What is the 8th Circuit’s 3M decision about?

The 3M decision limits the IRS’s authority to tax “blocked income” that a U.S. parent company cannot legally receive from a foreign subsidiary, reinforcing that clear statutory language governs over regulations under Section 482.

How does the Loper Bright ruling influence the 3M case?

The 8th Circuit relied on the Supreme Court’s Loper Bright decision, which ended judicial deference to agency interpretations. This means courts now determine the “best reading” of tax law rather than deferring to IRS regulations.

What is “blocked income” in international tax?

Blocked income refers to funds a foreign subsidiary cannot legally remit to its U.S. parent due to foreign law restrictions, such as currency controls or local regulations. The 3M decision confirms such income cannot be reallocated for U.S. tax purposes.

How does Section 482 apply to transfer pricing and blocked income?

Section 482 allows the IRS to allocate income among related entities to prevent tax evasion, but only when the U.S. parent has dominion and control over the income. The 3M decision confirms that income outside a taxpayer’s legal control cannot be taxed under this provision.

What does “dominion and control” mean in this context?

Dominion and control refer to a taxpayer’s legal ability to access and use income. The 3M decision reaffirmed that the IRS cannot impute income to a U.S. company when foreign law prevents that control.

Why is this case considered a win for taxpayers?

The decision strengthens taxpayer protections in cross-border transactions by curbing the IRS’s ability to rely on regulations that go beyond the plain language of tax statutes.

How might this decision affect future IRS enforcement?

Post-Loper Bright, courts may be less likely to uphold IRS positions based solely on regulatory authority. The 3M case may influence transfer pricing, GILTI, BEAT, and other international tax enforcement areas.

How can organizations prepare in light of this decision?

Multinational companies should review transfer pricing documentation, blocked income issues, and Section 482 positions to ensure alignment with statutory language rather than regulatory interpretation. Consulting with experienced international tax advisors can help mitigate risk.

No Tax on Overtime: What the 2025-2028 Federal Deduction Really Means

January 15, 2026

PYA Insights

Executive Contacts

Tina Collins

Michelle Herrell

Beginning in 2025, eligible employees may deduct a portion of their overtime pay from federal taxable income. While commonly referred to as “no tax on overtime,” this provision functions as a limited federal income tax deduction and is scheduled to expire after 2028.

What are Key Highlights of the No Tax on Overtime Deduction?

Effective for overtime earned in years 2025-2028
Available without itemizing deductions
Reduces federal taxable income (state and local taxes may still apply)
Maximum deduction is $12,500 per return, $25,000 for married filing jointly
Deduction begins phasing out when adjusted gross income exceeds $150,000
Not available for married filing separately

What Overtime Pay Qualifies for the Deduction?

Only overtime pay that meets the Fair Labor Standards Act (FLSA) definition qualifies for the deduction. Overtime must be paid at time-and-a-half for hours worked over 40 in a regular workweek. Bonuses, premium pay, or other compensation not meeting FSLA rules do not qualify. Employer policies do not override FLSA rules for tax purposes.

How is the Overtime Deduction Calculated?

The deduction applies only to the “extra half” pay above the employee’s regular hourly rate; it does not apply to the full overtime amount:

Example 1: Time-and-a-Half Overtime

- Monica earns $20 per hour and $30 per hour for overtime. (Deductible portion is $10 per overtime hour.) If she earned $15,000 in overtime pay, dividing by three yields a $5,000 allowable deduction.

Example 2: Double-Time Overtime

- Rachel earns $20 per hour but is paid double-time for overtime ($40 per hour). Even though her employer pays more, the deduction is still limited to the Fair Labor Standards Act amount ($10 per overtime hour). If she earned $30,000 in overtime pay, dividing by four yields a $7,500 allowable deduction.

How Do Employees Report and Document Overtime for the Deduction?

For 2025, employees may use a reasonable calculation based on final pay stubs. Beginning in 2026, W-2 forms will include separate reporting for overtime pay. Employees should retain pay stubs and payroll records to support their calculations.

What are Important Reminders About the Claim Limitations?

Employees should remember these limitations before filing the overtime deduction:

Filing status matters; married filing separately is not eligible for this deduction.
The deduction is subject to caps and income phaseouts.
State and local taxes can differ in treatment.

PYA Can Help

As questions increase around overtime taxation under the One Big Beautiful Bill Act, understanding how the federal deduction actually works is critical. PYA’s Tax experts can help evaluate eligibility and ensure calculations and documentation align with IRS guidance.