Tax Bytes: Week of November 10, 2025

Tax developments

IRS provides tip and overtime reporting relief

The Internal Revenue Service (IRS) issued Notice 2025-62 (the Notice), which provides relief from penalties under Internal Revenue Code (Code) section 6721 and 6722 for the 2025 reporting year for all forms on which overtime or tips might be reported (i.e., W-2, 1099-MISC, 1099-NEC, 1099-K and the corresponding payee statements), so long as the statement is otherwise complete and correct, and includes the amount of cash tips that would have been required to be reported prior to the amendments made by the One Big Beautiful Bill Act (OBBBA). There is no corresponding requirement for overtime because, prior to OBBBA, qualified overtime was not required to be reported to the IRS.

Under the OBBBA, individuals can claim an income tax deduction for qualified tips, which are cash tips received in occupations that customarily and regularly received tips on or before December 31, 2024. Similarly, individuals can claim a deduction for qualified overtime compensation received during the taxable year, which is defined as the premium portion of overtime as required by the Fair Labor Standard Act (the FLSA), i.e., the portion of compensation calculated at an additional hourly rate for weekly hours over 40.

The IRS recognized that prior to the OBBBA, payors and employers were not required to separately report cash tips, occupations, or overtime compensation, and many may not currently have the information, systems, or procedure in place to comply with these new requirements. Consequently, the Notice provides penalty relief under Code sections 6721 and 6722 for the information reporting requirements applicable to both qualified tips and qualified overtime during the 2025 taxable year.

The IRS had previously announced that Forms W-2 and 1099 for the 2025 taxable year, which were released prior to OBBBA, would not be updated to account for the OBBBA-related changes, meaning that the transition period is necessary for both employers and the IRS to adapt to the new requirements.

While not a requirement to receive penalty relief for 2025, employers and payors are encouraged to provide employees and payees with the information needed to claim the tips or overtime deduction on the employee’s or payee’s individual income tax return. For tips, this additional information would include the employee’s occupation code, whether the employer’s or payor’s trade or business is a specified service trade or business and the amount of cash tips. For overtime, this additional information would include a computation of the premium portion of overtime computed under the FLSA rules. Employers and payors can make such information available to their employees and payees by including it in box 14 of an employee’s Form W-2, or through an online portal, additional written statements furnished to the employees or payees, or other secure methods.

The IRS indicated that additional guidance for individual taxpayers with respect to claiming the new deductions for qualified tips and qualified overtime compensation is forthcoming.

IRS updates Form 1099-K FAQs to reflect updated reporting thresholds

The IRS published Fact Sheet 2025-08, which addresses changes to Form 1099-K reporting requirements made by the OBBBA. Pursuant to section 6050W of the Code, Form 1099-K reporting is required when payments that exceed a specified threshold are received for goods and services through a payment settlement entity (PSE), which include third party settlement organizations (TPSOs). A TPSO is the central organization with the contractual obligation to make payments to participating payees of third party network transactions (i.e., apps used to transfer money between buyers and sellers).  

The OBBBA retroactively reinstated higher reporting thresholds that were in effect prior to the American Rescue Plan Act of 2021. The lower reporting thresholds had been widely criticized as unduly burdensome. Under the restored threshold, TPSOs are not required to file a Form 1099-K unless the gross amount of reportable payment transactions to a payee exceeds $20,000 and the number of transactions exceeds 200. When payments exceed these thresholds, TPSOs must report a payee’s gross sales to the IRS and send payment information to the payee on a Form 1099-K.

The updated FAQs include specific guidance for ticket resale transactions, and reference Executive Order 14254, Combating Unfair Practices in the Live Entertainment Market, 90 F.R. 14699 (March 31, 2025). This Executive Order directs the Secretary of the Treasury Department and Attorney General to ensure that ticket scalpers operate in full compliance with the Code. The guidance emphasizes that income from ticket sales is includable in gross income and that payment settlement entities facilitating ticket sales and re-sales must file a Form 1099-K when payments and transactions exceed the reporting threshold.

Mind the clock: Bayou Serpent prevails over IRS on late notice

The US Tax Court issued a significant decision in favor of Bayou Serpent Property, LLC (Bayou Serpent), holding that the IRS Final Partnership Adjustment (FPA) was invalid because it was not issued within the strict statutory timeframe mandated by the Bipartisan Budget Act audit regime. Specifically, the court found that the FPA, which sought to disallow a $76.5 million charitable donation deduction for a conservation easement, was issued more than 270 days after Bayou Serpent submitted its modification request, and crucially, after no further information was either provided by the partnership or requested by the IRS. As a result, the adjustments in the FPA are unenforceable, and the IRS is barred from collecting the related imputed underpayment or penalties from the partnership or its partners.

Read our full alert here.

Proposed regulations to withdraw look-through rule for qualified investment entities – changes will facilitate foreign investment in US real estate

On October 20, 2025, the Department of Treasury and the IRS published proposed regulations (the Proposed Regulations) that would withdraw the domestic corporation look-through rule adopted in the April 25, 2024 final regulations under Internal Revenue Code section 897 (2024 Final Regulations). In a positive development for the private funds market, the Proposed Regulations would restore the historical treatment of non-public domestic C corporations as “blocker” entities for purposes of determining whether a Real Estate Investment Trust or Regulated Investment Company qualifies as a “domestically controlled” qualified investment entity. The Proposed Regulations are intended to simplify compliance, address administrative concerns associated with the 2024 Final Regulations, and realign the domestic control analysis with prior longstanding practice.

Read our full alert here.

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Finance Bill 2025 Summary
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