Tax

For decades, taxpayers trusted a simple rule: if you mailed a tax return or payment by the deadline, the IRS treated it as timely filed. Recent U.S. Postal Service (USPS) practices have changed that reality and created a serious trap for anyone who relies on last-minute mailing.

Today, the USPS often applies postmarks at regional processing centers instead of at your local post office. Those centers may be many miles away, and reduced truck schedules can delay transport. 

As a result, a return you drop off on April 15 may receive a postmark dated April 16 or later. The IRS will then treat your filing as late, even though you acted responsibly. Being one day late can trigger penalties and interest equal to 5 percent of the tax due.

Sometimes, USPS postmark machines don’t even apply a postmark.

You also cannot rely on postage labels printed at home or at self-service kiosks. Those labels only show when you bought postage, not when the USPS accepted your mail.

You can protect yourself by taking control of the mailing process. Present your return at a post office retail counter and ask the clerk to apply a manual postmark. For stronger protection, use certified mail. Certified mail provides a postmarked receipt that serves as legal proof of mailing and delivery.

You also have legal proof by filing and paying electronically or by using an IRS-approved private delivery service. Electronic filing provides an electronic postmark and removes uncertainty.

If you plan to file by mail, choose your method carefully. A small decision can prevent an expensive and frustrating surprise. If you want to discuss your tax filings, please call me directly at 408-778-9651

• By Leon Clinton
• February 6, 2026

Congress created a valuable new tax break for tipped workers under the One Big Beautiful Bill Act. The No Tax on Tips deduction applies retroactively beginning January 1, 2025, and the IRS has designated 2025 as a transition year. As a result, the deduction operates differently for 2025 than for later years.

For tax years 2025 through 2028, taxpayers who work in one of 68 customarily tipped occupations may exclude from taxable income up to $25,000 annually in voluntarily paid cash tips. The deduction begins to phase out when modified adjusted gross income exceeds $150,000, or $300,000 for joint filers. Only tips that the taxpayer reports to the IRS qualify for the deduction.

For employees, employers report tips on Form W-2, or employees report unreported tips to the IRS on Form 4137. 

The IRS did not revise Forms W-2 or 4137 for 2025 to separately identify qualifying tips. Because of this limitation, the IRS does not require employers to separately track qualifying tips on the 2025 Form W-2.

Employees may determine their qualifying tips by using Social Security tips shown in box 7 of Form W-2, tip reports submitted to the employer on Form 4070, employer-provided tip summaries, and any unreported tips reported to the IRS on Form 4137.

Independent contractors face fewer reporting obstacles for 2025. Payors and payment processors such as PayPal or Venmo do not need to separately report tips on Form 1099-NEC or 1099-K. Independent contractors may determine qualifying tips using earnings statements, receipts, point-of-sale reports, daily tip logs, payment processor records, or similar documentation. Contractors may also include tips paid in cash, provided they maintain adequate records.

The law generally denies the tips deduction for income earned in a specified service trade or business (SSTB), such as health, law, accounting, consulting, financial services, athletics, or performing arts. However, the IRS has delayed enforcement of this no-SSTB rule until it issues final regulations. As a result, the IRS will not apply the rule for 2025 or 2026.

This delay significantly expands eligibility. Any employee or independent contractor in a customarily tipped occupation may claim the deduction for 2025, regardless of the employer’s or contractor’s SSTB status. This relief benefits many workers, including entertainers, digital content creators, and massage therapists.

If you want to discuss the tips deduction, please call me on my direct line at 408-778-9651  

Sincerely,

• By Leon Clinton
• February 3, 2026

If your business pays a large lump-sum commission to terminate a salesperson or vendor, the tax treatment matters. In many cases, you can deduct the full payment in the year you pay it rather than spreading the deduction over many years.

Consider a common situation: You operate an investment advisory firm that uses the cash method of accounting. Clients pay you an annual fee based on assets under management, and you split a portion of those fees with a salesperson or vendor. Your agreement requires you to pay a termination amount equal to the last three years of commissions if you end the relationship. In your case, that payment totals $225,000.

The tax law generally allows a current deduction. You pay this amount to settle an existing contractual obligation tied to services already performed. You do not acquire a new asset, a customer list, or an ongoing right. The payment functions like a catch-up commission or severance payment. Section 162 allows a full deduction for ordinary and necessary business expenses, including compensation for past services.

You do not need to capitalize this payment under Section 197 because you did not acquire an intangible asset in connection with a business purchase. You also avoid capitalization under Section 263 because the payment does not create or enhance a separate and distinct asset. Instead, it eliminates a liability that already existed under your agreement.

The IRS sometimes argues that a termination payment produces a long-term benefit, such as increased future profitability. That argument carries limited weight when the payment merely ends a contractual relationship and does not create a transferable or enforceable right. Courts and IRS guidance consistently treat severance-style payments as current deductions even when the business benefits afterward.

To protect the deduction, you should document the payment carefully. Your agreement and termination documents should clearly show that the payment settles a preexisting obligation for prior services. Avoid language that suggests you purchased goodwill, clients, or future rights.

The bottom line remains straightforward: A $225,000 termination commission is typically deductible as a business expense in the year paid. With proper documentation, you can deduct the full amount now and avoid unnecessary capitalization.

If you want to discuss termination payments, please call me on my direct line at 408-778-9651  

• By Leon Clinton
• January 30, 2026