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Episode 14: Year-End Planning Strategies to Consider
Welcome back to “Tackling Tax,” where we’ll bring you the latest on tax policy and strategies—in an easy-to-understand format. Whether you’re looking to learn more about tax bills, global tax implications, or planning insights for your business, you’re in the right place.
Listen every other week for more from our guests, which include everyone from university scholars to industry professionals to the firm’s experienced leaders.
On this episode, we’ll dive into year-end planning and the strategies you could consider heading into 2026. We welcome Spencer Heywood and Michael Cornett to highlight planning topics to be aware of for the new year.
If you have any questions or need any assistance, please reach out to a professional at Forvis Mazars.
Transcript
IRIS LAWS
On this episode, we’ll dive into year-end planning and what strategies you could consider heading into 2026. We welcome Spencer Heyward and Michael Cornett, our colleagues in the firm’s Washington National Tax Office, to talk about the action items and planning topics to be aware of for the new year. From your one stop for tax updates and analysis, I'm Iris.
DEVIN TENNEY
And I’m Devin.
IRIS LAWS
It’s Tuesday November 11th and this is Tackling Tax.
DEVIN TENNEY
Before we get started with our much-anticipated guest, we normally start our show with our Fast Four stories. This week, however, we want to focus a little bit more on last week’s Supreme Court case about tariffs. So as a first for Tackling Tax, let’s get started with what we are calling our Tuesday Spotlight, a deeper dive into the tariff case.
IRIS LAWS
Last week, the Supreme Court heard oral arguments for and against upholding President Trump’s tariffs implemented under the International Emergency Economic Powers Act, or IEEPA as we’ll call it. So, Devin, I know this probably makes me a nerd, but here I am. I have to admit, it was super interesting to me. So not to bore you with all of the specifics, but I do think it’s helpful and kind of an interesting exercise to understand some of the points that are being considered in here.
So that being said, for the sake of brevity, I’ll focus on three of the points they spent most of their time on in the hearing. The first of which was a discussion of the plain text language of IEEPA itself. So part of the wording of IEEPA gives the president the power, to quote “regulate importation,” sort of, among other things, a list of things. The question then is whether the term “regulate” in its nature implies tariff or tax.
DEVIN TENNEY
Well, Iris, let me just say that you are a nerd, but it’s not just because of your interest in the tariff.
IRIS LAWS
There you go.
DEVIN TENNEY
All right. But no. So that’s a very good point. I think that’s the primary point here, right? Is this question of what does regulate importation mean? So what are the positions that are being taken on both sides?
IRIS LAWS
Yeah, I mean, the point that the government is making in defense of the IEEPA tariffs is that, you know, what else would it mean if not tariff or tax, like what are the other things that they would think about “regulate” covering. But the plaintiffs are arguing that IEEPA gives the president sort of a variety of powers to regulate importation, but not the power to raise income, or in this case tariffs is their way of quote, “raising income.” So they’re holding that it’s a different sort of bucket altogether. That it’s not included in the text of IEEPA itself and therefore should not be upheld.
DEVIN TENNEY
So is this where the majority of the time was spent then in the hearing was focusing on this argument?
IRIS LAWS
Yeah. I mean, I’d probably agree with that. Outside the debate about “regulate,” too, there were some other discussions on, you know, technical terminology within the statute. So, there was some discussion about the terminology about what the term “licenses” implies in the context of IEEPA. You know, actually, one of the justices mentioned that the license point of what that means is important to that justice. So we’ll see what that means as well, with how the outcome comes.
DEVIN TENNEY
Okay. So our primary point was related to the interpretation of that language in IEEPA. What is the second issue that was focused on in this hearing?
IRIS LAWS
Sure. The second, I would say, actually is somewhat connected to the first when you look at the arguments. But the argument is that no one disagrees, sort of that baseline with the power of the president to embargo importation of goods from certain nations all together. So meaning they could, you know, President Trump can stop all importation from, say, I don’t know, for example, Canada or something, if he wants.
So that’s kind of like the extreme option. So if that’s the case, the argument goes, why shouldn’t he therefore have the power to tariff? So arguably the more diplomatic or less extreme option. You know I think that that’s an interesting one. And, they do go into it to a certain extent, sort of back and forth about that argument.
DEVIN TENNEY
Okay. So from what we just talked about that I’m guessing the plaintiff’s position is that the embargoes and tariffs are different. One is raising revenue while the other is not.
IRIS LAWS
Right. Nailed it. Yep. That’s the argument. Right? I think probably my favorite quote from the hearing was in response to the point that the difference between embargoes and tariffs is, quote, “an odd donut hole.” So that’s obviously from the government, right? But the Oregon Solicitor General, Benjamin Guttman, Gutmann responded that, to that odd donut hole sort of quote saying, “It’s not a donut hole, it’s a whole different kind of pastry.” So basically emphasizing, of course, that the difference between revenue raising and not is really the point that they’re making here.
DEVIN TENNEY
Well, you got a lot of good play on words. So I think that then brings us to our last point. You want to walk us through then what the third item was that was focused on?
IRIS LAWS
Yeah, sure. The last point actually focuses more on the question of IEEPA’s constitutional bounds to allow the president to levy these tariffs. So there is a concept called the non-delegation doctrine. That basically says that if Congress, which has the constitutional power to levy tariffs, delegates its powers, then it has to do so within sort of a reasonable limit. There has to be limitations. There has to be checks to that delegation.
So looking at other pieces of trade legislation that are currently in place, you’ll see those limitations. So there could be a requirement for an investigation. There could be a limit to the amount of the tariff or the time that the tariffs are in place.
DEVIN TENNEY
So it sounds like in other areas there are certain limitations that are imposed. But is that not the case then with IEEPA?
IRIS LAWS
Right. Not specifically. The government is arguing, though, that the president’s role in foreign policy has generally been pretty broad, right? So he has broad powers in the realm of foreign policy. And they’re arguing that that should lower the bar significantly for the non-delegation doctrine, essentially saying that, in this case, non-delegation doctrine should not pose a problem.
DEVIN TENNEY
Okay. Well that’s interesting. I think I have a fair idea then of the three main points that were discussed. But for our listeners, really from a practical insight, what does that actually mean? What’s to come? What should we expect?
00;07;04;24 - 00;07;35;28
IRIS LAWS
Right. So the big takeaway here is if they do overturn the IEEPA tariffs, then importers of record may be due a refund. And I’m going to say may be due a refund here because one of the plaintiff’s arguments actually in the case itself posed the possibility of maybe the justices implementing an overturn of IEEPA on a prospective basis without issuing refunds, retrospectively. So we’ll see what happens there.
DEVIN TENNEY
All right. Well, let’s say refunds are issued. Does that include everyone who’s been paying tariffs on everything? Consumers? What does that refund actually apply to?
IRIS LAWS
Right. So if it is, we would anticipate that it would be for the importers of record. So it’s those people who are sort of legally required to pay the tariff when they’re importing, not necessarily the end consumer. So those importers might be passing on higher prices. Right? I think some of us have experienced that just sort of in everyday life.
You know, we’ll have to see whether the consumer would get any sort of benefit. It would probably be up to those importers based on either their agreements or just sort of their goodwill of how they handle that.
DEVIN TENNEY
Well, what should our listeners do if they haven’t paid a tariff yet, but are anticipating that they will, before the court issues their opinion?
IRIS LAWS
It’s a great question, right, because you want to avoid the situation of paying the tariff, filing for a refund, waiting for cash, or even the possibility that no refund will be provided at all depending on how the Supreme Court rules so there is something called entry liquidation, which is essentially the final calculation of the tariff amount. It’s interesting, you can actually file for an extension of liquidation for up to a three-year period. So that could be something to consider. It would give you the option right to pause on paying the tariff until the opinion is issued.
DEVIN TENNEY
Now, you mentioned that time period where we were waiting to hear how the court will rule. How long are we actually going to be waiting for?
IRIS LAWS
There isn’t a set timeline here. I know, that’s unfortunate. If we look to sort of trends and recent cases and how long that’s been taking, you know, best guess we’re probably looking somewhere between 2 to 4 months. But this was done on an expedited basis, so that could be different or because of the gravity of the situation maybe they take longer. You know, we just really have to wait and see.
DEVIN TENNEY
Yeah. Certainly does seem like it could be a fairly long time. Why is that?
IRIS LAWS
You know, it is a process, right. So it does take some time. Following the hearing, they’ll take a vote internally, the justices will, and then assign certain justices to be drafters of the opinions. For sure they’ll be a majority opinion, which sort of is, quote, “the winner,” right? And then there could also be a concurring opinion like what we saw with this case in the appeals court. Then there could also be a dissenting opinion for those that don’t possibly agree with the majority. So lots of drafting, lots of revisions, that kind of thing to go on.
DEVIN TENNEY
Well, Iris, what happens if SCOTUS does rule against this and strikes down these IEEPA tariffs? What does that mean moving forward then? Are tariffs gone across the board?
IRIS LAWS
You know, I know most of our listeners would hope that that’s the case. Unfortunately, that’s not what’s going to be reality. So this is specific to IEEPA tariffs. So, those reciprocal tariffs that President Trump, you know, held up on what he is calling Liberation Day is the big chart with all the different tariff rates. Some of the what, quote “trafficking tariffs,” which are related to fentanyl per his executive order, those kinds of things.
What’s not impacted are the tariffs like on China under Section 301. Some of the tariffs we’ve heard on copper, on autos, on aluminum, that kind of thing, which is under 232. I also think it’s an interesting point to make that the recent tariffs that have been issued, President Trump has strategically not implemented them under IEEPA and instead has implemented them under 232. And so whether that’s an indication of his feeling about the case or he’s just kind of covering himself regardless of how the outcome is, there will be tariffs implemented moving forward.
So, be sure to take a look at our website for further discussion about some of the strategies that go into place for mitigating tariffs on a broader level. We actually had Michael Cornett on one of our earliest episodes to talk about tariff strategies. So that’s things like unbundling, transfer pricing, classification, or, you know, country of origin, some of that good stuff. So there’s a lot to unpack there. And, you know, more to come. We’ll be monitoring this for you guys for sure.
DEVIN TENNEY
Well, I really appreciate your practical insight on this. And, well, that’s a wrap for our first Tuesday spotlight. Stay tuned for the main event, a discussion about year-end planning.
IRIS LAWS
Well, today we’re going to be talking all about year-end planning. And we’re so excited to welcome Michael Cornett and Spencer Heywood for the discussion. Mike Cornett is a managing director with the Washington National Tax Office here at Forvis Mazars. He focuses on international tax and tariffs, while Spencer is also with WNTO. He’s a senior manager focused on technical tax writing and is also a specialist with our private client sector. So welcome to Tackling Tax, Mike and Spencer.
MICHAEL CORNETT
Thanks, Iris.
SPENCER HEYWOOD
Yeah, thanks for having us.
IRIS LAWS
Before we get started, I did want to share sort of a shameless plug with the audience for our webinar about year-end planning with these folks that serves as a companion to the podcast today. We’re going to be focusing today on our top five planning points. But please be sure to tune in to that webinar for a more full discussion of the points we’re talking about today.
And then also five additional points to come in at our top ten going into 2026. So that being said, I turn to Mike for our first sort of top five planning points of the year. The first on my list, which I think everyone who knows you is aware that this is your new favorite slogan is model, model, model. So for those in the back, why has the tagline become such an important thing for clients?
MICHAEL CORNETT
Well, it’s become an important thing because, you know, when you look at the bill, the OB3, in isolation each provision looks beneficial, or at least most of the major ones look beneficial. But when you start seeing how they interact with each other and different limitations, the only way you can see that is by modeling.
So you really have to do modeling to figure out, you know, what is the best decision for me to make when it comes to the elective provisions of this? Because while it may sound good on one end, when you push that election through, it may cause an answer you weren’t anticipating.
IRIS LAWS
So is that just for, I mean, you speak international tax, right? Is that true for international and domestic-only entities? Or would you say it’s more applicable to one or the other?
MICHAEL CORNETT
It’s really applicable to both. I mean, yes, with international it’s extremely critical because of the different international provisions and the interaction with some of these changes on the domestic side. But even for domestic, it is really kind of critical to do some modeling because, you know, you could put yourself in a situation where I take all these extra deductions because it’s like, great, I don’t have to pay any tax this year. But then you may have created, for example, a net operating loss, and that means next year you only get 80% of that deduction next year.
IRIS LAWS
Right.
MICHAEL CORNETT
So you’re really sacrificing, you know, potentially expenses.
IRIS LAWS
And we’ve talked about right before, like partnership tax. Are we going to run into basis situations? Are we going to kick in to a different waterfall part of the agreement, that kind of thing. But you spoke about elections. There are sort of two areas, right, that we think about are the biggest sort of decision points right now that clients are going to be modeling and maybe toggling between different options. What are those two for the group?
MICHAEL CORNETT
Probably the two biggest ones out there are, you know, bonus depreciation. Do you want to elect to take 100% depreciation on tangible personal property purchased after 1/19/2025? The other one being capitalized domestic R&D expenses that you’re now allowed to either immediately write off here in 2025 or ratably between ‘25 and ‘26.
IRIS LAWS
Perfect. So we’ve talked international and federal and some of those decisions, but we haven’t touched on state. And I haven’t seen a ton in the traditional media, that kind of thing, about how OB3 affects states. Can you speak to that a little bit?
MICHAEL CORNETT
You know, the states a lot of times, you know, do follow federal law or start with federal adjusted gross income. States right now trying to figure out do they want to, in essence, follow the changes of OB3. And it’s a problem right now for states, because a lot of the states are running budget deficits or projected to run budget deficits.
So we’re starting to see some states saying, hey, we’re not going to adopt the OB3 provision of, let’s say, bonus depreciation, or we may not adopt the taking the capitalized domestic R&D and allowing for an immediate deduction because it would just increase their deficit. So we are seeing states going through that process right now. Do we want to follow it or not?
IRIS LAWS
Do we know when we’ll have an answer? One way or the other? Is there like a time frame or are we just kind of waiting to see?
MICHAEL CORNETT
Every state, I mean, you’re starting to see a few states have already started to do something on this. You know, Michigan’s put something out there, Colorado’s done something. But, you know, depending on how they use the word, it’s the word conformity is what they use in the vernacular. Here is how they do it. They may have to call a special session of their legislature to come back and look at it.
It may just be automatic. It may not even be automatic at all and stuff will just happen, you know, 2 or 3 years down the road, like California did. So every state’s will be different. I would suspect, if I was just looking at my crystal ball, you know, sometime within the next year, every state will do something because, you know, we’re not having to do anything really until the 2025 filing season kicks off here, which will of course be until sometime in 2026 for a lot of you taxpayers.
DEVIN TENNEY
Well, the federal law was not complicated enough. It sounds like with the state conformity issue, modeling is going to be very important. So for our next year-end planning point, we want to talk about charitable contributions. Now, Spencer, I want to go to you with this one. There was a big change under OB3 impacting charitable contributions, that impacted both individuals and corporations. Can you walk us through what that change was?
SPENCER HEYWOOD
Sure thing, Devin. It’s a good question. Many people have been asking us. So let’s let me start with the foreign corporations. So for tax years beginning after December 31st, 2025, charitable contributions made by corporations will be subject to a 1% floor limitation. So this means that only contributions in excess of 1% of a corporation’s taxable income will be deductible.
So Devin, let me give you a quick example. Let’s say a corporation’s taxable income for the year is $1 million. Only the portion of charitable contributions in excess of 1% or $10,000 would be deductible by the corporation. So if the corporation made $50,000 of charitable contributions for the year, only $40,000 would be deductible for tax purposes. And the same concept goes for individual tax return filers claiming itemized deductions, except that that limitation is a half percent floor measured against their adjusted gross income.
I’ll also add that in addition to the floor limitations, both corporations and individual taxpayers should also consider the ceiling limitations that are in place related to charitable contributions. So this isn’t new, but just a reminder that corporations can’t deduct charitable contributions in excess of 10% of their taxable income. Something that is new, however, is that beginning in 2026, individuals that itemize their deductions and that are in the top 37% tax bracket will have their itemized deductions, which includes charitable contributions, of course, those will be limited to a 35% benefit rather than a 37% benefit, which is reflective of the tax bracket that they’re in now.
DEVIN TENNEY
So there’s a lot of significant changes here that are going to impact the deduction that, you know, both individuals and corporations alike are going to be able to take as a result of their charitable contributions. So is there any planning that we can then do? We are in our top five planning items here. So what can individuals and corporations do to hopefully maybe mitigate some of the effect of, you know, these new floors?
SPENCER HEYWOOD
Yeah. So as I mentioned, the new floors aren’t applicable until tax years beginning after December 31st, 2025. So both corporate and individual taxpayers still have some time this year to make contributions that won’t be subject to the floor. Now for this year and going forward, something we’ve been talking to our clients about is the concept of bunching contributions.
So, let’s say you’re accustomed to contributing $10,000 every year to charity. What you might think about doing is combining your charitable contributions, say for the next three years, into one contribution in a single year. So you contribute $30,000, let’s say, in 2025. So you aren’t subject to the floor. Or if you did it in 2026, then you would only be subject to the floor one time.
So that way you can make three years’ worth of contributions in one year and either avoid or minimize the floor. Now remember the ceilings. If you’re bunching and increasing your charitable contribution, you got to remember those ceilings, right? The 10% ceiling for corporations, 35% ceiling for individuals beginning in 2026. So as Mike mentioned, you really got to model this out and try to hit that sweet spot of enough contributions, but not too much.
Now if you did end up with excess contributions, that’s not the end of the world, because those excess do carry forward for five years. Which, that also actually brings up an additional interesting consideration. If an excess contribution is generated, so if you exceed that ceiling, not only can you carry forward that excess, but you can also carry forward the amount limited by the floor.
So again, you’d have to do some modeling. And I think the IRS is going to need to provide some more guidance on whether the floor applies every year on the carry forward amounts, but there may be a planning opportunity here as well.
DEVIN TENNEY
You know, it’s an interesting concept. I don’t know how many corporations out there are, you know, doing over 10% of taxable income per year. But for those that are for each year that you continue to exceed that 10% taxable income threshold, you’re really only getting hit with that 1% floor once, because that 1% will continue to carry over and effectively cover the 1%, and the subsequent years that should carry forward then as long as you are staying over the 10%. But I’m not sure if there’s a ton of clients and taxpayers that are paying over 10% of taxable income. But it certainly is something I think that they should consider.
SPENCER HEYWOOD
Yeah. That’s right. And let me just speak a little more to the concept of bunching. A real neat way to do this is by using a donor advised fund. These are relatively easy and quick to set up. And with these funds, what you can do is you can make, let’s say, your bunched contributions.
So going back to my example of three years’ worth of contributions put into one year. So $30,000, you can contribute that to a donor advised fund, you get the deduction in the year that you make the contribution. But you can advise that fund to spread those contributions over, you know, the time that you decide.
So in this case, you could still make your contributions, $10,000 contributions every year for three years using a fund like that. So it’s a really neat, clean way to incorporate this bunching technique.
IRIS LAWS
So, Spencer, my husband is a big golfer, and he, you know, all the time he goes to these charitable sort of golf tournaments and there’s all these corporate sponsors. Is there sort of a play that I’ve heard you talk about with regards to the corporate contributions and whether they can be classified as advertising versus charity? Like, is there something there?
SPENCER HEYWOOD
Yeah. So it just makes the, you know, detailing these contributions, a little more important. So using your example of a golf tournament that’s often put on by charity, there’s typically when you make those contributions, there’s typically a portion that can be applied to advertising and a portion that could be applied to charitable contributions.
And so really making sure instead of just kind of dumping it all into the charitable contribution basket, which might be limited by the floor or the ceiling, you’d want to break out whatever is truly advertising. Let’s say you get some signage as part of your sponsorship or, you know, some sort of advertising that comes along with it. You want to make sure that that’s categorized within advertising, so you’re not subject to those limits.
IRIS LAWS
Well, thanks for that. And, I think that brings us to our third planning point, which, Mike, looking at you and I did one sort of broadcasting note here at the time of this episode. I just wanted to say that the Supreme Court has not yet heard the case about President Trump’s IEEPA tariffs. And so, that’s just we don’t know how that went.
We don’t know the arguments that were brought up, all that good stuff. But that being said, before we dive into sort of tariff mitigation strategies, which is sort of the more practical side of like how companies can think about tariffs and plan looking into 2026. Mike, could you give us a quick overview of the case and, and what might happen if the tariffs are overturned?
MICHAEL CORNETT
Yeah, Iris, the case is arisen out of, you know, President Trump has used the International Emergency Economic Powers Act or IEEPA to impose many of his tariffs here during his first few months of his administration. Several companies have challenged those tariffs, along with state attorney generals. There were cases filed. The International Trade Court heard the original case and found against the president’s use of those tariffs under a couple different theories.
Case then went up on appeal to the U.S. Court of Appeals for the Federal Circuit, where, again, they found in a split decision, 7-to-4 against the president. And so then the president appealed to the Supreme Court, as you said. That’ll be later on November 5th; it’ll be interesting to see where it goes.
The split court was an interesting decision because, you know, on the seven, it was basically, you know, to put it easily they just said that IEEPA didn’t provide for tariffs to be issued. I mean, there is some nuance to that. Whereas the four said of course IEEPA allows for tariffs to be imposed by the president. So it’ll be a very interesting argument, as to what people should be thinking about doing.
I mean, if the Supreme Court does find that the tariffs were illegal, there certainly will have to be refund opportunities. Now, maybe that means you actually file a refund claim. Maybe it means, you know, you’ll need to file an actual protest with a court to get your money back. We’ve heard that the other process is what they call liquidation, where, you know, you may have not paid the tariffs yet to, the Customs Border Protection.
And so you can ask for that period of payment to be extended there. So it’ll be very interesting. The key thing there is make sure you have your documentation, you know, know what you pay tariffs on. Make sure they were tariffs covered by IEEPA because this court case really is only dealing with certain tariffs under IEEPA and is not that dealing with other tariffs referred to as 232 or 301, which is like steel, copper, or aluminum. Some of the tariffs on China are also not covered, even though there are some tariffs on China that were IEEPA-based.
IRIS LAWS
Perfect. So outside of the case then, it sounds like I haven’t ever heard you say that you think tariffs are going away, right? Like, to your point, you just said 232 and 301. They’re still going to be there. How do we think, if they are overturned, are companies still going to be affected by tariffs more generally?
MICHAEL CORNETT
Yeah, I think, you know, this president has certainly indicated if he were to lose his case, he will look for other avenues, whether it’s 232, 301-type tariffs. So I think, you know, you still need to be prepared that we’re going to be in a tariff-based economy. Also, you know, he’s negotiated trade deals in the meantime and those trade deals have tariffs being imposed. And the thought is, even if the president were to lose these cases, deals will still stay in place. And so you will still see tariffs, you know, coming from those countries where the trade deals are in place.
IRIS LAWS
So tariffs are here to stay. How can we mitigate them? Let’s jump right into that.
MICHAEL CORNETT
Yeah. How to mitigate. You know I mean, of course, the easy thing to do, well easy is probably to not the proper word. But, you know, you look at your classifications, look at your country of origin, look at your valuations. I mean, that’s how tariffs are determined anyway. Make sure you classify the product right. Because that could impact the tariff.
Other strategies are, if you’re dealing with related parties, also looking at your transfer pricing, see if you can reduce transfer pricing, which would help maybe reduce the customs valuations. A couple other strategies people are using is a concept called first sale, which means generally when you have a situation where you have a manufacturer or middleman and then importer of record, that you try to base the customs value on that price between the manufacturer and the middleman.
That requires you get a lot of documentation, but, again, that’s possible. And then another one we’re seeing a lot of is what I call unbundling of services, because we didn’t impose a lot of tariffs prior to President Trump. People would maybe bury services in the price on the invoice for the good. You know, after, you know, purchased services like installation, warranty services, maintenance contract.
So it’s important to go back and pull out all those services, which shouldn’t be subject, or considered price of the product, and get them separately stated and then you won’t pay tariffs on services.
DEVIN TENNEY
Well, Spencer, I want to kick it back to you for our fourth year-end planning point. And that again is another opportunity from OB3. And it’s related to compensation and benefit offerings for employers and their employees. And you know, our team has been traveling a lot. Michael’s basically been living out of a hotel. But over the last two months, we’ve been speaking with a lot of conferences and with clients, and there is one topic that seems to be very important no matter where we go.
And that’s no tax on tips and no tax on overtime. A lot of time is being spent in these presentations and conversations talking about these provisions. You know, we’ve got our 25 transition guidance considerations, but we also have items of consideration moving forward and working with payroll. So can you maybe just talk us through a little bit. You know, what employers should be considering as an opportunity standpoint in year-end planning as it relates to there’s no tax on tips and overtime.
SPENCER HEYWOOD
Yeah, sure. Devin, it’s true. Business owners have really keyed into this issue. Not so much because the deductions available or to them for tip and overtime deduction, but to their employees, like you mentioned. And how to handle that within their payroll. So I think the important thing that business owners and executives may want to let their employees know is that not over, not all of their overtime may be eligible for the deduction.
So there are limits, right? There’s a limit of $12,500 for single filers, $25,000 for those who are filing married joint. And the deduction begins to phase out at $150,000 of modified adjusted gross income for single filers and 300,000 for joint filers. So employees should know that perhaps not all of their overtime compensation may be eligible for the deduction.
Also, the deduction only applies to overtime paid as required under the Fair Labor Standards Act. So just to give an example, we’ll use an easy number here. Let’s say you have an employee that makes $10 per hour. If the FLSA, the Fair Labor Standards Act requires time and a half paid on that on those overtime hours. And so you pay them $15 an hour, only the amount in excess of the employee’s normal rate that’s required to be paid under the FLSA is eligible for the deduction. So in this example, only $5 per hour would be eligible for the deduction.
DEVIN TENNEY
Yeah, it’s a really good point. I’ve had questions on collective bargaining agreements. Or maybe they have a higher overtime rate that’s been negotiated with the union or other jurisdictions that have higher rates. And no, this is limited to FLSA required overtime in that one-and-a-half and only the additional incremental amount. What about tips? What is the primary consideration on that front?
SPENCER HEYWOOD
Yeah. So, you know, some of the same considerations. It’s important for employers to understand what tips may qualify for the deduction and which tips don’t so they can properly report that information to their employees. The IRS did release some proposed regulations which identify different qualifying occupations and other technicalities surrounding tips. One of those, for example, is that tips must be paid voluntarily.
So, think about automatic gratuities. Say you have a large party at a restaurant and there’s a mandatory automatic gratuity charged. That kind of tip would not qualify for the deduction because it wasn’t paid voluntarily. There’s other limits.
So, similar to the overtime wages. A little bit different, though for tips. The tips limit is $25,000. And that’s true whether you’re filing single or filing joint. And then the modified AGI limits are the same: $150,000 and $300,000 when the phaseout of the deduction begins. So, again, employees should know that not all of their tip income may be eligible for the deduction.
DEVIN TENNEY
Yeah, I think that’s definitely important. And one item I want to point out is, you know, there really is not much guidance right now for tips or overtime, particularly as it relates to 2025 guidance or transition. So what I have been telling employers as we travel and do these presentations is for 2025, just do a good faith effort to provide like a reasonable approximation to your employees of what you believe that overtime amount is, you know, certainly inform them to consult their own tax advisors.
But I think a lack of guidance for 2025, good faith effort, reasonable approximation will probably cover you on that front. And then we have a revised 2026 form W-2. So, you know, reach out to your payroll providers, and, you know, see how they’re revising their systems to kind of help you track this moving forward. And, you know, going back to the overtime, I think to the extent you have, concerns about, well, what’s our regular rate of pay to calculate the overtime based on or who is ultimately required to do it?
You know, certainly I would advise, you know, consulting your internal legal counsel to potentially then engage external legal counsel from, you know, that’s labor law to kind of look into that so you can get a little bit more comfortable on who you should and what you should be, you know, reporting.
IRIS LAWS
Well, that brings us to our fifth and final planning tip for 2025. Mike, this is going to be a little bit of a preview for one of our upcoming episodes and that’s about section 1202. For those who aren’t code heads who can rattle off, you know, IRC sections in their sleep, what is 1202 and what’s really the opportunity for folks here?
MICHAEL CORNETT
Yeah, the opportunity for folks here is if they own stock, at the time, meets certain requirements at the time they originally bought it, they have the ability to exclude gain earned when they dispose of that stock later at a very high level.
IRIS LAWS
This isn’t new, though, right? I mean, I’ve heard folks trying to qualify for this for a while, so why is it in our top ten, I guess really is the question, right.
MICHAEL CORNETT
Yeah. You’re right, Iris. This is not new. It’s been around, but what they did here in OB3 was expand the benefits and change some the limitation. So now it’s more available for more people than it was before. Now to apply to, you know, these new rules apply for stock issued after July 4th of 2025. And what they did is they expand the asset base, as they call it, for individuals.
So it would be on companies whose assets, at the time of the issuance of the stock were $75 million or less, up from $50 million. And then increase the gain, the eligible exclusion from, the greater of ten times basis or $15 million hits now, ten, which is the current rule or the new rule. And then the overall was 10 million. So 10 times basis or 10 million. So they’ve allowed the pool to be bigger on the people who were there. And then they gave some graduated scales, depending on whether you filed for three, five, or three or four or five years.
IRIS LAWS
So, you know, all of our listeners are, have a to-do list however long and a lot of them are saying, hey, with these planning points, what should I actually add as an action item to my to-do list? What’s your answer for this one?
MICHAEL CORNETT
My favorite one is model, model, model, but I can’t use that here. So I think for this one, the thing to do is go back and work with your advisor to figure out, you know, the stock that I have held in maybe this small company. Do I have the proper documentation for it? When did I buy it? If I’m going to go forward and invest in a smaller company, make sure again that I do have that proper documentation to support that I qualify for this provision.
IRIS LAWS
And potentially right, if you’re holding qualifying stock at the moment and considering a transaction, be sure to work with your advisor to make sure you’re not blowing any sort of, one of the rules to keep from your qualification, right?
MICHAEL CORNETT
Yeah, absolutely. The rules are often complex in this area. And it’ll all depend. There’s certain things, whether you own it directly, you own it through a partnership. There’s just a lot that goes into this. So you definitely need to work with an advisor to make sure that you’re going to qualify, or you don’t lose your qualification.
IRIS LAWS
Well, perfect. I think that wraps it up. If you’re interested in 1202, be sure to keep an eye out for our upcoming episode, all specific to that topic. But without further ado, I just wanted to say thank you. Mike and Spencer, this has been very insightful. And we hope to see you again on our show.
SPENCER HEYWOOD
Thanks, Iris.
MICHAEL CORNETT
Appreciate it.
IRIS LAWS
And stick around for our Focused FORsight of the week.
DEVIN TENNEY
Each episode will bring you what we call a Focused FORsight of the week, an article or webinar that might be of interest to you. This week’s Focused FORsight is actually a webinar that is going to be happening tomorrow, November 12th, where we, and that also includes me as one of the presenters, will be going into our top ten planning points heading into 2026. So if you enjoyed our episode today, it is not too late to register for that event on our website, and I really hope to see you there.
IRIS LAWS
And that’s our show. Thanks for joining! Remember to subscribe and listen in for the next episode of the podcast. Until next time.
ANNOUNCER
The information set forth in this podcast contains the analysis and conclusions of the panelists based upon his, her, or their research and analysis of industry information and legal authorities. Such analysis and conclusions should not be deemed opinions or conclusions by Forvis Mazars or the panelists as to any individual situation as situations are fact-specific.
The listener should perform their own analysis and form their own conclusions regarding any specific situation. Further, the panelists’ conclusions may be revised without notice, with or without changes in industry information and legal authorities.