481 adjustments for M&A

In situations where section 382 would limit the ability to offset income post-transaction, section 481 enables some taxpayers to accelerate income into the year of certain M&A transactions and possibly into the prior year. Under IRS procedural rules, for certain accounting method changes a taxpayer must file the method change request prior to the end of the tax year in order to obtain this treatment.

Accelerating an ownership change

In September 2019, the IRS and the Treasury Department proposed new regulations under section 382 that limit the use of certain tax attributes, including NOLs, following a corporation’s ownership change.

One major departure from the current rules is the proposed removal of one of two safe harbors for calculating the recognition of built-in gain—the IRC section 338 approach, which is generally more favorable for companies with built-in gain. If these proposed regulations are finalized in their current form—a somewhat unlikely development—many companies (especially life sciences and technology companies, which often derive most of their value from self-created intangibles) would be negatively affected.

Whether the proposed regulations will be finalized in their current form is uncertain. Nonetheless, companies contemplating an upcoming ownership change (e.g., through a stock offering) might consider accelerating the ownership change to take advantage of the section 338 approach.

Projecting earnings and profits

During year-end planning, it may be important for a corporation to project the remaining current-year earnings to determine whether any distributions made during the year would be treated as derived from its earnings and profits, and thus be taxable as dividends or subject to withholding tax. These projections can also aid companies planning to distribute cash (or other property) to shareholders in deciding in which tax year to make the distribution.

Form 8937, Report of Organizational Actions Affecting Basis of Securities

A corporation that takes organizational actions affecting its shareholders’ stock basis generally must file IRS Form 8937 within the earlier of 45 days or Jan. 15 of the following year.

Organizational actions include distributions that are fully or partially nontaxable (which reduce basis), stock splits, some stock dividends and some reorganizations. S corporations may report the required information on Schedule K-1, and a corporation may meet the filing requirements through a posting on its website. Corporations should analyze their transactions to ensure they meet the filing requirements in a timely manner.

A business that entered into a transaction with negative tax consequences can sometimes rescind the transaction and unwind those consequences. The IRS has sanctioned rescission in some cases (Rev. Rul. 80-58), but rescission is difficult to accomplish and often requires a valid business purpose. Because a rescission must occur within the same tax year as the transaction, the topic of rescission warrants consideration as part of year-end planning. 

The Financial Accounting Standards Board released Accounting Standards Update (ASU) 2023-09 in December 2023. The ASU requires additional income tax disclosures around effective tax rates and cash income taxes paid. ASU 2023-09 is effective for public business entities for annual periods beginning after Dec. 15, 2024 (generally, calendar year 2025), and effective for all other business entities one year later. The ASU requires adoption of this guidance on a prospective basis, though retrospective application is permitted.

Given the requirements of ASU 2023-09 and increasing demands on companies’ tax departments, companies should consider implementing software and other process improvements as part of their year-end planning.

An effectively implemented provision software solution can reduce the time spent on provision preparation, enhance calculation accuracy, and provide a powerful engine for modeling the tax effects of changes in tax law or changes within the company. 

Bonus depreciation is presently 60% for property placed in service during calendar year 2024, and phases down to 40% for property placed in service during 2025. Bonus depreciation is scheduled to be fully phased out for property placed in service after 2026. Those timelines are extended for one year for certain property with a long production period.

Taxpayers should plan for and model the impact of decreasing bonus depreciation in future years. Taxpayers with significant capital expenditures should consider solutions to accelerate the placed-in-service date of qualifying property (to benefit from a higher bonus percentage) as well as other ways to mitigate the impact of reduced depreciation deductions. 

Inventory management and supply chain optimization have become focus areas in the manufacturing and consumer products industries. Inventory planning around year-end may allow a company to increase deductions or reduce taxes payable in the current year. 

With many tax provisions in the Tax Cuts and Jobs Act of 2017 scheduled to phase out over the next few years, taxpayers should continue to model the impact of sunsetting provisions. 

Accounting method planning continues to be key for:

• Maximizing cash tax savings
• Reducing exposure for prior-year improper treatment
• Reducing or increasing current-year taxable income to achieve tax planning goals
• Creating permanent benefits through actions such as utilizing expiring attributes or moving taxable income to a year with a lower tax rate

In certain cases, a taxpayer may be able to take (or delay) an action in order to achieve a result in line with their present accounting method. For example, a cash method taxpayer who defers payment of an expense to defer the associated deduction can continue using the cash method. In other cases, the taxpayer may have to change an accounting method in order to achieve the desired result.

All accounting method changes require the taxpayer to request consent from the IRS prior to implementing the change. Many accounting method changes qualify for “automatic” consent that is deemed granted as soon as the taxpayer files the appropriate form requesting the change; however, certain changes require “nonautomatic” consent. Nonautomatic accounting method changes require the taxpayer to request consent prior to year-end.  

Expiring provisions in the Tax Cuts and Jobs Act of 2017 (TCJA) will have some implications for compensatory payments. Assuming tax rates will go up, it may be beneficial to accelerate compensation income for the individual, although that benefit has to be weighed against the reduced deduction for the employer. ​

There are also new rules regarding employer deductions for expenses associated with eating facilities and with certain meals, and expanding the group of covered employees for whom public employers can claim limited compensation deductions. Though these rules are not effective until 2026 and 2027, respectively, advance planning may be necessary to properly implement them.

Meals and entertainment expenses: Section 274(o)​

The TCJA added a new subsection (o) to Internal Revenue Code section 274. Effective for amounts paid or incurred after Dec. 31, 2025, section 274(o) will disallow deductions for certain meals and for the operational expenses of certain eating facilities.

Specifically, as of Jan. 1, 2026, the following expenses will be nondeductible: ​

• Expenses for the operation of an employer-operated eating facility ​
• Expenses for food or beverages “associated with” an employer-operated eating facility, including other de minimis fringe food or beverages ​
• Expenses for meals provided for the convenience of the employer

Limits on the deductibility of executive compensation: Section 162(m)

IRC section 162(m) imposes a $1 million deduction limitation for compensation paid to covered employees of public filers. For tax years beginning after 2026, the section adds five more of the highest-compensated employees to the definition of covered employees, regardless of whether they are officers.

Taxpayers placing energy property in service in 2024 should consider energy credit opportunities under the IRA, which enables many solar power system components, battery storage devices, geothermal heat pumps and other energy property to qualify for a section 48 investment tax credit. A taxpayer may be able to claim a credit for up to 50% of qualifying capital expenditures if certain requirements are met.

For property placed in service after 2024, the section 48 investment tax credit will be replaced by the section 48E clean electricity investment tax credit.

The credit framework of section 48E is similar to that of section 48; however, it is technology-neutral, meaning that taxpayers will not need to invest in specific technologies to qualify. Instead, the property will need to produce electricity for which the greenhouse gas (GHG) emissions rate is zero or less. Section 48E is scheduled to sunset the later of 2032 or when certain GHG emissions rates are reached.

Taxpayers may elect to buy certain clean energy tax credits from an unrelated seller for cash under monetization rules added by the IRA.

Buyers of these credits may be businesses with taxable income that want to reduce federal income tax liability, reduce estimated tax payments or support sustainability initiatives. Individuals are also able to purchase credits—but because purchased tax credits are treated as passive activity, passive activity loss and credit limitations must be considered. Buyers may be able to purchase the credits at a discount without recognizing any increase in federal taxable income.

The purchase of the tax credit does require careful diligence, as the buyer may be subject to underpayment penalties and excessive credit transfer taxes in the event a portion, or all, of the purchased credit is disallowed by the IRS. Tax advisors can assist in mitigating these risks through proper due diligence.

As your business activities evolve and legislation changes—particularly in industries like transportation, energy or manufacturing—excise tax opportunities and exposure may fluctuate. Staying informed of legislative updates, such as changes in environmental taxes or energy-related credits, is key to reducing risk. Dedicated planning can also uncover opportunities for reducing excise tax burdens, depending on your business activities.

To accurately select partnerships for examination, the IRS is using an artificial intelligence (AI) solution, which was developed through a collaboration of experts in data science and tax enforcement who have been working together to develop machine learning technology.

The AI tool will “identify potential compliance risk in the areas of partnership tax, general income tax and accounting, and international tax in a taxpayer segment that historically has been subject to limited examination coverage,” according to an IRS news release.

Issues of interest for the IRS in partnership examinations are:

• Sale of partnership interest and reporting of gain or loss
• Substantiation of basis
• Supporting documentation for the section 754 election and section 743 (b) basis adjustment calculation
• Installment sale methods
• Characterization of gain or loss (capital vs. ordinary)
• Recognition of income and deferred income issues

Exams of high net worth individuals are conducted by the IRS Global High Wealth Industry Group, which is made up of experienced IRS auditors and forensic accountants. They commonly start with examining an individual and spread to that individual’s related entities, including partnerships and S or C corporations. Exams conducted by the Global High Wealth Industry Group can last from 18 months to two years.

The following are common items that the IRS examines:

• Sale of partnership interest, particularly when significant gains are involved
• Large gains transactions and support for determining the character of the gain (e.g., ordinary income vs. capital gain)
• Significant loss transactions and ensuring that the loss is valid to offset other income 
• Charitable donations, both cash and noncash
• Utilization of a previously generated net operating loss (NOL)
• Distinction between passive and nonpassive activities
• Personal use of corporate aircraft

See our 2024 year-end tax planning guide for individuals for more detail on those IRS focus areas for high net worth individuals, as well as suggestions for how to document and support the activity reported on the tax return.

The IRS is paying a lot of attention to the section 41 research and development tax credit. Although the agency announced in June 2024 that it would reduce the amount of information required for submitting new research credit claims, the IRS may still demand more information during examination.

Moreover, starting in January 2025, the IRS can treat research credit claims as invalid if they are submitted without the required information. The agency can reject them summarily without the right to appeal.

The IRS has been emboldened by some recent wins in court cases involving the section 41 credit. Some of the most notable rulings have underscored the importance of detailed project documentation and contract review.

The IRS continues to scrutinize employee retention credit (ERC) claims. In addition to conducting examinations of claims, the IRS is sending letters fully disallowing unpaid ERC claims without examinations. The agency plans to send letters recapturing ERC refunds that it determines were erroneous.

Taxpayers receiving any of these IRS notices should work with a tax professional to respond promptly. Looking forward, as the IRS hires and trains more revenue agents, particularly IRS employment tax specialists, more employment tax examinations may occur.

The IRS has enhanced taxpayer access by improving its online tools, which provide more ways to communicate and interact with the IRS.

Taxpayers are first required to verify their identity through ID.me, a third-party identity verification service used on various online platforms. ID.me provides a username and password to the user to verify their identity. This same ID.me account can be used to access services through other government agencies, such as the Social Security Administration and Veterans Affairs. Through ID.me, the taxpayer can access individual and business accounts.

Individual taxpayers can use online access to:

• Retrieve tax records
• Make and view payments
• View or create payment plans
• View tax balances
• View a tax practitioner’s authorizations
• Request account transcripts
• Approve and electronically sign Form 2848, Power of Attorney

Business taxpayers are now able to access tax records online as well. The business accounts are limited but are useful to sole proprietors, partnerships and S corporations.

• Sole proprietor taxpayers can gain access through the same ID.me account to view and manage the business profile, view and make tax payments, access tax records, and view IRS notices and letters. The newest feature is the ability to register for clean energy credits if the sole proprietor is eligible.
• An individual partner of a partnership or shareholder of a S corporation can access features only for the tax years that the partner or shareholder received a Schedule K-1. The IRS is working to provide more tax years on business accounts. An individual partner or shareholder can view the profile but not make changes yet. These users can also view balances and make payments on certain tax forms.

The IRS document upload tool (DUT) allows the taxpayer to respond to IRS notices electronically. DUT operates as a digital mailroom that sorts and routes the uploaded documents to the appropriate IRS location. Taxpayers will receive electronic confirmation on screen, but it is important to note that the confirmation cannot serve as legal confirmation of delivery or receipt.

DUT may also be used over the phone with certain IRS hotline representatives. The caller will need to obtain an access code from the IRS representative to utilize the tool in this manner.

The IRS has issued various disaster relief postponing deadlines for taxpayers in affected states and specific counties to file tax returns, make tax payments, and perform other time-sensitive acts.

Taxpayers in parts of Arkansas, Florida, Iowa, Kentucky, Mississippi, New Mexico, Oklahoma, Texas and West Virginia have until Nov. 1, 2024, to file their 2023 tax year returns and make estimated tax payments.

Taxpayers in all or parts of Connecticut, Florida, Illinois, Kentucky, Louisiana, Minnesota, Missouri, New York, Pennsylvania, Puerto Rico, South Dakota, Texas, Vermont, the Virgin Islands and Washington state have until Feb. 3, 2025, to file their 2023 tax year returns and make estimated tax payments.

Taxpayers affected by Hurricane Helene in all or parts of Alabama, Florida, Georgia, North Carolina, South Carolina, Tennessee and Virginia will have until May 1, 2025, to file their 2023 tax year returns and make estimated tax payments.

Some of the most immediate concerns in a natural disaster arise from physical damage to property. Taxpayers learn the extent of damage to their property and consult with insurers to understand the financial impacts. Affected taxpayers and their advisors should familiarize themselves with the rules for assessing losses associated with casualty events, and the options for early deductions or deferring gain.

Assessing and recognizing losses

As a general rule, business taxpayers are entitled to deduct losses when property is destroyed in a casualty event under section 165. The measure of the loss is generally the lesser of the diminution of value or the amount of the adjusted basis in the property. If property is totally destroyed and the value of the property is greater than that adjusted basis, the amount of the loss equals the taxpayer’s adjusted basis.

Taxpayers are only entitled to deduct losses that are not compensated by insurance or other proceeds, meaning taxpayers whose property is insured may be in a holding position that prevents them from taking a deduction until they know how much insurance they will receive.

Special consideration for individual taxpayers

Under the Tax Cuts and Jobs Act (TCJA), for years 2018 through 2025, individual taxpayers can only deduct casualty losses for properties in a federally declared disaster area as prescribed by the president of the United States. This is a basic requirement to be able to take any deduction, but taxpayers are still subject to other limits.

An individual taxpayer affected by a federally declared disaster is still subject to the TCJA limitations per section 165(h), which states that a net casualty loss is allowed only to the extent it exceeds 10% of adjusted gross income (AGI) and a $100 floor.

Although certain IRS articles and publications indicate that qualified disaster losses are not subject to the 10% AGI limitation, it is important to clarify that qualified disaster is a technical term; as of early October, the 2024 disasters had not been declared qualified disasters by Congress.

The difference in terminology is subtle, but a loss attributable to a federally declared disaster is not equivalent to a qualified disaster loss. The 10% AGI limitation is a statutory rule, which means only an act of Congress can make a disaster a qualified disaster with losses not subject to the 10% AGI limitation. The IRS does not have discretion to waive the statutory 10% AGI limitation.

Deferring casualty gains

When insurance proceeds (or fair market value awards in a condemnation) exceed basis, taxpayers may experience a casualty gain (i.e., an involuntary conversion).

Section 1033 allows taxpayers to defer this gain by purchasing replacement property that is similar or related in service or use to what was destroyed.

In a presidentially declared disaster, section 1033(h)(2) provides a special rule that treats any tangible property purchased for use in a taxpayer’s trade or business as qualified replacement property for any converted property that the taxpayer held for use in its trade or business or for investment. This means taxpayers have very broad latitude to choose what they want to purchase, even if it is completely different from the property that was lost.

Note that section 1033 is also available for personal use property, but the special rule does not apply to individuals, who must stick to property replacing what was destroyed.