Key Tax and Litigation Developments: What Businesses Should Know Heading Into 2026.

As we approach the end of 2025, several significant changes in tax law, litigation risks, and regulatory developments are on the horizon—many of which will directly impact businesses, employers, and high-net-worth individuals.

1. Federal Tax Relief Expiring on Student Loans

The temporary federal income tax exclusion for forgiven student loans is set to expire after 2025. Beginning in 2026, forgiven student debt—including Parent PLUS loans—will once again be treated as taxable income. Businesses offering education assistance plans should review their programs now, as the IRS permanently extended the ability for employers to provide up to $5,250 annually in tax-free education benefits. These plans can also be applied toward student loan repayment, providing a valuable retention tool for employers.

2. Retirement Accounts: RMDs and Roth Conversions

For individuals approaching Required Minimum Distribution (RMD) age, timing remains critical. Taxpayers must take their annual RMD before converting any portion of a traditional IRA to a Roth. This rule becomes particularly important for those with multiple IRAs, as the IRS requires the aggregate RMD to be satisfied first. Business owners with significant retirement assets should engage in proactive planning to avoid costly missteps.

3. Charitable Contributions: IRS Scrutiny Increasing

Taxpayers should expect heightened enforcement around charitable deductions. Strict documentation—such as contemporaneous receipts, written acknowledgments, and appraisals for gifts over $5,000—is essential. Courts have recently disallowed sizable deductions where supporting details were incomplete, underscoring the need for compliance.

4. Business Tax Litigation: Netting of Overpayments and Underpayments

A recent appeals court case highlights the complexities of corporate tax compliance after mergers and acquisitions. The IRS denied Bank of America’s attempt to offset pre-merger underpayments of Merrill Lynch against BOA’s overpayments, ruling that the two entities were separate taxpayers before the merger. This underscores a critical point in M&A transactions: tax liabilities and entitlements may not always consolidate cleanly, leaving companies exposed to unexpected costs.

5. Tax Disputes: Timeliness of Court Petitions

The Tax Court continues to strictly enforce filing deadlines. A recent decision dismissed a taxpayer’s petition filed just one day late, even after the Supreme Court left the door open for equitable relief. Businesses facing IRS actions must be diligent in meeting all statutory deadlines, as courts show little tolerance for delays.

6. Damages and Settlements: Taxable vs. Nontaxable Awards

Not all settlement proceeds are tax-free. While damages for physical injuries are generally excluded from income, awards for emotional distress, wrongful termination, and reputational harm are taxable. Attorney’s fees present another trap—except in narrow circumstances such as discrimination cases, plaintiffs cannot deduct these costs, meaning they may be taxed on the gross settlement.

7. Legislative Outlook: The “One Big Beautiful Bill” and Beyond

Congress remains divided, but several issues could significantly shape the tax landscape:

• Government Funding Battles: Negotiations over spending cuts may trigger a government shutdown, potentially slowing IRS operations.

• Reconciliation Measures: Proposals to scale back Medicaid and other benefits face long odds but remain in play.

• Premium Tax Credit Extensions: Expanded subsidies under the Affordable Care Act expire after 2025, potentially impacting millions.

• Technical Corrections: Lawmakers are already signaling the need to fix drafting errors in the recently passed legislation, including provisions affecting deductibility.

  
  

Takeaway for Businesses and Executives

The shifting tax and litigation environment underscores the importance of forward-looking legal and financial strategies. From employer benefit plans and retirement distributions to mergers, acquisitions, and IRS disputes, companies must remain proactive to manage risk and capitalize on available opportunities.

At Spizzirri Law LLC, we guide clients through these complex intersections of federal tax law, business litigation, and corporate transactions. If your business is navigating a merger, facing an IRS challenge, or reassessing tax strategy in light of 2025’s changes, our team is here to help.

Thanks for reading.

MD

Reference: The Kiplinger Tax Letter: Vol. 100, No.17, Pages1-3