Tax

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

Many taxpayers assume that tax law looks only at the stock they actually own. Section 318 proves that assumption wrong

The Section 318 attribution rules can treat you as owning business interests you never purchased, simply because of family relationships, entity ownership, or even stock options. When that happens, your tax results can change dramatically.

Section 318 matters because many tax rules depend on ownership thresholds. Ten percent, 50 percent, or 80 percent ownership often determines control, related-party status, and reporting obligations. Through constructive ownership, a taxpayer who believes they own only a small interest may suddenly cross one of these thresholds.

Section 318 also changes how transactions are taxed. Stock redemptions, related-party sales, and similar transactions often turn on whether the parties count as related. Attribution can convert what looks like a capital gain into a taxable dividend or disallow a loss entirely. Sales involving family members or family-owned entities create the highest risk.

The rules also trigger reporting obligations. Several high-penalty regimes, including foreign-corporation reporting, rely on Section 318 ownership. A small direct interest can balloon into deemed control once family and entity ownership applies. Missed filings in these areas can produce severe penalties even when no tax is due.

Section 318 works through several channels. Family attribution pulls in stock owned by your spouse, parents, children, and grandchildren—regardless of age. Entity attribution moves stock owned by partnerships, corporations, trusts, or estates up to owners and beneficiaries. Attribution also flows downward from individuals to entities they control. Option attribution treats unexercised options as actual ownership.

These rules operate more broadly than the controlled-group rules under Section 1563. Whereas Section 1563 focuses on retirement plans and controlled groups, Section 318 appears throughout the tax code, affecting S corporation benefits, redemptions, foreign corporations, and related-party rules.

Practical examples highlight the risk. Family attribution can force S corporation health insurance into wages. Attribution can turn a family stock redemption into a dividend. Family ownership can convert a small foreign stake into controlled foreign-corporation status with extensive reporting.

If you own interests alongside family members, operate through multiple entities, or hold options, you should map both direct and constructive ownership. A clear attribution map often prevents unexpected tax bills, denied deductions, or penalty notices.

If you want to discuss the Section 318 attribution rules, please call me on my direct line at 408-778-9651  

• By Leon Clinton
• January 27, 2026