The IRS has released final Treas. Regs. §1.224-1 that:
- Defines qualified tips for purposes of the deduction;
- Provides a complete listing of qualified occupations and their corresponding codes (aka Treasury Tipped Occupations Codes (TTOCs)). These are essentially the same as the original proposed list with the addition of TTOCs for floral designers, visual artists, and gas pump attendants as well as more “illustrative examples” of the 70 or so TTOC categories; and
- Continues to defer providing guidance regarding the IRC §224 specified service trade or business exclusion, which means that the transitional relief provided in IRS Notice 2025-69 still applies and taxpayers will continue to qualify for the tips deduction even if they or their employer are engaged in an SSTB as defined in IRC §199A.
The final regulations generally retain the IRS’s position outlined in the proposed regulations concerning what is a qualified tip and what is a cash tip (only cash tips continue to qualify, including cash tips paid electronically), with additional clarifications as noted below.
The following are some of the more interesting items included in the final regulation and its accompanying supplementary information:
- The definition of “cash tips” from the proposed regulations is modified to exclude all digital assets (as defined in IRC §6045(g)(3)(D) and Treas. Regs. §1.6045-1(a)(19)) such as bitcoin, stablecoins, etc. However, tips paid with credit and debit card transactions and through payment apps such as Venmo or Zelle still qualify, as do tips paid in foreign currency;
- Additional examples are provided clarifying:
- Whether a tip is mandatory or voluntary for different types of point of sale (POS) systems and contracts for services; and
- When payments to digital service providers are treated as compensation or deductible tips, including how digital rewards are treated and the impact of audience engagement mechanisms;
- The IRS makes clear that the job descriptions included in the TTOC chart are “illustrative” only and are not an “exhaustive list,” which means taxpayers working in certain jobs may still qualify for the deduction even if the job is not specifically listed;
- The IRS stated that whether the self-employed health insurance deduction, the one-half of self-employment tax deduction, and the self-employed retirement deduction should be deducted for purposes of determining the net income limitation for self-employed taxpayers is beyond the scope of the regulation. Remember that the original version of the Schedule 1-A instructions did not require these items to be deducted for purposes of calculating the net income limitation, whereas the current instructions do; and
- Taxpayers who are involved in the cannabis industry are engaged in an illegal activity under federal law and are therefore ineligible for the deduction even if they are engaged in an occupation that is otherwise listed in the TTOC chart and cannabis is legal in the state in which they work.
The final regulations maintain the positions that:
- Self-employed taxpayers can only claim the deduction for tips included on Form 1099; and
- Partners cannot claim a deduction for tips reported on an information return provided to the partnership.
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