Skip to Main Content
Gift Planning Menu

"No Tax on Tips" and Overtime Penalty Relief for 2025

Published November 7, 2025

On November 5, the Internal Revenue Service (IRS) and the Department of Treasury published guidance providing penalty relief to employers and taxpayers for tax year 2025. The One Big Beautiful Bill Act (OBBBA) passed a new deduction for tips and qualified overtime compensation.

The “No Tax on Tips” deduction is allowed for up to $25,000 in tips in years 2025 through 2028. The deduction is phased out for single individuals with income over $150,000 and joint filers who earn over $300,000. A taxpayer will lose $100 of exclusion for each $1,000 over the excess amount.

The qualified overtime exclusion is allowed for up to $12,500 ($25,000 for joint filers), in years 2025 through 2028. The overtime exclusion applies to taxpayers with modified adjusted gross income of up to $150,000 ($300,000 for a joint return). There is a 10% phaseout above those levels. The overtime benefit phases out for single taxpayers with income of $275,000 and joint taxpayers with joint income of over $425,000. The overtime pay must be in excess of the normal full-time pay rate. If an employee earns $18 per hour and is paid $27 per hour for overtime, only the $9 per hour for overtime pay is deductible.

With the new deductions, employers and other payors are required to file information returns to the IRS or Social Security Administration (SSA) and provide statements to taxpayers with the total amount of qualified overtime or cash tips received during the year.

IRS Notice 2025-62 provides penalty relief for employers related to the filing of information reporting requirements in tax year 2025. Employers will not have penalties for failing to provide a separate accounting of the cash tips or qualified overtime compensation to employees. The penalty relief is an acknowledgement that employers may not have the information required to be able to file accurate information returns to the IRS or SSA or the information statement to the employee. The 2025 tax year will be a transition period for enforcement and administration of these new deductions.

Editor's Note: Additional taxpayer-centric guidance related to the two new deductions will need to be provided before the 2025 tax filing season. It will be challenging for employers to comply with the new information returns, educate employees and ensure compliance with a complex law.

Nationwide Tax Forum Seminars Available Online

On November 4, the IRS announced the launch of the 2025 Nationwide Tax Forum Online. The online forum provides tax professionals with access to seminars recorded at the 2025 Nationwide Tax Forum. The seminars cover current tax law, IRS procedures and essential topics related to the upcoming tax season.

The online seminars are available for a fee of $29 per credit. Each seminar includes a slide deck, downloadable resources and full transcripts that correspond to a 50-minute interactive video presentation.

Tax professionals can gain access to the seminars by creating an account on the IRS National Tax Forum Online website, www.IRStaxforumonline.com. If needed, instructions are available on the FAQs section of the website.

The 15 new seminars from the 2025 forum are:

  1. Building a Sustainable Practice Through Ethics.
  2. Distributions from Retirement Plans and IRA's: A Crash Course.
  3. How to Help Taxpayers Avoid Abusive Tax Promotions and Abusive Return Preparers.
  4. Introduction to OPR and Circular 230.
  5. Law and Audit – The Due Diligence Process.
  6. New Features for Tax Pros: Do Business Faster and Easier with IRS Online.
  7. Plenary Session: Tax Law Changes for Tax Year 2025.
  8. Retirement Plans Basics 101 for the Practitioner.
  9. Stand Out as a Trusted Tax Professional: A Guide to Prepare Accurate Refundable Tax Credit Returns for Your Clients.
  10. Taxable Digital Asset Transactions: The Impact of the 1099-DA on Tax Year 2025.
  11. Using IRS Digital Tools and Communications Options for Practitioners.
  12. Partnerships and Non-resident Alien Withholding: Sections 1446(a) and 1446(f).
  13. How to Avoid Processing Delays and Streamline Return Filing.
  14. Getting Taxpayers Back on Track: Quickly Resolving Unpaid Tax Debts While Preventing New Ones from Occurring.
  15. Disaster Reporting Best Practices – Maximizing Resources from A to Z.

The seminars count toward continuing education credits. The IRS Nationwide Tax Forum Online is a continuing education provider, certified by the National Association of State Boards of Accountancy and the IRS Return Preparer Office. While the presentations are based on current law as of the presentation date, it is recommended to check with IRS.gov for any changes or updates.

Charitable Easement Valuation Rejected

In Paul-Adams Quarry Trust LLC v. Commissioner; No. 10145-21, the Tax Court held that the value of a charitable easement was reduced from over $10.2 million to $612,000. The gross valuation misstatement penalty of 40% also applied.

In 2007, a partnership purchased more than 207 acres of land (Paul-Adams property) in Elbert County, Georgia, near the Elberton granite deposit. The property was used to quarry granite of various quality. The partnership suffered losses and abandoned use of the property in 2012. The partners contributed the property to Paul-Adams Quarry Trust, LLC.

An original partner, Robert Elliot Paul, Sr., purchased the Paul-Adams property in 1997 for $199,000 and sold it for $327,000 in 2000. Mr. Paul, along with Francis L. Adams (taxpayer), repurchased the Paul-Adams property for $429,875 in 2007. Adams was the Paul-Adams, LLC tax matters partner and the petitioner in this matter. Paul and Adams formed the Paul-Adams Quarry Trust, LLC in 2016.

The property was put to use as a quarry for granite dimension stone in 2010 and continued to operate at a loss until 2012. A conservation easement was granted to the Oconee River Land Trust on December 22, 2017. At the time of the easement, the quarry pit was full of water and not in use. Additional permitting would have been required to allow the Paul-Adams property to be used as more than a dimension stone quarry.

Taxpayer contends the Paul-Adams property was valued at over $10.5 million before the easement and $310,980 after the grant of the easement. The appraisal of the conservation easement assigned a value of $10,234,108. However, the appraisal did not account for the mining activity from 2010 through 2012.

The claimed value was based on the property being an operating granite quarry. In taxpayer’s opinion, the Paul-Adams property could potentially produce “a material percentage of the total granite dimension stone produced annually in the entire State of Georgia.” 

The partnership filed Form 1065 claiming a total charitable deduction to the Oconee River Land Trust of $10,244,108, of which $10,234,108 was attributed to the conservation easement and $10,000 was a cash contribution. The IRS audited the partnership and denied $10,234,108 of the charitable deduction and determined a 40% accuracy penalty under Sec. 6662(h) should be applied, with alternate penalties alleged related to understatement penalties and disregard of Sec. 6662(b) and (c).

Over the course of an eight-day trial, the Court heard from various witnesses, including mining experts and valuation experts.

Taxpayer’s geology and Elberton granite deposit expert, Dr. Schroeder, noted that the Paul-Adams quarry had the potential to gross an annual revenue of $6.5 million based on the estimated volume of 10.7 million tons of potential granite being present.

Taxpayer’s mineral economics and granite market studies expert, Nick Proctor, used a discounted cashflow income approach to determine valuation, with a value of $12,157,000 based on a hypothetical quarry operation with a 9% discount rate, stemming from a net present value royalty stream of $5,349,000.

Additional expert testimony was offered on behalf of taxpayer from Robert J. Fletcher, who conducted the appraisal attached to the 2017 tax return. Mr. Fletcher was recognized as an expert in real estate appraisals. The appraisal valuation was based on the owner-operator method of the income approach, with a hypothetical quarry operated for 15 years, with a 12% discount rate resulting in a net present valuation of $10,545,088. To determine the after value, Mr. Fletcher used the comparable sales method, analyzing the sale of ten properties. The easement valuation was based on the before value of $10,545,088 and the after value of $310,980. 

Taxpayer also offered testimony from Benjamin Black, an expert in geological testing, geologic investigation, mineral resource evaluation and suitability of property for stone development. Mr. Black created multiple models for the quarry to determine an estimated 15.6 million cubic feet of stone could be extracted. An additional model was developed that determined a potential stone pit quarry of 31.4-acre surface footprint could be developed.

IRS expert Andy Sheppard, a Georgia certified general real property appraiser, is an expert in the appraisal of conservation easements. He analyzed four comparable sales with an estimated fair market value price per acre of $4,750. He determined that the before value was $985,000. He used the comparable sales method to determine the after value, selecting four comparable sales for analysis. He determined the after price per acre to be $1,800, making the property worth a total value of $373,000. Therefore, the value of the easement was $612,000.

Additional rebuttal experts were provided by both parties. The trial was a battle of the experts. The Court noted that Adams had participated in multiple conservation easement transactions over the years, with Mr. Fletcher as the appraiser. The IRS contended that the values were inflated and that Mr. Adams was aware of the inflated values.

The Court found that Adams failed to provide credible evidence for the highest and best use of the Paul-Adams property was as an active quarry. The claimed value exceeded 2,400% over the prior sale price in 2007. The Court stated that, in view of the entire record, Adams’ claims of an active quarry was utterly unsupportable. The gross misstatement 40% penalty was applicable under Sec. 6662(h).

The Court found that the economic analysis put forth by Mr. Adams was unreliable, implausible and lacked credibility, with unrealistic sale volumes and market share forecasts. At the date the easement was granted, the Paul-Adams property had no existing record beyond significant losses when the quarry was in operation. 

The Court accepted the IRS expert’s valuation and held the conservation easement value was properly valued at $612,000. Further, the Court held that the Sec. 6662(h) 40% gross valuation misstatement penalty was applicable because the claimed deduction exceeded 200% of the correct amount. The Court disallowed reasonable cause defenses under Sec. 6664(c)(3).

Applicable Federal Rate of 4.6% for November: Rev. Rul. 2025-21; 2025-45 IRB 1 (15 October 2025)

The IRS has announced the Applicable Federal Rate (AFR) for November of 2025. The AFR under Sec. 7520 for the month of November is 4.6%. The rates for October of 4.6% and September of 4.8% also may be used. The highest AFR is beneficial for charitable deductions of remainder interests. The lowest AFR is best for lead trusts and life estate reserved agreements. With a gift annuity, if the annuitant desires greater tax-free payments the lowest AFR is preferable. During 2025, pooled income funds in existence less than three tax years must use a 4.0% deemed rate of return. Charitable gift receipts should state, “No goods or services were provided in exchange for this gift and the nonprofit has exclusive legal control over the gift property.”