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2023 Year-End Tax Planning for Businesses

Posted by BOOSCPA Strategic Tax Services Group Posted on Dec 11 2023
2023 Corporate Year End Tax Planning
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2023 Year-End Guide – Tax Accounting Methods

A taxpayer’s tax accounting methods determine when income is recognized and costs are deducted for income tax purposes. Strategically adopting or changing tax accounting methods can provide opportunities to drive tax savings and increase cash flow. However, the rules covering the ability to use or change certain accounting methods are often complex, and the procedures for changing methods depend on the mechanism for receiving IRS consent — that is, whether the change is automatic or non-automatic. Many method changes require an application be filed with the IRS prior to the end of the year for which the change is requested.

Among others, taxpayers should consider the following tax accounting method implications and potential changes for 2023 and 2024, which are further discussed below.

Items taxpayers should review by year end:
    Be mindful of the December 31st deadline for non-automatic method changes
  • Verify eligibility to use small business taxpayer exceptions and evaluate method implications
  • Year-end clean-up Items: accelerate common deductions/losses, if appropriate
  • Revisit the de minimis book safe harbor for write-offs of tangible property
  • Consider methods implications of potential M&A transactions
Items to review in early months of 2024:
    Review latest specified research and experimental expenditures guidance (Section 174) and evaluate implications on 2023 tax year
  • Review opportunities for immediate deduction of fixed assets
  • Consider the UNICAP historic absorption ratio election
  • Review leasing transactions for compliance with tax rules
  • Evaluate accounting method changes for controlled foreign corporations

Items Taxpayers Should Review by Year End:
Be mindful of the December 31st Deadline for Non-automatic Method Changes
Although the IRS has continued to increase the types of accounting method changes that can be made under the automatic change procedures, some common method changes must still be filed under the non-automatic change procedures. Importantly, a calendar year-end taxpayer that has identified a non-automatic accounting method change that it needs or desires to make effective for the 2023 tax year must file the application on Form 3115 during 2023 (i.e., the year of change). (Technically, a taxpayer with a 12/31/23 year end has until Tuesday, January 2, 2024, to file because December 31 is a Sunday and Monday is the holiday observance of New Year’s Day, therefore, Tuesday is the next business day after the due date).
 
Among the method changes that must be filed under the non-automatic change procedures are many changes to correct an impermissible method of recognizing liabilities under an accrual method (for example, using a reserve-type accrual), and long-term contract changes. Additionally, taxpayers that do not qualify to use the automatic change procedures because they have made a change with respect to the same item within the past five tax years will need to file under the non-automatic change procedures to request their method change. 

Generally, more information needs to be provided on Form 3115 for a non-automatic accounting method change, and the complexity of the issue and the taxpayer’s facts may increase the time needed to gather data and prepare the application. Taxpayers that wish to file non-automatic accounting method changes effective for 2023 should begin gathering the necessary information and prepare the application as soon as possible to avoid a last-minute rush. 


Verify Eligibility to Use Small Business Taxpayer Exceptions and Evaluate Method Implications
A taxpayer that currently qualifies as a small business taxpayer for accounting method purposes is able to use small business taxpayer accounting methods – which include the overall cash method of accounting and other simplifying provisions, such as exemptions from:
    Section 471 inventory methods;
  • Section 263A uniform capitalization (UNICAP) rules;
  • The Section 460 requirements to use the percentage-of-completion method for certain long-term construction contracts; and
  • The Section 163(j) limit on the deductibility of business interest expense. 

Generally, a small business taxpayer is a taxpayer, other than a tax shelter under Section 448(d)(3), that meets the Section 448(c) gross receipts test for a given tax year. For a tax year beginning in 2023, a taxpayer meets the gross receipts test if it has average annual gross receipts for the three prior tax years (2022, 2021, 2020) of $29,000,000 or less.  In calculating the gross receipts test, a taxpayer must follow the guidelines for items to be included or excluded from gross receipts, and include the gross receipts of all applicable entities and predecessors under the aggregation rules. 

Taxpayers must evaluate each year whether they qualify as a small business taxpayer by continuing to meet the gross receipts test. In addition, taxpayers should determine whether any M&A activities they have engaged in or anticipate undertaking will affect their small business taxpayer status. If so, the taxpayer should determine for what year accounting method changes may be required, as well as whether it may be advantageous to make the method changes earlier than required. 

Taxpayers should verify as early as possible whether they remain eligible to continue to use their current accounting methods.  If method changes are needed, a taxpayer needs to determine whether:
    The change(s) qualify to use the automatic change procedures (in which case Form 3115 can be filed in 2024); or
  • A non-automatic accounting method change needs to be filed before the end of 2023 for the change to apply in the first year the taxpayer does not qualify as a small business taxpayer. 
Additionally, if accounting method changes need to be made, taxpayers should consider the impact of the Section 481(a) adjustments on their current year tax returns as well as ensure that the methods being adopted are consistently applied.

Year-end Clean-up Items: Accelerate Common Deductions/Losses
Heading into year-end tax planning season, companies may be able to take some relatively easy steps to accelerate certain deductions into 2023 or, if more advantageous, defer certain deductions to one or more later years. The key reminder for all of the following year-end “clean-up” items is that the taxpayer must make the necessary revisions or take the necessary actions before the end of the 2023 taxable year. (Unless otherwise indicated, the following items discuss planning relevant to an accrual basis taxpayer.)
Deduction of accrued bonuses. In most circumstances, a taxpayer will want to deduct bonuses in the year they are earned (the service year), rather than the year the amounts are paid to the recipient employees. To accomplish this, taxpayers may wish to:
    Review bonus plans before year end and consider changing the terms to eliminate any contingencies that can cause the bonus liability not to meet the Section 461 “all events test” as of the last day of the taxable year. Taxpayers may be able to implement strategies that allow for an accelerated deduction for tax purposes while retaining the employment requirement on the bonus payment date. These may include using (i) a “bonus pool” with a mechanism for reallocating forfeited bonuses back into the pool; or (ii) a “minimum bonus” strategy that allows some flexibility for the employer to retain a specified amount of forfeited bonuses.
  • It is important that the bonus pool amount is fixed through a binding corporate action (e.g., board resolution) taken prior to year end that specifies the pool amount, or through a formula that is fixed before the end of the tax year, taking into account financial data as of the end of the tax year. A change in the bonus plan would be considered a change in underlying facts, which would allow the taxpayer to prospectively adopt a new method of accounting without filing a Form 3115.
  • Schedule bonus payments to recipients to be made no later than 2-1/2 months after the tax year end to meet the requirements of Section 404 for deduction in the service year.
Deduction of commission liabilities. Taxpayers with commission liabilities should consider taking the following actions prior to the end of the 2023 taxable year:
    Review commission agreements for needed revisions. By analyzing the terms of the arrangements, taxpayers can determine what event(s) must occur to fix the commission liability and meet the all events test under Section 461. Companies may consider revising commission agreements to remove contingences or otherwise better align their business goals with deduction timing for tax purposes.
  • One example of a contingency associated with commission liability is a requirement that a customer remain a customer for a specified time before the employee/agent is entitled to a commission. In this case, the liability would not be considered fixed until the conclusion of the specified time period, thereby precluding the taxpayer’s deduction of the commission liabilities prior to that date.
  • Consider the tax treatment of prepaid commissions and associated elections. For financial reporting purposes, many companies capitalize commissions paid to both employees and independent contractors, typically amortizing amounts over the same period as the related revenue stream under ASC 606. Tax requirements for capitalization of commissions and the timing of their deduction will differ based on the recipient of the commission and whether the recipient’s efforts to earn the commission facilitate the acquisition or creation of an intangible.
  • The Section 263(a) requirement to capitalize commissions as facilitative costs applies to commissions paid to third parties, including independent contractors, but employee compensation is exempt from this requirement. Thus, commissions paid to employees generally can be deducted in the year the commissions are incurred.
  • If the taxpayer prefers to capitalize commissions paid to employees, it may opt to do so by making an annual election. The flexibility to switch between deducting and capitalizing employee commissions each year provides a helpful planning opportunity for companies.
  • Schedule accrued commission payments to employee recipients to be made no later than 2-1/2 months after the tax year end. This timing is necessary to meet the requirements of Section 404 for a deduction in the service year. Accrued commissions to third parties (e.g., independent contractors) would generally be deductible in the year incurred.

Deductions of prepaid expenses. For federal income tax purposes, companies may have an opportunity to take a current deduction for some of the expenses they prepay, rather than capitalizing and amortizing the amounts over the term of the underlying agreement or taking a deduction at the time services are rendered.

A cash basis taxpayer can generally deduct prepaid expenses in the year of actual payment as long as the prepaid expense meets an exception referred to as the “12-month rule.” Under the 12-month rule, taxpayers can deduct prepaid expenses in the year the amounts are paid (rather than having to capitalize and amortize the amounts over a future period) if the right/benefit associated with the prepayment does not extend beyond the earlier of i) 12 months after the first date on which the taxpayer realizes the right/benefit, or ii) the end of the taxable year following the year of payment. As taxpayers are required to meet the Section 461 all events test prior to applying the 12-month rule, accrual basis taxpayers must carefully examine the nature of their prepaids to determine whether there is a fixed and determinable liability and whether economic performance has occurred by year end.

The rules provide some valuable options for accelerated deduction of prepaids for accrual basis companies – for example, insurance, taxes, government licensing fees, software maintenance contracts, and warranty-type service contracts. Identifying prepaids eligible for accelerated deduction under the tax rules can prove a worthwhile exercise by helping companies strategize whether to make prepayments before year end, which may require a change in accounting method for the eligible prepaids.

Inventory write offs. Often companies carry inventory that is obsolete, unsalable, damaged, defective, or no longer needed.  While for financial reporting inventory is generally reduced by reserves, for tax purposes a business normally must dispose of inventories to recognize a loss, unless an exception applies. Thus, a best practice for tax purposes to accelerate losses related to inventory is to dispose of or scrap the inventory by year end.
An important exception to this rule is the treatment of “subnormal goods,” which are defined as goods that are unsaleable at normal prices or unusable in the normal way due to damage, imperfections, shop wear, changes of style, odd or broken lots, or other similar reasons. For these types of items, companies may be able to write down the cost of inventory to the actual offering price within 30 days after year end, less any selling costs, even if the inventory is not sold or disposed of by year end.

Revisit the De Minimis Book Safe Harbor for Write-offs of Tangible Property

Subject to limitations, the so-called tangible property regulations (TPR) permit a taxpayer to elect to deduct the costs of items that likewise are expensed under a written financial accounting policy in place as of the beginning of the tax year. The election must be made annually and, because it is not a method of accounting, can be made for a given year without regard to whether the taxpayer has made the election for a prior year. The taxpayer can adjust the tax benefit of the safe harbor election by modifying the associated financial accounting policy prior to the beginning of the tax year for which the election will be made, changing the ceiling amount for items eligible to be deducted.

Under the safe harbor election, taxpayers with an applicable financial statement (AFS) may deduct amounts paid for tangible property up to $5,000 per invoice or item ($2,500 per invoice or item for taxpayers without an AFS). Deductions must be substantiated by invoice.

Critical year-end action items are:

    Review and make desired changes to the associated financial accounting policy prior to the beginning of the upcoming tax year; and
  • Plan to attach the required election statement to the timely-filed, original return for the year in which the election is to be effective.
Consider Methods Implications of Potential M&A Transactions
Taxpayers contemplating an acquisition, disposition, or other M&A transaction should consider the opportunities for accounting methods planning as well as any procedural requirements. Both buy-side and sell-side companies can benefit from proactively considering a transaction’s effects on existing accounting methods and related potential risk mitigation or planning strategies. Below are some examples of the opportunities to consider.
 
Final year restrictions. In general, automatic accounting method changes are not permitted in a taxpayer’s final year of a trade or business (e.g., when a taxpayer is acquired in a taxable asset acquisition). During the transaction process, taxpayers may contemplate certain changes in accounting methods, such as the correction of an impermissible method or a change in overall method. It is important to carefully consider the structure of a transaction to determine if any accounting method changes are permitted or required.
 
If a transaction does not result in the cessation of a trade or business, taxpayers may want to plan for the timing of an accounting method change (i.e., whether the change is made pre- vs. post-transaction). For example, certain method changes may be qualified for accelerated taxable income adjustments in a pre-transaction period. By beginning the planning process early, taxpayers may be able to include beneficial terms in the agreement, such as limiting the pre-transaction realization of potential tax benefits to the sellers or requiring the sellers to correct potential exposure items.
 
Due diligence preparation. A taxpayer looking to sell part or all of a company may be able to use accounting methods planning to strengthen its profile in attracting potential buyers. A comprehensive accounting method review can uncover opportunities to mitigate potential risk and identify ways to achieve desired tax attributes well in advance of the formal due diligence process.
 
Post-transaction alignment. Acquisitive taxpayers should consider the impact of a transaction’s structure on the tax attributes — including the tax accounting methods — of acquired companies. In situations where the acquired company’s accounting methods carry over, accounting method changes can align the methods being used across the group to streamline the compliance process. Alternatively, transaction structures resulting in the adoption of new methods can provide opportunities to select methods that best align with the taxpayer’s tax objectives. Taxpayers able to adopt new methods may also benefit from the ability to establish methods that cannot be changed through the automatic procedures at a later date, such as certain percentage-of-completion methods under Section 460 or the 3-1/2 month rule for deducting certain prepaid services.


Items to review in early months of 2024:

Review Latest Section 174 Guidance and Evaluate Implications on 2023 Tax Year

The Tax Cuts and Jobs Act (TCJA)

The Tax Cuts and Jobs Act (TCJA) made significant changes to Internal Revenue Code Section 174, which deals with the deduction of research and experimental (R&E) expenses. Prior to the TCJA, businesses could deduct these expenses in the year they were incurred. However, the TCJA introduced new rules that require businesses to capitalize and amortize R&E expenses over a five-year period or 15-year period for foreign costs, starting from the midpoint of the taxable year in which the expenses were incurred. This change applies to R&E expenses incurred in tax years beginning after December 31, 2021. The changes to Section 174 also included language defining any software developed internally or by third parties as Section 174 expenses. Prior to the change, taxpayers rarely treated its R&E expenses as Section 174 expenses and elected to deduct these costs under Section 162.

IRS Notice 2023-63
In September 2023, the IRS released Notice 2023-63, which contains substantive pre-regulatory guidance on the new Section 174 capitalization requirements and announced that the Treasury and the IRS intend to issue proposed regulations consistent with the Notice. The guidance provides taxpayers with an advance look into upcoming proposed regulations, which the IRS anticipates will apply for taxable years ending after September 8, 2023.
The Notice provides valuable guidance to taxpayers in several key areas. Specifically, it provides clarity on which indirect costs should be treated as Section 174 expenses, such as overhead, depreciation, and personnel costs and which expenses should not be treated as 174 expenses, such as G&A expenses. Additionally, the Notice provides guidance and examples on software development costs that should and should not be treated as 174 expenses, which was a key area of confusion among taxpayers. R&E performed under contract is another key area covered by the Notice The Notice informs taxpayers that they must have no financial risk and no rights to the research in order to treat the expenses performed under contract 162 costs instead of 174 expenses.  
The Notice also provides guidance to taxpayers in the following areas:
    Methodology for allocating overhead and depreciation;
  • Short tax year treatment;
  • Project Completion method expense and revenue treatment;
  • Cost sharing agreements; and
  • Recovery of the costs for business sold or cease to exist.

Taxpayers that intend to rely on this guidance for the 2023 taxable year should begin to consider how it may differ from positions taken for the 2022 taxable year or in calculating their 2023 estimated tax payments. In doing so, taxpayers should take special note of certain key areas of uncertainty.

For taxpayers with divergent prior positions, the IRS intends to issue new procedural guidance to assist taxpayers in making accounting method changes that are needed to conform to the new guidance.

Planning Considerations for M&A Transactions

Section 7 of the Notice addresses some basic consequences of asset dispositions, entity terminations, and carryover transactions for corporations. However, the Notice leaves unaddressed a number of interactions between Section 174 and other M&A tax rules, including those addressed below.

Section 338(h)(10). While the Notice does not specifically address Section 338(h)(10), the Notice appears to make clear that specified research and experimental (SRE) expenditures capitalized under Section 174 by a target should remain with the selling parent following a Section 338(h)(10) election. As such, the SRE expenditures will provide no current year reduction in gain from the deemed asset sale but may provide the seller utilizable amortization in future tax years. To the extent the buyer and seller are negotiating a gross up payment in conjunction with the election, treatment of the SRE expenditures in the calculation of the gross up should be addressed.

Section 382. To date there has been no guidance on the interaction of Section 174 and the safe harbors outlined in Notice 2003-65. Notice 2003-65 provides two safe harbor methodologies for calculating the NUBIG/NUBIL and RBIG/RBIL from a loss corporation’s Section 382 ownership change, the 338 approach and the 1374 approach. Under both approaches, the NUBIG/NUBIL is the net amount of gain or loss that would be recognized in a hypothetical asset sale, whereby the loss corporation sells all of its assets, and the buyer assumes all of the loss corporation’s liabilities. 

In the absence of specific guidance, the conservative approach has been to factor the SRE expenditures into the calculation of both NUBIG/NUBIL and RBIG/RBIL. To the extent the calculated limit under this approach does not have a detrimental impact on the tax provision or tax filing positions, a company may have the opportunity to wait to see if further guidance on this issue is released. However, for other companies, the Notice’s guidance may support beneficial positions with respect to calculating NUBIG/NUBIL and RBIG/RBIL as neither the 338 or 1374 methods provide for a deemed liquidation or cessation of the loss corporation. As needed, companies should weigh the strength of these potential positions.

Unified Loss Rule. In certain situations when selling a subsidiary member at a loss, a consolidated federal income tax group can reattribute tax attributes (e.g., NOLs and deferred deductions) from the departing subsidiary to the group under an election within the unified loss rule (ULR). This election allows the group to retain valuable tax attributes.

To date there is no guidance on the interaction of SRE expenditures capitalized under Section 174 and the ULR. However, unamortized SRE expenditures (to which Section 174(d) has not been applied) appear distinguishable from deferred deductions or any other category of asset that could be electively reattributed under the ULR. As such, to the extent a group is selling a subsidiary with valuable unamortized SRE expenditures, the group should consider whether to value the SRE amortization as part of the deal consideration or seek a sale structure other than a stock sale.

Cost Sharing Arrangements (CSAs) under Reg. §1.482-7.

Under the cost sharing regulations of Reg. §1.482-7, two or more participants in a qualified CSA agree to bear intangible development costs (IDCs) in proportion to each party’s expected benefit from exploiting the developed intangible property. If during the course of a year, the actual IDC expenditures of each CSA participant are not in proportion to the expected benefit, cost sharing payments are made among CSA participants to achieve the proper expense/benefit allocations. Payments received by a CSA participant payee (from another CSA participant payor) are treated as contra-costs or contra-expenses, and thus serve to reduce the payee’s IDCs.

Notice 2023-63 clarifies that payments made to a CSA participant payee that incurs both immediately deductible IDCs and those that are required to be charged to a capital account should be allocated among these cost categories proportionately. If a CSA payment exceeds the total amount of IDCs in these two categories, the excess is to be treated as income by the payee. Furthermore, to comply with the different amortization periods, taxpayers will have to segregate all IDCs that must be capitalized into U.S.-incurred expenses and non-U.S.-incurred expenses.

Although this guidance regarding Section 174 and cost sharing is welcome, open questions remain. For example, the guidance does not address the treatment of outsourced research and development (R&D) activities within a CSA, and it does not address intercompany R&D CSAs outside of qualified CSAs under Reg. §1.482-7.

It is important for taxpayers who have filed or have previously filed research and development (R&D) tax credits, have software development expenses, or are in a trade or business that incurs research expenses, to perform a Section 174 analysis. For others that may not have tracked or identified these costs or have not historically claimed the R&D tax credit, it is still necessary to identify Section 174 costs specifically, as they are now subject to capitalization. Taxpayers are encouraged to establish a methodology for calculating and documenting a consistent approach to comply with these new rules. Further, with limited guidance from the Treasury and IRS, taxpayers should consider other potential tax impacts.

Review Opportunities for Immediate Deduction of Fixed Assets
Although Congress is considering legislation that would delay the ongoing phase-out of bonus depreciation (which reduces from 80% in 2023 to 60% in 2024), considerable uncertainty remains as to the prospects for its passage. As such, year-end tax planning for fixed assets emphasizes cash tax savings through scrubbing fixed asset accounts for costs that can be deducted currently under Section 162 rather than being capitalized and recovered through depreciation, and reducing the depreciation recovery periods of capital costs where possible.

Fixed Asset Scrubs. Reviewing fixed asset registers for amounts that potentially may be recovered over a shorter depreciable life can yield cash tax benefits. For example, taxpayers may be able to reclassify certain interior improvements to a nonresidential building as “qualified improvement property” eligible for a shorter 15-year recovery period and bonus depreciation. The cash tax benefit from properly reducing the recovery period of depreciable property is achieved using the automatic accounting method change procedures.

Scrubbing fixed asset registers can also identify “ghost assets” that the company has physically disposed of in prior years but for various reasons have not been removed from the company’s accounting records. Identifying and deducting the remaining tax basis through an automatic change in accounting method can yield cash tax benefits as well.

Materials and Supplies. Scrubbing a company’s accounts for items that may be treated as materials and supplies can also yield cash tax benefits. Materials and supplies include spare parts, consumables (fuel, lubes, water, etc.) that will be used within the next 12 months; items costing no more than $200 each; and items that have an economic useful life of no more than 12 months. This definition can apply to a surprising array of items, permitting nearly immediate cost recovery in many cases. Reviewing and adjusting the process by which the company identifies items as materials and supplies and are key to maximizing this opportunity. This potential cash tax benefit is achieved through an automatic change in accounting method.

Additional potential benefits from reviewing the company’s application of the TPR can be found in a Tax Notes article authored by BDO’s James Atkinson.  See J. Atkinson, “Preparing for a Post-Bonus Depreciation World,” 179 Tax Notes 209 (April 10, 2023).

Consider the UNICAP Historic Absorption Ratio Election
Under Section 263A, taxpayers must capitalize direct and indirect costs allocable to real or tangible personal property produced or acquired for resale. The types and amounts of costs required to be capitalized under Section 263A typically go beyond those required to be capitalized for financial accounting purposes.  Accordingly, many taxpayers must undertake a computation each year to capitalize “additional section 263A” costs to property acquired or produced. For taxpayers seeking to streamline this often time-consuming process, the historic absorption ratio (HAR) election may be worth considering.

The historic absorption ratio method

While the Section 263A regulations list numerous methods and sub-methods taxpayers can use to identify and allocate additional Section 263A costs to ending inventory, many taxpayers select one of the three simplified methods (simplified production method, simplified resale method, and modified simplified production method) outlined in the regulations to streamline compliance efforts and reduce potential controversy with the IRS. Although these methods are generally less administratively burdensome in comparison to other alternatives, taxpayers must still dedicate significant efforts in maintaining the annual calculations. Taxpayers currently using one of the simplified methods may be able to further streamline their compliance process by electing to use the HAR method.

A taxpayer qualifies to make the HAR election once it has consistently used one of the three simplified methods for at least three consecutive tax years. In the year the election is made, the taxpayer calculates the HAR by averaging the absorption ratios from the prior three tax years. The HAR is then applied to ending inventory for the next five tax years, beginning with the election year. On the sixth year, the taxpayer must recompute the absorption ratio(s) using actual data for the year under the applicable simplified method:

    If the recomputed ratio(s) are within 0.5% of the HAR used for the preceding five years, the taxpayer can continue using the HAR for another five years.
  • If the recomputed ratio(s) are not within the 0.5% range, then the taxpayer is required to begin another three year testing period of calculating the actual absorption ratios.
Thus, while the HAR election still requires taxpayers to prepare Section 263A calculations for testing period years, the ability to bypass this exercise for at least five years in a row can save taxpayers a considerable amount of time in their compliance efforts.

Making and terminating the HAR election – weigh the benefits carefully

A taxpayer makes the HAR election by attaching an election statement to the tax return; no method change (Form 3115) or Section 481(a) catch-up adjustment is required. However, terminating the HAR election requires a non-automatic accounting method change, which the IRS generally will grant only in unusual circumstances. Therefore, given the inflexibility of the approach once the HAR election is made, taxpayers should carefully weigh the benefits of the administrative relief associated with making the HAR election against the trade-off of using a locked-in ratio in a year where the actual absorption ratio may be lower. With this in mind, taxpayers should consider making the election for a specific tax year when the absorption ratios used for the testing period are lower than usual, as this strategy might allow them to benefit both from minimizing compliance costs and capitalizing less amounts to ending inventory.

Review Leasing Transactions for Compliance with Tax Rules

The treatment of lease arrangements is a complex area due to many factors, including the diversity of lease structures, changing U.S. GAAP practices, and nuanced tax rules. In recent years, many companies have adopted ASC 842, the new GAAP standard governing lease accounting. The tax classification of an arrangement as a lease is independent of GAAP reporting, so the adoption of ASC 842 does not necessitate a tax accounting method change. However, given the changes in financial accounting practices, taxpayers adopting ASC 842 should perform a comprehensive tax review of their leases to ensure proper tax methods are maintained and to identify any tax accounting method changes that are needed.
 
A lease analysis for tax purposes generally focuses on the following three key areas:
 
Categorization. The classification of an arrangement as a “true” tax lease is a highly facts-based analysis that should be performed on each lease a taxpayer enters. While an arrangement may be presented as a lease for legal and/or financial reporting purposes, the tax classification depends more on the substance of the arrangement than the form. Tax treatment as a lease versus the financing of a purchase, provision of services, or other arrangement is based broadly on the (1) benefits and burdens of ownership and (2) economic substance of the transaction.
 
Timing of income/deductions. Taxpayers with leases may fall into special methods of accounting under Section 467. In general, a taxpayer is subject to Section 467 if the lease meets all of the following criteria:
    The lease is for the use of tangible property;
  • Total consideration paid under the lease exceeds $250,000; and
  • The rent schedule provides for increasing/decreasing payments throughout the term of the lease and/or there is a rent allocation schedule that differs from the payment schedule.
 
In most cases, taxpayers subject to Section 467 should recognize rental income (lessor) or rent expense (lessee) in line with the payment schedule. However, Section 467 may require the use of a different method, such as the proportional rental accrual method. Taxpayers with leases that are not subject to Section 467 should look to their overall method of accounting to determine the timing of income and deductions.
 
By undertaking a tax analysis prior to entering into a new lease, taxpayers may be able to negotiate more favorable lease terms that help align the timing of income/deductions with their overall tax objectives.
 
Maintaining the proper method. As mentioned above, adoption of ASC 842 for GAAP reporting purposes will likely change the way taxpayers compute existing book-to-tax adjustments. To ensure existing tax accounting methods are properly maintained, and to prevent errors or unauthorized method changes, taxpayers should ensure they understand any new lease-related balance sheet accounts and the appropriate tax treatment for such accounts.


Evaluate Accounting Method Changes for CFCs

Controlled foreign corporations (CFCs) are generally subject to the same requirements as U.S. taxpayers to use proper methods of accounting for tax purposes (for example, to calculate earnings and profits and to calculate tested income for GILTI). A CFC that has adopted an improper method of accounting or otherwise wishes to change an accounting method is required to file Form 3115.

A potential benefit of filing Form 3115 to correct an improper method is the ability to receive audit protection. If audit protection is granted, the IRS is precluded from challenging a taxpayer’s improper treatment for open tax years prior to the year of change. For CFCs or 10/50 corporations (foreign corporations with U.S. shareholders owning at least 10% but no more than 50%), however, audit protection may be denied for a tax year before the year the method change was requested under a “150% rule.” The 150% rule is met if one or more of the CFC’s or the 10/50 corporation’s U.S. corporate shareholders report deemed paid foreign taxes for that year that exceed 150% of the average deemed paid foreign taxes reported during the three prior tax years.

For the many CFCs that were subject to the transition tax imposed under Section 965, the 150% rule denying audit protection may have disincentivized them from filing method changes to correct improper accounting methods. Affected taxpayers may now find themselves clear of the rule for the 2023 or 2024 tax year and should consider filing method changes to clean up their impermissible methods prospectively. Some of the more common, automatic method changes that CFCs may encounter include the following:

    Changing from computing depreciation under the General Depreciation System (GDS) to the Alternative Depreciation System (ADS);
  • Switching to either the full inclusion method or the one-year deferral method for advance payments;
  • Changing to a proper Section 461 method to deduct liabilities such as bonuses and commissions in the year the liability is fixed and amounts are paid within 2-1/2 months of year end; and
  • Complying with Section 263A and adopting the U.S. ratio method to capitalize costs to ending inventory.

2023 Year-End Guide – Income Tax

What Lessons Can Corporate Tax Departments Take Into 2024?

In 2022, corporate tax departments that were already facing a persistent lack of resources had to adapt tax provision work and control frameworks to account for policy-related changes enacted over the last few years. With 2023 drawing to a close, now is a good time to revisit planning considerations – no matter when your tax year ends.

That is especially true, given the various important changes that are affecting, will affect, and will continue to affect tax functions. For instance, many Inflation Reduction Act rules took effect this year, and other changes, including some under OECD Pillar Two, are set to begin in 2024. Those policies, coupled with staffing and resource challenges, will make it even more important for tax departments to maintain and follow internal controls in the 2023 tax provision season.

Tax practices should therefore be prepared to continue handling complex issues in the year ahead. Addressing topics such as internal controls and tax technology can prepare you for the myriad changes 2024 could bring.

Managing Internal Controls

A tax office is only as strong as its accountability structure, and a strong control environment allows the tax function to operate more thoroughly, accurately, and efficiently. As companies adapt to policy changes and face new requirements and tighter deadlines, building and maintaining reliable control frameworks can help address issues like base erosion and profit shifting. While strong control frameworks are required for public companies under the Sarbanes-Oxley Act, private companies can benefit from implementing similar internal controls. Taking a more rigorous approach to internal controls can enhance organizational accountability, reduce fraud risk, and improve reporting. Private companies can also enlist third-party service providers for support in establishing a control framework.

A business is ultimately responsible for managing whatever tax framework it chooses to build. Even if an internal tax department outsources provision and tax return preparation work to a third-party service provider, it should ask its vendors the right questions and flag items that could result in control issues, such as significant transactions like mergers and acquisitions. Involving the tax department in transactional decision-making will help leadership stay informed and avoid potential tax liabilities and penalties. Further, quarterly controller meetings between internal tax departments and external service providers to discuss recent and ongoing transactions, lessons learned from past activities, and relevant tax issues, as well as each party’s responsibility in addressing them, can help companies develop and maintain effective control frameworks. 

Maintaining Successful Tax Processes

As companies grow, management inevitably becomes more decentralized as local teams are established to handle region-specific operations. Those smaller teams might not have the tax expertise to manage local obligations, such as timely filing returns and statutory audits and remaining compliant with transfer pricing. That leads to financial statement risk and cash tax exposure, complicating calculations of tax provision and taxes owed. Decentralized teams also create concerns for the corporate tax department, which must ensure that local offices are meeting their tax obligations.

Companies can combat those challenges by adding more oversight to local finance teams. Although it would be ideal to employ regional tax professionals to oversee and report into the overall tax function, ongoing shortages of experienced employees makes staffing those positions difficult. For departments unable to hire in-house regional tax professionals, outsourcing specific tax functions like global tax compliance and requirements to third-party tax service teams allows the internal workforce to focus on regional oversight.

Addressing Challenges Faced by Technical Functions

As technical tax functions have become more complex, strong control frameworks have become more important for tax departments. Because of continual changes in national and international tax policy and shifting financial responsibilities resulting from economic uncertainty, tax departments faced their fair share of obstacles in 2023.

Changing Tax Legislation

Between the implications of federal legislation like the Tax Cuts and Jobs Act (TCJA) and changes to corporate income taxation in numerous states, tax functions have had to adapt to many new tax laws. The TCJA eliminated the graduated corporate rate schedule and reduced the top U.S. corporate rate to 21% from 35%, and changes in state law have resulted in corporate rate reductions. While some of those legislative changes ultimately reduce tax liabilities, they impose on tax departments the added responsibility of monitoring and maintaining compliance as evolving laws continue to affect companies’ total tax liability and tax provision computations.

Looking ahead to 2023 and 2024 tax reporting, businesses must navigate how new minimum taxes introduced in the Inflation Reduction Act and the OECD’s Pillar Two framework might affect their tax positions. The U.S. corporate alternative minimum tax applies to companies with U.S. presence that have book income greater than $1 billion for three consecutive years. Once subject to that tax, a company must make adjustments based on current-year income to calculate if there is an additional tax. The global minimum tax introduced in Pillar Two also has a revenue threshold, but it applies only if individual countries have enacted laws to conform to the Pillar Two framework.

Companies that are close to those thresholds should have plans in place for what could happen if they grow beyond them and become subject to the tax requirements.     

Multinational corporations in scope for the Pillar Two global minimum tax will need to pay at least 15% in taxes on profits made in all countries. Although the tax is designed to avoid double taxation by applying a top-up tax to bring the total amount of income tax paid to the minimum of 15%, multinational corporations could be subject to double taxation if jurisdictions do not implement the rules consistently. 

All those legislative and regulatory changes add complexity to the computation of the tax provision and taxes owed, straining corporate tax functions that lack adequate resources and knowledge. Consulting with an experienced tax service provider can help tax departments avoid costly risks, penalties, and restatements stemming from material weaknesses and financial statement errors. 

Understanding Complexities Presented by Valuation Allowances 

Tax consultants can be especially helpful to tax teams in analyzing valuation allowance considerations. Because of economic volatility, many companies had to revisit their profit and loss operating forecasts in 2023. As a result, some changed their positions on whether the deferred tax assets (DTAs) on their balance sheets can be recoverable in the future, making tax provision and liability estimations more complex. Also, the TCJA allowed for the indefinite carryover of net operating losses and interest limitations, like those under Internal Revenue Code Section 163(j), that were generated post-TCJA. That makes the proper documentation and prediction of DTA realization more important because there is theoretically no expiration date for some. In practice, ASC 740 requires companies to apply a valuation allowance to any DTA that will likely not be realized in the near future to reflect a more accurate valuation of the business.

The TCJA amended IRC Section 174 to require the capitalization of some research and experimental expenditures, which can further complicate when and if a valuation allowance is required. Determining how to apply a valuation allowance is a complex process that requires careful judgment. For small tax departments without robust technological resources, determining when a valuation allowance is appropriate and how to apply it correctly can be difficult. 

Taking Advantage of Tax Technology

Today’s tax departments are charged with doing more with less and might still be relying on spreadsheet models, which can be prone to errors and difficult to maintain, for income tax accounting. 

Many companies have turned to tax provision and automation software to overcome those challenges. Tax software can help teams be more accurate and complete in their traditional tax functions, enabling employees to dedicate more time to strategic tax processes. It is also important to thoroughly train tax professionals to ensure technology is used to its full capacity.

Tax departments often encounter budget obstacles in building the business case to add technology. Although some business leaders are concerned about the resources needed to integrate tax technology, the benefits of tax software can reduce costs in the long term by boosting efficiencies. 

Over the last year, tax departments learned a lot as they dealt with increasing complexity. Recent policy changes have added to that, and we expect more of the same in the year ahead. But 2022 taught tax professionals that with proper control frameworks, improved processes, and tax technology, teams can manage challenges and mitigate risk with improved accuracy and efficiency. As obstacles persist in the near term, we expect tax functions equipped with the right resources and support to thrive.

Expanded Use of the Proportional Amortization Method for Tax Equity Investments Simplifies Accounting for Investors

More equity investors involved with projects to receive income tax credits and other income tax benefits might be able to use the proportional amortization method (PAM) to account for their investments.

On March 29, 2023, the Financial Accounting Standards Board issued Accounting Standards Update (ASU) 2023-02, “Investments – Equity Methods and Joint Ventures,” to expand the use of the PAM for some tax credit equity investments. As the required adoption date for public business entities nears, investors should revisit their tax equity investments to determine whether they will elect the PAM.

Qualifying equity investments are investments with yields generated primarily through income tax credits and other income tax benefits and that meet other criteria. Previously, the PAM was available only to account for low-income housing tax credit (LIHTC) investments as an alternative to either the cost or equity method.

Before, noncontrolling equity investments in other tax credit programs, such as the new markets tax credit (NMTC) and renewable energy tax credit (RETC) programs, were generally accounted for under the equity method of accounting. Under that method, the accounting for the investment and the credits was presented on a gross basis in the income statement, which many stakeholders believed did not accurately reflect the true economics.

After considering stakeholder input, the FASB expanded the use of the PAM to a greater population of tax credit equity investments. That should provide more consistent accounting and a greater understanding of those arrangements by financial statement users. Accordingly, tax equity investments in NMTC structures, RETC structures, or other tax credit programs can now be accounted for using the PAM if all criteria are met and the tax equity investor elects to use that method.

The update also affects tax equity investments in LIHTC structures through limited liability entities that are not accounted for using the PAM method – that is, entities accounted for using the cost or equity method.

New disclosure requirements apply to investments that generate income tax credits and other income tax benefits from a tax credit program for which the entity has elected to apply the PAM (including investments within that elected program that do not meet the conditions to apply the PAM).

PAM Overview

The PAM recognizes the amortization of the equity investment, income tax credits, and other income tax benefits (such as depreciation) on the income tax line of the income statement. The amortization of the equity investment is recognized each period in proportion to the tax equity investor’s share of the income tax benefits for that period over the investor’s share of the total anticipated income tax benefits for the life of the investment.

For a tax equity investor to elect the PAM for an equity investment, it must meet five requirements:

  1. It is probable that the income tax credits allocable to the tax equity investor will be available.
  2. The tax equity investor is unable to exercise significant influence over the operating and financial policies of the underlying project.
  3. Substantially all the projected benefits are from income tax credits and other income tax benefits. Projected benefits include income tax credits, other income tax benefits, and other non-income-tax-related benefits. The projected benefits are determined on a discounted basis using a discount rate that is consistent with the cash-flow assumptions used by the tax equity investor in making its decision to invest in the project.
  4. The tax equity investor’s projected yield based solely on the cash flows from the income tax credits and other income tax benefits is positive.
  5. The tax equity investor is a limited liability investor in the limited liability entity for both legal and tax purposes and its liability is limited to its capital investment.

Explanation of Provisions

The PAM applies only to arrangements in which a tax equity investor has an equity investment that is within the scope of ASC 323, “Equity Method Investments.” To determine whether an investor has an equity investment in a qualifying entity, it may first need to evaluate intermediary entities for consolidation under ASC 810, “Consolidation.” Whether an investor would consolidate those entities will vary depending on facts and circumstances.

A tax equity investor makes an accounting policy election to apply the PAM based on each tax credit program, rather than by electing to apply the PAM method at the tax equity investor level or to individual investments. Further, a tax equity investor that applies the PAM to qualifying tax equity investments must account for the receipt of the investment tax credits using the flow-through method under ASC 740, “Income Taxes,” even if the investor applies the deferral method for other investment tax credits received.

A tax equity investor should evaluate its eligibility to use the PAM at the time of the initial investment based on facts and conditions that exist at that time. It should reevaluate if there is a change in either the nature of the investment (for example, the investment is no longer a flow-through entity for tax purposes) or the relationship with the limited liability entity that could result in the tax equity investor no longer meeting the conditions to apply the PAM.

Non-income-tax credits (for example, refundable credits) are accounted for in pretax income under U.S. GAAP. Tax credits generated pursuant to the Chips and Science Act of 2022 and some credits enacted in the Inflation Reduction Act of 2022 meet the definition of refundable credits. In applying the “substantially all” test in the third criterion listed above, those credits are considered only as part of the denominator in the fraction, which could make it more difficult -- but not impossible -- to meet that criterion.

Other Changes

ASC 323-740, “Investments-Equity Method and Joint Ventures-Income Taxes,” included specialized guidance for LIHTC investments not accounted for using the PAM. ASU 2023-02 changed some of those rules, including removing the ability to account for LIHTC investments under a specialized cost method. Therefore, if the tax equity investment is not in the scope of the equity method, it will be accounted for under ASC 321, “Investments-Equity Securities.” The update also removed the specific equity method impairment guidance for LIHTC. Now, if a tax equity investment is accounted for under the equity method, impairment will be measured using the other-than-temporary model in the general sections of ASC 323. The update also requires all tax equity investments accounted for using the PAM to use the delayed equity contribution guidance in ASC 323-740-25-3, which requires a liability to be recognized for delayed equity contributions that are unconditional and legally binding or for equity contributions that are contingent on a future event when it becomes probable.

Disclosure Requirements

ASU 2023-02 prescribes disclosure requirements for all investments that generate income tax credits and other income tax benefits from a tax credit program for which the tax equity investor has elected to apply the PAM. Those disclosures are required for interim and annual periods and should include the nature of the investments, as well as the effect of the recognition and measurement of its investments and the related income tax credits and other income tax benefits on its financial position and results of operations.

The required disclosures are:
    the amount of income tax credits and other income tax benefits recognized during the period, including the line item in the income statement and cash flow statement in which it has been recognized; and
  • the amount of investments and the line item in which the investments are recognized in the balance sheet.
For investments accounted for using the PAM, the required disclosures are:
    the amount of investment amortization recognized as a component of income tax expense (benefit);
  • the amount of non-income-tax-related activity and other returns received that is recognized outside of income tax expense (benefit) and the line item in the income statement and cash flow statement in which it has been recognized; and
  • the significant modifications or events that resulted in a change in the nature of the investment or a change in the relationship with the underlying project.

Effective Date and Transition

Public business entities must adopt ASU 2023-02 in fiscal years beginning after December 15, 2023, including interim periods within those fiscal years. All other entities must adopt for fiscal years beginning after December 15, 2024, including interim periods within those fiscal years.

Early adoption is allowed for all entities in any interim period. If an entity adopts the provisions in an interim period, it must adopt them as of the beginning of the fiscal year that includes that interim period.

Entities may choose between the retrospective or modified retrospective transition options (see special rules below for LIHTC investments not accounted for using the PAM).

Retrospective Method

The tax equity investor evaluates all investments in which it expects to receive income tax credits or other income tax benefits as of the beginning of the earliest period presented. Determining whether the investment qualifies for the PAM is made as of the investment date. A cumulative-effect adjustment reflecting the difference between the previous and new accounting is recognized in the opening balance of retained earnings as of the beginning of the earliest period presented. 

Specific transition rules apply to LIHTC investments that are affected by the changes with respect to:
    the cost method guidance in ASC 323-740;
  • the impairment guidance for equity method investments in ASC 323-740; and
  • the delayed equity contribution guidance in ASC 323-740.
To recognize the effect of those changes, the tax equity investor must either use its general transition method (for example, retrospective, modified retrospective) or apply a prospective approach. That election may be made separately for each of the three transition adjustment types described above. However, a tax equity investor applies a consistent transition method for each transition adjustment type.

Modified Retrospective Method

The tax equity investor evaluates all investments in which it expects to receive income tax credits or other income tax benefits as of the beginning of the year of adoption. Determining whether the investment qualifies for the PAM is made as of the investment date. A cumulative-effect adjustment reflecting the difference between the previous and new accounting is recognized in the opening balance of retained earnings as of the beginning of the adoption period.

Planning Tips

As the required adoption date for public business entities nears, investors should review their tax equity investments to determine whether to elect the PAM, as well as whether to early adopt.

2023 Year End Guide – Business Incentives & Tax Credits

Employee Retention Credit

The employee retention credit (ERC) is a refundable payroll tax credit for wages and health plan expenses paid or incurred by an employer (1) whose operations were either fully or partially suspended due to a COVID-19-related governmental order; or (2) that experienced a significant decline in gross receipts during the COVID-19 pandemic. The ERC has arguably been one of the most valuable provisions originating under the Coronavirus Aid, Relief, and Economic Security Act — the CARES Act — offering significant payroll tax relief for employers who kept employees on their payroll and continued providing health benefits during the COVID-19 pandemic.

Eligible employers can file a claim retroactively until the statute of limitations closes on April 15, 2024, for the 2020 ERC and April 15, 2025, for the 2021 ERC. Note that the U.S. government has repeatedly revised the requirements for U.S. taxpayers to claim the ERC since its initial codification into law. As a result, many eligible taxpayers have been uncertain as to whether they may properly claim this often-valuable tax credit.

Employers should be certain that one of the two paths for eligibility is satisfied:
    Gross receipts in a calendar quarter were less than 80% of the gross receipts for the corresponding quarter in 2019; or
  • Business operations were fully or partially suspended during the calendar quarter because of orders from a governmental authority due to COVID-19.

Most eligibility disputes involve the partial suspension test. While most businesses were adversely impacted by COVID-19 related to government actions, not all are eligible for ERC under this provision. To be eligible under the partial suspension test, the suspension must have been material.

Identifying the relevant government orders is another common issue. Qualifying orders must have been mandatory, in effect, and must have caused a suspension of operations for the entire period during which the employer paid the wages supporting the ERC claim.

Also, because the ERC was intended to benefit small businesses, requirements exist that all businesses under common owners be aggregated into a single employer. This rule prevents large businesses from splitting into many entities to qualify. The same aggregation rule used to determine the size of an employer is applied to determine whether the employer experienced a partial suspension that was more than nominal.

In response to mounting concerns over a surge in improper claims for the ERC, on September 14, 2023, the IRS announced an immediate moratorium on processing new claims for the pandemic-era relief program. The moratorium, effective until at least the end of the year, aims to protect businesses from scams and predatory tactics. While the IRS continues to process previously filed ERC claims received before the moratorium, the agency warns that increased fraud concerns will result in longer processing times.
However, the pause on processing new claims does not modify the statute of limitations that expires on April 15, 2024, for wages paid in 2020. Therefore, an employer considering a new request for a legitimate ERC claim should proceed after carefully reviewing Information Releases 2023-169 and 2023 -170, which the IRS released on September 14, 2023. For employers who would like to make a change to a pending claim that has not been processed or paid, the IRS is expected to issue guidance in the near future.
The IRS has also intensified its focus on reviewing ERC claims for compliance concerns, including conducting audits and criminal investigations on promoters and businesses submitting dubious claims. Hundreds of criminal cases are currently under investigation, and thousands of ERC claims have been referred for audit. Those with pending claims should expect extended processing times, while those yet to file should review the guidelines and consult trusted tax professionals.

As the IRS continues to refine its efforts to assist businesses facing questionable ERC claims, it advises businesses to carefully consider their situation and explore the options available to them. The IRS reminds anyone who improperly claims the ERC that they must pay it back, possibly with penalties and interest.

The IRS has stated that it will develop an ERC settlement program in late 2023 for employers that already received an ERC payment based on a claim now believed by the employer to be overstated. Under the settlement program, employers will be able repay the excess ERC amounts while avoiding penalties and other future compliance actions.

Additionally, to assist businesses affected by aggressive promoters, the IRS is developing a special withdrawal option for businesses that have filed an ERC claim but have not yet had it processed. Details of this program are expected to be announced in the coming months.

Given the increased IRS scrutiny of ERC claims, employers should reevaluate their ERC positions regarding eligibility and the amount of the claim. The IRS recommends that taxpayers seek advice from a trusted tax advisor.

Employers that have already filed a claim not prepared by a trusted tax advisor should verify whether any of the red flags or other concerns listed in the two IRS Information Releases apply to their situation. If they do, they should have any already submitted claim reviewed by a trusted tax professional. If the review does not support the claim as it was filed, corrective action should be pursued.

Credit for Increasing Research Activities: Proposed Changes to Form 6765 and Exam Environment

The IRS on September 15, 2023, released a preview of proposed changes to Form 6765, Credit for Increasing Research Activities, which taxpayers use to claim the research credit. The proposed changes, likely to become effective at the beginning of the 2024 tax year, include a new Section E with five questions seeking miscellaneous information and a new Section F for reporting quantitative and qualitative information for each business component, required under Section 41 of the Internal Revenue Code.

The IRS has also requested feedback on whether Section F should be optional for some taxpayers, including those with qualified research expenditures that are less than a specific dollar amount at a controlled group level; with a research credit that is less than a specific dollar amount at a controlled group level; or that are Qualified Small Businesses for payroll tax credit purposes.

It is important to note that if Section F were made optional for certain taxpayers, it would not exempt them from the requirement to maintain books and records or provide Section F information in a similar format, if requested; and it would not apply to amended returns for the research credit.


Examination Environment

Currently, the IRS receives a significant number of returns claiming the research credit, which requires substantial examination resources from both taxpayers and the IRS. To ensure effective tax administration for this issue, the IRS aims to clarify the requirements for claiming the research credit by considering all feedback received from stakeholders before finalizing any changes to Form 6765.

In response to ongoing concerns of improper claims of the research credit, the IRS has intensified its focus on reviewing these claims for nonconformities, including conducting a greater number of audits. Navigating the complexities of the research credit can be challenging, especially with the increased scrutiny, advancement of recent case law, and the newly implemented IRS compliance measures in place.

It is important for taxpayers to accurately determine eligibility, validate and properly record contemporaneous documentation to support research credit claims, and defend against examinations. Taxpayers should work with a trusted tax advisor to support compliance with IRS regulations and proper eligibility for the research credit.


Tax Credit Monetization

The signing of the Inflation Reduction Act on August 16, 2022, marked the largest-ever U.S. investment to combat climate change, allocating $369 billion to energy security and clean energy programs over the next 10 years, including provisions incentivizing the manufacturing of clean energy equipment and the development of renewable energy generation.

Overall, the act modifies many of the current energy-related tax credits and introduces significant new credits and structures intended to facilitate long-term investment in the renewables industry. Capital investments in renewable energy or energy storage, manufacturing of solar, wind, and battery components, and the production and sale or use of renewable energy are activities that could trigger one of the over 20 new or expanded IRA tax credits. The IRA also introduced new ways to monetize tax credits and additional bonus credit amounts for projects meeting prevailing wage and apprenticeship, energy community, and domestic content requirements.

45X – Advanced Manufacturing Production Tax Credit

The 45X Advanced Manufacturing Production Credit is a new production tax credit meant to encourage the production and sale of energy components within the U.S., specifically related to solar, wind, batteries, and critical mineral components. To be eligible for the credit, components must be produced in the U.S. or a U.S. possession and sold by the manufacturer to unrelated parties.

The Department of Energy has released a full list of eligible components as defined by the IRA, with specific credit amounts that vary according to the component. Manufacturers can also monetize 45X credits through a direct payment from the IRS for the first five years under Internal Revenue Code Section 6417. They may also transfer a portion or all of the credit to another taxpayer through the direct transfer system Section 6418 election. The 45X credit is a statutory credit with no limit on the amount of funding available; however, the credit will begin to phase out in 2030 and will be completely phased out after 2033. Manufacturers cannot claim 45X credits for any facility that has claimed a 48C credit.

48C – Qualifying Advanced Energy Project Tax Credit

In 2009, Congress enacted the America Recovery and Reinvestment Act, which included the 48C tax credit for qualifying advanced energy project investments. This credit initially applied to investment in facilities that produced various renewable energy assets and other property that reduced greenhouse gas emissions.

The Inflation Reduction Act provided new funding for the 48C credit and expanded the definition of qualified advanced energy projects to include facilities that produce components used in carbon capture, utilization and storage, energy grid modernization, renewable fuel generation and refinement, components of electric vehicles, and recycling facilities for eligible components. Manufacturers investing to construct, re-equip, or expand a facility that meets the definition of a qualified advanced energy project can apply for an allocation of the 48C credit.

The IRS and Department of Energy will award $10 billion in 48C credits via a two- step application process, with $4 billion reserved for projects located in energy communities. The base amount of the 48C credit is 6%, but the total credit can be as high as 30% if applicants meet prevailing wage and apprenticeship requirements. Recipients can claim 48C credits on federal corporate income taxes for a percentage of eligible investment costs placed into service during the current tax year. Corporations or flow-through entity shareholders who lack the ability to utilize the credits may sell them for cash under the new IRA credit transfer provisions.

Taxpayers applying for 48C allocation must submit an initial concept paper as well as a full application to be reviewed by the IRS and DOE. The first round of 48C allocation will award $4 billion by March 31, 2024. While the current round’s concept paper deadline has already passed, there will be additional rounds for the remaining $6 billion of funding in 2024 and beyond.

6418 – Transferability

Under IRC Section 6418, certain renewable energy tax credits can now be transferred by companies generating eligible credits to any qualified buyer seeking to purchase tax credits. Through credit transfers, taxpayers have the option to sell all or a portion of their credits in exchange for cash as part of their overall renewable energy goals if they are not able to fully utilize the benefit. Companies are able to purchase these credits at a discount, with the sale proceeds improving the economics of clean energy development.

The market rate for the sale of credits will be highly dependent on the type of credit being transferred, as well as the substantiation and documentation related to the seller’s eligibility for the credit taken and any bonus credit amounts claimed. The current rates seen in the market for transferring credits is around $.90 to $.94 per $1 of credit, but these amounts are subject to change based on specific fact patterns for each individual transaction and the overall market trend.

Taxpayers considering buying or selling tax credits that are transferable under the IRA should be looking ahead and forecasting their potential tax liability and resulting appetite for buying and selling credits. These credits can be transferred and utilized against estimated quarterly payments as soon as transfer agreements are finalized. This expedited reduction in cash outlay for the buyer and monetization of credits for the seller is a consideration that should be taken into account by taxpayers interested in entering the market of transferring credits. Note that taxpayers must be able to effectively utilize general business credits for this opportunity to be worthwhile.


Bonus Credits

The Inflation Reduction Act not only introduced new and expanded credits for investment in and production of renewable energy and its related components, it also included provisions for bonus credit amounts subject to meeting specific requirements. The prevailing wage and apprenticeship requirement is a 5x multiplier for certain credits that can bring the credit rate from 6% to 30% by paying prevailing wages to all labor related to the construction, installation, alteration, and repair of eligible property. Additionally, taxpayers must ensure that a certain percentage of these labor hours are performed by a qualified apprentice. Other common credit adders available for taxpayers that meet energy community and domestic content requirements provide a 10% adder to the base rate of the credit. Taxpayer documentation will be required to substantiate the claim of these bonus credit amounts and will need to be presented to a buyer in the event that these credits are transferred under 6418. 

Taxpayers that have current or planned investments or activities for which they plan to utilize the prevailing wage and apprenticeship multiplier should be planning a documentation strategy and procedure. In the event of an IRS audit or transfer of these credits, taxpayers will be required to substantiate the wages paid to laborers as well as the number of hours performed by registered apprentices. Depending on the size and amount of labor involved in qualified investments or production, documentation for PWA as well as the domestic content requirements will likely be a highly burdensome task if not planned accordingly at the outset of a project.

New Markets Tax Credits

The U.S. Treasury’s CDFI Fund recently released its annual allocation of New Markets Tax Credits (NMTCs). The federal New Markets Tax Credit (NMTC) program was established in 2000 to subsidize capital investments in eligible low-income census tracts. The subsidy provides upfront cash in the form of NMTC-subsidized loans fixed at below-market interest (2.5-3.5%). The loan principal is generally forgiven after a seven-year term resulting in a permanent cash benefit. Funding for these subsidized loans is highly competitive and expected to be depleted quickly.

Taxpayers across many industries can be good candidates to participate in the NMTC program.

Recipients are evaluated based on the community impact derived from the investments (e.g., job creation, community services provided, etc.). Ideal projects have at least $7 million in capital expenditure. These initial questions will help interested parties assess if a project is viable for NMTC.

    Address of proposed project
  • High-level project description
  • Status of construction/timeline of CAPEX (midstream projects are permitted)
  • Estimate of direct jobs to be created by project (within 3 years of PIS)

Taxpayers with ongoing or planned capital investments for late 2023 or early 2024 that are eligible to receive NMTC financing should begin reaching out to community development entities. The latest round of allocation was announced on September 22, and early outreach provides qualified active low-income community businesses a strong advantage in securing this financing due to the program’s competitive nature and limited funds.


2023 Year-End Guide – State and Local Tax

With thousands of taxing jurisdictions, from school boards to counties and states, and many different types of taxes, state and local taxation is complex. Each tax type comes with its own set of rules — by jurisdiction — all of which require a different level of attention. 

This article provides a high-level overview to help companies with 2023 year-end SALT planning considerations, and it provides guidance on how to hit the ground running in 2024.

This article provides a high-level overview to help companies with 2023

Liquidity Events

Liquidity events take the form of IPOs; financings; sales of stock, assets, or businesses; and third-party investments. Those events involve different forms of transactions, often driven by business or federal tax considerations; unfortunately, and far too often, the SALT impact is ignored until the 11th hour or later.

A liquidity event is not an occasion for surprises. When a taxpayer is contemplating any form of transaction, state and local taxes should not be overlooked. Knowledgeable SALT professionals can help identify planning opportunities and point out potential pitfalls, and it is never too early to involve them. If you wait until after the transaction occurs or until the state tax returns are being prepared, it may be too late to leverage their insight.

From state tax due diligence to understanding the total state tax treatment of a transaction to properly reporting and documenting state tax impacts, addressing SALT at the outset of a deal is critical. If involved before the year-end liquidity event, SALT professionals can suggest helpful adjustments to the transaction that may be federal tax-neutral but could result in identifying significant state tax savings or costs now, rather than later. After the liquidity event, because the state tax savings or costs already have been identified, they can be properly documented and reported post-transaction. Further, because SALT expertise was involved at the front end, state tax post-transaction integration, planning, and remediation can be more seamlessly pursued.

Income/Franchise Taxes

If anything has been learned from the last six years of federal tax legislation, it’s that state income tax conformity cannot be taken for granted. While states often conform to myriad federal tax provisions, it's important to verify S corporations are treated as such by each state they operate in. Further, S corporations must confirm that their status applies to state income taxes. Not asking those questions early can lead to a misunderstanding and potential issues later. 

Several states don’t conform to federal entity tax classification regulations. Some, including New York, require a separate state-only S corporation election. New Jersey now allows an election out of S corporation treatment. Making those elections — or not — can lead to different state income tax answers, so it’s important to understand the available options before the transaction occurs.

Asking important questions early can help provide clarity in the decision-making process:
    If the liquidity event will result in gain, how is the gain going to be treated for state income tax purposes?
  • Is it apportionable business gain or allocable nonbusiness gain?
  • Is a partnership interest, stock, or asset being sold?
  • How will the gain be apportioned?
  • Was the seller unitary with the partnership or subsidiary, or did the assets serve an operational or investment function for the seller?
  • Will the gross receipts or net gain from the sale be included in the sales factor, and, if so, how will they be apportioned?

Those are just some of the questions that are never asked on the federal level because they don’t have to be. But they are material on the state level and, again, are unwelcome surprises.

Sales/Use Taxes

Most U.S. states require a business to collect and remit sales and use taxes even if it has only economic, and no physical, presence. Remote sellers, software licensors, and other businesses that provide services or deliver their products to customers from a remote location must comply with state and local taxes.

Left unchecked, those state and local tax obligations — and the corresponding potential liability for tax, interest, and penalties — will grow. Moreover, neglecting your sales and use tax obligations could result in a lost opportunity to pass the sales and use tax burden to customers as intended by state tax laws.

A company could very well experience material sales and use tax obligations resulting from a sale, even though the transaction or reorganization is tax free for federal income tax purposes. To avoid any material issues, several steps should be taken:
    Determine nexus and filing obligations;
  • Evaluate product and service taxability;
  • Quantify potential tax exposure;
  • Mitigate and disclose historical tax liabilities;
  • Consider implementing a sales tax system; and
  • Maintain sales tax compliance.

Real Estate Transfer Taxes

Most states impose real estate transfer taxes (RETTs) or conveyance taxes on the sale or transfer of real property, or controlling interest transfer taxes when an interest in an entity holding real property is sold. Few taxpayers are familiar with RETTs, and the complex rules and compliance burdens associated with those state taxes could prove costly if they are not considered up front.

State PTE Tax Elections

Roughly 35 states now allow pass-through entities (PTEs) to elect to be taxed at the entity level to help their residents avoid the $10,000 limit on federal itemized deductions for state and local taxes known as the “SALT cap.” Those PTE tax elections are much more complex than simply checking a box to make an election on a tax return. Although state PTE tax elections are meant to benefit the individual members, not all elections are alike, and they are not always advisable.

Before making an election, a PTE should model the net federal and state tax benefits and consequences to the PTE — for every state in which the PTE operates, as well as for each resident and nonresident member — to avoid potential unintended tax results. A thorough evaluation of whether to make a state PTE tax election (or elections) should be completed before the end of the year, modeling the net tax benefits or costs, as should a determination of timing elections, procedures, and other election requirements (e.g., owner consents, owner votes to authorize the election, and partnership or LLC operating agreement amendments). If those steps are completed ahead of time, then the table has been set to make the election in the days ahead.

When considering a state PTE tax election, one of the most important issues to evaluate is whether members who are nonresidents of the state for which the election is made can claim a tax credit for their share of the taxes paid by the PTE on their resident state income tax returns. If a state does not offer a tax credit for elective taxes paid by the PTE, then a PTE tax election could result in additional state tax burden that exceeds some members’ federal itemized deduction benefit ($0.37 is less than $1.00). Therefore, as part of the pre-year-end evaluation and modeling exercise, PTEs should consider whether the election would result in members being precluded from claiming other state tax credits — which ordinarily would reduce their state income tax liability dollar for dollar — in order to receive federal tax deductions that are less valuable.

Does P.L. 86-272 Still Exist?

P.L. 86-272 is a federal law that prevents a state from imposing a net income tax on any person’s net income derived within the state from interstate commerce if the only business activity performed in the state is the solicitation of orders of tangible personal property that are sent outside the state for approval or rejection and, if approved, are filled by shipment or delivery from a point outside the state.

The Multistate Tax Commission (MTC) adopted a revised statement of its interpretation of P.L. 86-272 which, for practical purposes, largely nullifies the law’s protections for businesses that engage in activities over the internet. To date, California and New Jersey have formally adopted the MTC’s revised interpretation of internet-based activities, while Minnesota and New York have proposed the interpretation as new rules. Other states are applying the MTC’s interpretation on audit without any notice of formal rulemaking.

Online sellers of tangible personal property that have previously claimed protection from state net income taxes under P.L. 86-272 should review their positions. Online sellers that use static websites that don't allow them to communicate or interact with their customers — a rare practice — seem to be the only type of seller that the MTC, California, New Jersey, and other states still consider protected by P.L 86-272.

The effect of the MTC’s new interpretation on a taxpayer’s state net income tax exposure should be evaluated before the end of the year. Structural changes, ruling requests, or plans to challenge states’ evolving limitation of P.L. 86-272 protections applicable to online sales can be put into place.

However, nexus or loss of P.L. 86-272 protection can be a double-edged sword. For example, in California, if a company is subject to tax in another state using California’s new standard, then it is not required to throw those sales back into its California numerator for apportionment purposes.

Property Tax

For many businesses, property tax is the largest state and local tax obligation and a significant recurring operating expense that accounts for a substantial portion of local government tax revenue. Unlike other taxes, property tax assessments are ad valorem, meaning they are based on the estimated value of the property. Thus, they could be confusing for taxpayers and subject to differing opinions by appraisers, making them vulnerable to appeal. Assessed property values also tend to lag true market value in a recession.

Property tax reductions can provide valuable above-the-line cash savings, especially during economic downturns when assessed values may be more likely to decrease. The current economic environment amplifies the need for taxpayers to avoid excessive property tax liabilities by making sure their properties are not overvalued.

Annual compliance and real estate appeal deadlines can provide opportunities to challenge property values. Challenging real property assessments issued by jurisdictions within the appeal window may reduce real property tax liabilities. Taking appropriate positions on personal property tax returns related to any detriments to value could reduce personal property tax liabilities. Planning for and attending to property taxes can help a business minimize its total tax liability.

Conclusion

There are 50 states and thousands of local taxing jurisdictions that impose multiple different tax types. Ensuring that your company is in compliance with those state and local taxes — and only paying the amount of tax legally owed — can help reduce your total tax liability.  As a taxpayer, it is more efficient to be proactive, rather than reactive, when it comes to state and local taxes.  Being proactive will help identify issues and solutions that can be applied to other taxing jurisdictions, as well as helping limit audits, notices, penalties, and interest.

2023 Year-End Guide – Partnerships

The IRS in the past year has been actively challenging partnerships’ tax positions in court – from the valuation of granted profits interests to limited partner self-employment exemption claims and the structuring of leveraged partnership transactions. At the same time, the agency is dedicating to new funding and resources to examining partnerships.
These developments, along with some reporting and regulatory changes, mean there are a number of tax areas partnerships should be looking into as they plan for year end and the coming year:
    Review Valuation of Granted Profits Interests, Partners’ Capital Accounts
  • Consider Active Limited Partners’ Potential Liability for Self-Employment Tax
  • Prepare for Expanded IRS Audit Focus on Partnerships
  • Review Structure of Leveraged Partnership Transactions, Application of Anti-Abuse Rules
  • Prepare for New Reporting on 2023 Form 1065 Schedule K-1
  • Evaluate Before Year End Expiration of Partnership Bottom-Dollar Guarantee Transition Rules

Review Valuation of Granted Profits Interests, Partners’ Capital Accounts

In a recent Tax Court case, the IRS attempted — unsuccessfully — to supplant the fair market value agreed to by unrelated parties in a partnership transaction with its expert’s higher estimate, asserting that the taxpayer received a taxable capital interest in exchange for services provided to a partnership, not a nontaxable profits interest. If structured and substantiated properly, profits interests can be valuable tools for compensating providers of services to partnerships at no immediate tax cost. Although the court upheld the taxpayers’ valuation, the IRS challenge highlights the importance for partnerships to:
    Properly determine, support and document value when granting and establishing rights to profits interests, and
  • Strongly consider revaluing partners’ capital accounts according to Treasury regulations to reflect fair market value when profits interests are granted.

The case, ES NPA Holding LLC v. Commissioner, T.C. Memo 2023-55 (May 3, 2023), involved a partnership (ES NPA) that provided services to another partnership in exchange for a partnership interest. The taxpayers contended that interest was a profits interest, which was not immediately taxable. The IRS argued that, under its higher estimation of the value of the underlying business, ES NPA took a capital interest in the partnership that ostensibly should be immediately taxable.

Relying on the fair market value negotiated among the parties to the transaction, the Tax Court agreed with the taxpayer that there was not a taxable capital shift between partners. Unsurprisingly, the Tax Court also concluded — premised on the IRS’s guidance in Revenue Procedure 93-27 — that receipt of a profits interest will not result in the immediate recognition of taxable income. What is somewhat surprising is that the IRS challenged whether the interest was, in fact, a profits interest.

Facts in ES NPA Holding

Under the basic facts, a partnership (NPA, LLC) had three classes of units, including Class A, Class B and Class C units. Upon liquidation of NPA, LLC, the Class A and Class B units were to receive 100% of the original capital assigned to these units before any amounts would be distributable to the Class C units – which were the units that ES NPA received in exchange for its services.

After an unrelated third party purchased 70% of the company for $21 million, the parties to the transaction agreed that the original capital assigned to the Class A and Class B units was $21 million and $9 million, respectively. Thus, the total agreed to value of NPA, LLC was $30 million. Under this valuation, the Class C units held by ES NPA would have $0 value in the event of a hypothetical liquidation of NPA, LLC, at the time of the transaction – suggesting ES NPA received only a profits interest in NPA, LLC.

IRS Challenge

Despite the parties’ agreement as to the $30 million equity valuation, the IRS argued that the value of NPA, LLC was $52.5 million. Using this value, the IRS determined that the liquidation value of the Class C units held by ES NPA was in excess of $12 million (rather than $0). Assuming this valuation is accurate, the Class C units would be considered capital interests and would not be eligible for the safe harbor under Revenue Procedure 93-27, which generally exempts from immediate taxation profit interests – but not capital interests – received in exchange for the provision of services to a partnership.

Based on its arguments, the IRS appears to believe that such a capital shift would be immediately taxable to the recipient. Although not specifically addressed in the Tax Court’s decision, receipt of a capital interest in exchange for the performance of services is generally a taxable event under established case law. However, there is some question around whether a capital interest received for purposes other than the performance of services would be immediately taxable.

Tax Court’s Holding

Ultimately, the Tax Court concluded that the best estimate of fair market value in this case was the purchase price agreed to by unrelated parties. While acknowledging that formal valuation reports may be helpful in establishing fair market value, the Tax Court noted that such appraisals are not required. Rather, as in this case, deference was provided to the transaction price agreed to by unrelated taxpayers. Importantly, the Tax Court noted that the testimony of the selling taxpayer was credible and unbiased. The Tax Court further noted, “we find nothing in the record to dispute a finding that the transaction was arm’s length and bona fide.”

What If the Court Accepted the IRS’s Narrow Reading of Its Own Revenue Procedure?

Although this case is a “win” for the taxpayer, the IRS presumably didn’t go to court without reason. The IRS believed the recipient of the Class C units should immediately recognize taxable income. However, the IRS’s primary argument sought to prevent application of Revenue Procedure 93-27 via a narrow reading of the guidance. The IRS’s primary argument was not whether the Class C units represented a capital interest. What if the Tax Court agreed that Revenue Procedure 93-27 didn’t apply to these facts?

Revenue Procedure 93-27 is a safe harbor provision that states the IRS will not treat receipt of a profits interest as immediately taxable. If the Tax Court agreed that the safe harbor didn’t apply, as argued by the IRS, the IRS would still need to address judicial precedent holding that receipt of a profits interest is not taxable because the value of the interest received is speculative. Thus, the IRS would then have had to successfully argue that the Class C units had value beyond speculation. Given the result in the IRS’s secondary, capital shift argument, it seems unlikely that it would have prevailed.

Key Considerations and Takeaway

Acknowledging the taxpayer’s success in this case, it is important to note that the IRS sought to challenge the taxpayer in court. This is presumably not a decision taken lightly by the IRS. Is this a warning sign to taxpayers when structuring transactions where the buyer anticipates future upside that may or may not be speculative?

There are a few important factors that, if the facts had been different, potentially could have altered the outcome of the case:

    The Tax Court found the selling taxpayer’s testimony to be credible and unbiased, with nothing in the record indicating something other than an arm’s-length transaction.
  • The facts did not indicate that the taxpayer needed the cash to support further business operations, was simply looking to monetize his investment as quickly as possible or otherwise facing circumstances prompting the seller to sell at a discount.
  • The lack of taxpayer relatedness was important in supporting the use of the agreed fair market value.
  • The discussion within the Tax Court’s opinion doesn’t address whether the property owner ever sought other bids for his business or if that would have changed the court’s analysis and conclusion regarding the credibility and unbiased nature of the witness.

Ultimately, while a positive outcome for the taxpayer in this case, the IRS’s decision to take this case to trial should serve as a cautionary tale. Taxpayers are well advised to closely scrutinize the factors in their own transactions to ensure the fair market value positions are fully documented and supported.

When issuing a profits interest, it's critical to document the valuation of the partnership and to strongly consider a book up of capital accounts to reflect the valuation. Analyzing and documenting whether the bargaining positions of the parties are truly adversarial would presumably help substantiate the parties’ agreement of value.

Consider Active Limited Partners’ Potential Liability for Self-Employment Tax

A judicial resolution may be near for the unanswered question of whether limited partners in state law limited partnerships may claim exemption from self-employment (SECA) taxes — despite being more than passive investors. Depending on the outcome in the pending Soroban Capital Partners litigation, limited partners in state law limited partnerships who actively participate in the partnership’s business may lose the opportunity to claim this exemption. If this happens, these limited partners would likely become subject to SECA tax on their partnership income.

SECA taxes can be substantial for active partners in profitable partnerships. The SECA tax rate consists of two parts: 12.4% for social security (old-age, survivors, and disability insurance) and 2.9% for Medicare (hospital insurance). While the 12.4% social security tax is currently limited to the first $160,200 of self-employment earnings, partners who are subject to SECA tax must pay the 2.9% Medicare part of the tax on their entire net earnings from the partnership. There is also an additional 0.9% Medicare tax on all earnings from the partnership over a certain base amount (currently $125,000; $200,000; or $250,000 depending on the partner’s tax filing status)

Why are some limited partners in jeopardy of losing their SECA tax exemption?

Under Internal Revenue Code Section 1402(a)(13), the distributive share of partnership income allocable to a “limited partner” is generally not subject to SECA tax, other than for guaranteed payments for services rendered. However, the statute does not define “limited partner,” and proposed regulations issued in 1997 that attempted to clarify the rules around the limited partner exclusion have never been finalized.

More recently, courts have held — in favor of the IRS — that members in limited liability companies (LLCs) and partners in limited liability partnerships (LLPs) that are active in the entity’s trade or business are ineligible for the SECA tax exemption. Despite these IRS successes, some continue to claim that state law controls in defining “limited partner” in the case of a state law limited partnership and, therefore, limited partners in state law limited partnerships — even active limited partners — may be eligible for the SECA tax exemption. This issue has yet to be specifically addressed by the courts, but Soroban Capital Partners may be the first case to squarely resolve it.

What is the issue in the Soroban Capital Partners litigation?

The Soroban Capital Partners litigation filed with the Tax Court involves a New York hedge fund management company formed as a Delaware limited partnership. The taxpayers challenge the IRS’s characterization of partnership net income as net earnings from self-employment subject to SECA tax. According to the facts presented, each of the three individual limited partners spent between 2,300 and 2,500 hours working for Soroban, its general partner and various affiliates – suggesting that the limited partners were “active participants” in the partnership’s business.

In its March 2 objection to the taxpayers’ motion for summary judgment, the government contends that the term “limited partner” is a federal tax concept that is determined based on the actions of the partners – not the type of state law entity. Citing previous cases, the government asserts that the determination of limited partner status is a “facts and circumstances inquiry” that requires a “functional analysis.” The taxpayers in Soroban, on the other hand, argue that such a functional analysis does not apply in the case of a state law limited partnership and that, in the case of these partnerships, limited partner status is determined by state law.

Under the functional analysis adopted by the Tax Court in previous cases, to determine who is a limited partner, the court looks at the relationship of the owner to the entity’s business and the factual nature of services the owner provides to the entity’s operations. For the SECA tax exemption to apply, the government states (citing case law), “an owner must not participate actively in the entity's business operations and must have protection from the entity's obligations.”

What should limited partners do pending the outcome of the Soroban case?

Limited partners who actively participate in the partnership’s business should review their facts and circumstances and potential exposure to SECA tax. Although there is currently no clear authority precluding active limited partners of a state law limited partnership from claiming exemption from SECA tax, such a position should be taken with caution and a clear understanding of the risks—including being subject to IRS challenge if audited. The IRS continues to focus on scrutinizing such claims through its SECA Tax compliance campaign. Moreover, the opportunity to claim the exemption could be significantly narrowed depending on the outcome of Soroban Capital Partners.

Prepare for Expanded IRS Audit Focus on Partnerships

The IRS on September 8, 2023, announced that it will leverage funding from the Inflation Reduction Act to take new compliance actions, including actions focused on partnerships and other high income/high-wealth taxpayers. It intends to use artificial intelligence (AI) and improved technology to identify potential compliance risk areas.

Subsequently, on September 20, the IRS further announced plans to establish a new work unit to focus on large or complex pass-through entities. The new pass-through area workgroup will be housed in the IRS Large Business and International (LB&I) division and will include the people joining the IRS under a new IRS hiring initiative. The creation of this new unit is another part of the IRS’s new compliance effort.

With respect to partnerships, the IRS announcement on new enforcement efforts indicates that the IRS will focus on two key areas:

    Expanding its Large Partnership Compliance program by using AI to identify compliance risks, and
  • Increasing use of compliance letters focused on partnerships with balance sheet discrepancies.

Large Partnership Compliance and AI

The IRS began focusing on examinations of the largest and most complex partnership returns through its Large Partnership Compliance pilot program launched in 2021. It now plans to expand the program to additional large partnerships, using AI to select returns for examination. The AI, which has been developed jointly by experts in data science and tax enforcement, uses machine learning technology to identify potential compliance risks in partnership tax and other areas.

The IRS stated that it plans, by the end of this month, to have opened examinations of 75 of the largest partnership in the U.S. in a cross section of industries – including hedge funds, real estate investment partnerships, publicly traded partnerships, and large law firms.

Compliance Letters and Balance Sheet Discrepancies

The IRS has identified ongoing discrepancies in balance sheets of partnerships with over $10 million in assets. The IRS announcement explains that there have been an increasing number of partnership returns in recent years showing discrepancies in balances between the end of one year and the beginning of the next year – many in the millions of dollars, without any required attached statement explaining the discrepancy.

The IRS states that it did not previously have the resources to follow up and engage with large partnerships on these discrepancies. Using its new resources, the IRS plans to approach the issue by mailing out compliance letters to around 500 partnerships starting in early October. Depending on the partnerships’ responses, the IRS might take additional action, including potential examination.

Planning Considerations

With the passage of the Bipartisan Budget Act of 2015 (BBA), promulgating new centralized partnership audit rules, there has been an increased focus on partnership compliance. In conjunction, recent reporting updates for Schedule K-1, Schedule K-2, and Schedule K-3 require partnerships to now disclose additional information. This new announcement from the IRS reflects the agency’s continued focus on partnership compliance using a variety of tools, including AI, and further highlights the necessity for consistent and accurate partnership reporting.

With the IRS signaling its areas of focus, taxpayers can proactively enhance their “exam readiness.” Prior to initiation of an exam, taxpayers may wish to consider taking steps such as confirming application of the BBA partnership audit rules across entities within a complex structure, identifying open tax years for entities subject to these rules, assessing completeness of existing tax return workpapers and relevant documentation, and establishing a framework of the exam response process.

Once an audit notice or compliance letter arrives, prepared taxpayers will be ready to implement their exam process. Key to a taxpayer’s exam process will be considering designation of the partnership representative, availability of documentation that the IRS will likely request, familiarity with operating agreements and other transaction documents, and accessibility of qualified advisors to assist in the exam process.  

Review Structure of Leveraged Partnership Transactions, Application of Anti-Abuse Rules

On May 12, the Department of Justice (DOJ) filed its opening brief in its appeal to the Seventh Circuit of the Tax Court’s decision in Tribune Media Co. v. Commissioner (T.C. Memo 2021-122). The government views the Tax Court’s ruling as paving the way for inappropriate income tax planning, potentially enabling taxpayers to follow the roadmap created by the taxpayer in Tribune Media to implement leveraged partnership transactions without triggering taxable gain while avoiding incurring meaningful economic risk.

The appeal is primarily focused on perceived errors by the Tax Court in applying a liability allocation anti-abuse rule under Treas. Reg. §1.752-2(j) and the general partnership anti-abuse rule under Treas. Reg. §1.701-2. If successful on appeal, the case would likely be remanded to the Tax Court for a determination regarding applicability of the liability allocation and general anti-abuse rules. It is unclear whether the Tax Court would reach a different conclusion upon remand.

The initial brief submitted by DOJ contains a discussion of factors determined to be relevant in concluding the taxpayer’s guarantee was without substance. Consideration should be given to these factors – summarized in the conclusion below – when structuring or evaluating transactions.

Summary of Relevant Facts

In 2009, Tribune Media Company completed a transaction in which it contributed the Chicago Cubs baseball team to a partnership in exchange for an interest in the partnership plus a $714 million cash distribution. Under the disguised sale of property rules in section 707(a)(2)(B), the $714 million would be viewed as a consideration received in connection with a partial sale of the Chicago Cubs baseball team. However, through use of liability guarantees, a significant portion of the debt used to fund the cash distribution was allocated to Tribune Media. Under an exception to the disguised sale rules, distributions funded by debt allocated to the distributee are not treated as disguised sale consideration.

Based on rules described in Treas. Reg. §1.752-2, to the extent a partner bears economic risk of loss (EROL) with respect to a liability, the liability will be allocated to the partner. For purposes of determining whether a taxpayer has EROL with respect to a particular liability, the regulations provide for an analysis relying on hypothetical facts. Under Treas. Reg. §1.752-2(b), a partner bears EROL with respect to a liability to the extent that, if the partnership constructively liquidated, the partner or a related person would be obligated to make a payment with respect to the liability. For purposes of this analysis, regulations require the constructive liquidation to be determined under all the following hypothetical facts:

    All the partnership’s liabilities become payable in full.
  • With the exception of property contributed to secure a partnership liability (see Treas. Reg. §1.752-2(h)(2)), all the partnership’s assets, including cash, have a value of zero.
  • The partnership disposes of all its property in a fully taxable transaction for no consideration (except relief from liabilities for which the creditors’ right to repayment is limited solely to one or more assets of the partnership).
  • All items of income, gain, loss or deduction are allocated among the partners.
  • The partnership liquidates.

To benefit from the debt financed distribution exception to the disguised sale rules, Tribune Media agreed to guarantee a portion of the debt used to fund the distribution. The objective of this guarantee was to create EROL resulting in an allocation of the liability to Tribune Media. Based on the terms of the executed agreements and the general rules described in Treas. Reg. §1.752-2, Tribune Media properly bore EROL. As shown on applicable income tax returns, partnership liabilities were allocated to Tribune Media and reflected its EROL.

Liability Allocation Anti-Abuse Rule

Upon examination, the IRS concluded that the parties’ attempt to create EROL violated the anti-abuse rule under Treas. Reg. §1.752-2(j), which generally provides that an obligation of a partner to make a payment may be disregarded if facts and circumstances indicate that a principal purpose of the arrangement is to eliminate the partner’s EROL with respect to that obligation.

As discussed in both the Tax Court’s opinion and DOJ’s opening appeals brief, the parties structured an arrangement that met the literal requirements to create EROL under Treas. Reg. §1.752-2. However, under the government’s view of the facts, Tribune Media did not bear meaningful risk of loss. The government noted that that “[t]he Tax Court and Tribune itself concluded that Tribune had no more than a ‘remote’ risk under the Senior Guarantee” with “myriad protections in place that all but assured Tribune would never be called upon to repay any portion of the Senior Debt.”

It appears that, in evaluating applicability of the section 752 anti-abuse rule, the Tax Court focused on the fiction that is deemed to occur for purposes of determining EROL under Treas. Reg. §1.752-2. Consequently, the Tax Court assumed the debt became due and all relevant assets became worthless. Under this interpretation, Tribune Media would be called upon to satisfy the outstanding liability. Consequently, the Tax Court concluded that the actual and remote risk to Tribune Media wasn’t relevant to the anti-abuse rule under Treas. Reg. §1.752-2(j). With this ruling the Tax Court would significantly limit the potential effectiveness of the anti-abuse rule.

The government views the reference in Treas. Reg. §1.752-2(j) to “facts and circumstances” to mean a required analysis of the actual economic arrangement of the parties. This contrasts with the view apparently taken by the Tax Court. In the Tax Court’s analysis, the anti-abuse analysis was conducted under the lens of the hypothetical factual assumptions required under the general rule of Treas. Reg. §1.752-2(b). The different views, of course, could have dramatic results in terms of whether and when the anti-abuse rule may apply.

General Partnership Anti-Abuse Rule

In addition to the liability allocation anti-abuse rule under Treas. Reg. §1.752-2(j), the government has also taken issue with the Tax Court’s application of the general partnership anti-abuse rule under Treas. Reg. §1.701-2. In its decision, the Tax Court noted that the Treas. Reg. §1.701-2 anti-abuse rules apply only “to the function of the partnership as a whole.” The government, on the other hand, points out that Treas. Reg. §1.701-2(a)(2) requires that “[t]he form of each partnership transaction must be respected under substance over form principles.”

Ultimately, DOJ believes the Tax Court has misapplied the general anti-abuse rule. Acknowledging that the totality of the transaction may have had a business purpose, analyzing specific aspects under the general anti-abuse rule is appropriate. Similar to the discussion around the liability allocation anti-abuse rule, a recharacterization of the loan guarantee could have a significant impact on the tax consequences to the parties involved.

Conclusion

Based on the status of the Tribune Media case and the government’s appeal, there are a few important factors for consideration and reasonably drawn conclusions.

The government disagrees with the manner in which the Tax Court applied both the liability allocation anti-abuse rule and the general anti-abuse rule. It is reasonable to conclude that, if faced with a similar fact pattern, the IRS will challenge application of the debt-financed distribution exception to the disguised sale rules. In its brief, DOJ described the following factors as critical in its determination that the loan guarantee was without economic substance:

    The Cubs’ baseball club had strong revenue flow and structural protections built into the transaction ensuring the ability of the Cubs to meet its financial obligations. In particular, the Cubs had stable and growing cash flow streams from long-term media rights agreements along with strong ticket sale revenue. Debt service arrangements were structured to pull from these cash flow streams.
  • As part of obtaining approval from Major League Baseball to complete the transaction, several parties to the transaction executed an operating support agreement intended to provide a “financial safety net” to the Cubs in times of economic uncertainty.
  • To prevent potential creditor seizure of the Cubs baseball team, the Commissioner of Major League Baseball had the authority to take significant actions, including requiring funding additional equity contributions, the sale of the team and the provision of a super-senior loan to fund operating expenses.
  • There is unique value to the collateral associated with a major league baseball team. Based on S&P valuations, upon a distressed asset sale, a 40% reduction in the value of the collateral would still yield significant value.
  • Tribune Media documented its belief that the possibility of its guarantees would be called upon was remote. On its financial statements, Tribune Media disclosed the guarantees in the notes but did not record a liability, create a reserve, or report any value associated with the guarantees. 

The Tax Court evaluated application of both the liability allocation anti-abuse rule and the general anti-abuse rule. The Tax Court concluded that the liability allocation anti-abuse rule was inapplicable. This conclusion was premised on application of the hypothetical transactions described in Treas. Reg. §1.752-2(b), i.e., the loan becomes due and payable, and the obligor has no assets with which to satisfy the obligation. Under this assumption, the Tax Court concluded that the remoteness of the guarantor’s obligation is not relevant. If this approach is accurate, application of the liability allocation anti-abuse rule would certainly seem to be significantly limited. If appropriate to analyze this anti-abuse rule under actual facts, it’s unclear whether the Tax Court would have reached a different end result.

Until resolved on appeal, taxpayers should be able to rely on the Tax Court’s ruling in Tribune Media to structure transactions involving debt-financed distributions. However, taxpayers should likewise be prepared for IRS challenge if audited.

Prepare for New Reporting on 2023 Form 1065 Schedule K-1

The IRS included new and modified reporting requirements in its draft 2023 Form 1065 Schedule K-1 , released on June 14, 2023, including:

    A modified reporting requirement concerning decreases in a partner’s percentage share of the partnership’s profit, loss and capital, and
  • A new reporting requirement relating to partnership debt subject to guarantees or other payment obligations of a partner.

Decreases in a Partner’s Share of Partnership Profit, Loss and Capital

The modification to the Schedule K-1 reporting reflected on the draft 2023 Schedule K-1 concerns certain decreases in a partner’s percentage share of the partnership’s profit, loss and capital from the beginning of the partnership’s tax year to the end of the tax year.

Reporting a partner’s percentage share of the partnership’s profit, loss and capital at the beginning and the end of the tax year is not a new requirement. Prior versions of the Schedule K-1 require the partnership to check a box indicating if a decrease in a partner’s percentage share of profit, loss and capital from the beginning of the tax year to the end of the tax year is due to a sale or exchange of partnership interests. The draft 2023 Schedule K-1 refines this reporting by distinguishing, in Part II, Item J, between decreases due to sales of partnership interests and decreases due to exchanges. Partnerships must check one box if a decrease in a partner’s percentage share of profit, loss and capital from the beginning to the end of the partnership tax year is due to a sale of partnership interests and a separate box if the decrease is due to an exchange of partnership interests.

While it is unclear why the IRS distinguishes a sale from an exchange in this context, in the absence of clarifying instructions to the 2023 Form 1065, an exchange of partnership interests should be interpreted broadly to encompass any non-sale transfers of partnership interests, whether taxable or not, including by gift, a redemption or otherwise.

Partnership Debt Subject to Guarantees or Other Payment Obligations of a Partner

The new reporting requirement reflected on the draft 2023 Schedule K-1 underscores the importance of properly classifying partnership liabilities as recourse or nonrecourse under the Section 752 rules. The draft 2023 Schedule K-1, in Part II, Item K3, requires the partnership to check a box if a partner’s share of any partnership indebtedness (also reported on the Schedule K-1) is subject to guarantees or other payment obligations by the partner.

The existence of a guarantee or other partner payment obligation is relevant in determining whether a partnership liability is considered recourse or nonrecourse under the rules of Section 752. Regulations state that a partnership liability is a recourse liability to the extent that any partner or related person bears an economic risk of loss with respect to the obligation. A partner that has an obligation to make a net payment to a creditor or other person with respect to a partnership liability upon a constructive liquidation of the partnership, including pursuant to a deficit restoration obligation (DRO) in the partnership agreement, is considered to bear the economic risk of loss of that partnership liability. A partner’s payment obligation with respect to partnership debt may arise pursuant to any contractual guarantees, indemnifications, reimbursement agreements or other obligations running directly to creditors, to other partners or to the partnership.

The existence of a debt guarantee or other payment obligation by the partner with respect to a partnership liability may indicate that the partner bears some or all of the economic risk of loss for such liability, which is a key factor in classifying a partnership liability as recourse or nonrecourse under the rules of Section 752.

Evaluate Before Year End Expiration of Partnership Bottom-Dollar Guarantee Transition Rules

The transition period for “bottom-dollar” guarantees ended on October 4, 2023, and in some cases partners that were relying on bottom-dollar guarantees for partnership tax basis would have needed to have new arrangements in place by that time if they intended to preserve tax basis associated with a bottom-dollar guarantee. However, partners in some partnerships may have until the end of the partnership tax year to set up new arrangements.

Bottom-Dollar Guarantees and Transition Period

A bottom-dollar guarantee is a guarantee by a partner of an amount of partnership debt, where the partner pays only if the creditor collects less than the full amount of the debt from the partnership. Further, in a bottom-dollar guarantee, even if the creditor does not collect the full amount of the debt, the bottom-dollar guarantor pays nothing provided the creditor collects at least the amount of the bottom-dollar payment obligation. For example, a lender loans ABC partnership $100 secured by land and partner A guarantees the bottom $10 of the loan. If the lender can only recover $11 of the $100 loan, then Partner A has no obligation on the guarantee. However, if the lender can only recover $6 of the $100 loan, then Partner A would be liable for $4 under the guarantee ($10 bottom guarantee less $6 recovered).

Regulations under Section 752 issued in 2019 curtailed the use of bottom-dollar payment obligations to establish economic risk of loss for a guarantor to be allocated recourse liabilities on partnership debt incurred after October 5, 2016, unless special transition rules applied. The transition rules in the 2019 regulations allowed taxpayers to continue using bottom-dollar guarantees for debt existing on October 5, 2016, to the extent the basis associated with the allocation of liabilities in connection with the bottom-dollar guarantee under the old rules protected a negative capital account prior to that date.

The transition rules were effective for only a seven-year period that ends on October 4, 2023.

Tax Implications of Transition Period Ending

Upon expiration of the seven-year transition period on October 4, 2023, any debt supported by a bottom-dollar guarantee during the transition period will no longer be adequate to support the allocation of the debt to the guarantor and the liability must be reallocated among the partners based on the rules of Section 752. If debt allocations change due to the expiration of the transition period, a partner with a negative tax capital amount no longer supported by debt may recognize gain under Section 731.

Despite the final demise of bottom-dollar guarantees, other options may be available for partners to achieve desired tax results, such as using “vertical slice guarantees,” under which a partner guarantees a percentage of each dollar of debt, and intelligently managing non-recourse liability allocations.

Planning Considerations

Partnerships should review liability allocations to ensure that tax deferrals continue as planned. The transition period under the 2019 regulations ended October 4, 2023, but there may still be time to make arrangements to preserve tax basis before the end of the partnership tax year.

Partners are required to determine the adjusted basis of their interest in a partnership only when necessary for the determination of their tax liability or that of any other person. Otherwise, the determination of the adjusted basis of a partnership interest is ordinarily made as of the end of a partnership tax year. Therefore, if a partner is not otherwise required to determine the adjusted basis of his or her partnership interest in order to determine the partner’s own tax liability or that of any other person for the period between October 4, 2023, and the end of the partnership’s tax year, the partner may have until the end of the partnership’s tax year to set in place alternative arrangements.

Partnerships must disclose bottom-dollar guarantees on Form 8275 for tax years ending on or after October 5, 2016, in which the guarantee is undertaken or modified.

2023 Year-End Tax Planning for Individuals

Posted by BOOSCPA Strategic Tax Services Group Posted on Dec 11 2023
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2023 YEAR-END TAX PLANNING FOR INDIVIDUALS

With rising interest rates, inflation and continuing market volatility, tax planning is as essential as ever for taxpayers looking to manage cash flow while paying the least amount of taxes possible over time. As we approach year end, now is the time for individuals, business owners and family offices to review their 2023 and 2024 tax situations and identify opportunities for reducing, deferring or accelerating their tax obligations.

The information contained within this article is based on federal laws and policies in effect as of the publication date. This article discusses tax planning for federal taxes. Applicable state and foreign taxes should also be considered. Taxpayers should consult with a trusted advisor when making tax and financial decisions regarding any of the items below.


Individual Tax Planning Highlights

2023 Federal Income Tax Rate Brackets

Tax Rate

Joint/Surviving Spouse

Single

Head of Household

Married Filing Separately

Estates & Trusts

10%

$0 – $22,000

$0 – $11,000

$0 – $15,700

$0 – $11,000

$0 – $2,900

12%

$22,001 – 
$89,450

$11,001 –
$44,725

$15,701 –
$59,850

$11,001 –
$44,725

-

22%

$89,451 –
$190,750

$44,726 –
$95,375

$59,851 –
$95,350

$44,726 –
$95,375

-

24%

$190,751 –
$364,200

$95,376 – $182,100

$95,351 – $182,100

$95,376 –
$182,100

$2,901 –
$10,550

32%

$364,201 –
$462,500

$182,101 – $231,250

$182,101 – $231,250

$182,101 –
$231,250

-

35%

$462,501 –
$693,750

$231,251 – $578,125

$231,251 – $578,100

$231,251 –
$346,875

$10,551 – $14,450

37%

Over $693,750

Over $578,125

Over $578,100

Over $346,875

Over $14,450

2024 Federal Income Tax Rate Brackets

Tax Rate

Joint/Surviving Spouse

Single

Head of Household

Married Filing Separately

Estates & Trusts

10%

$0 – $23,200

$0 – $11,600

$0 – $16,550

$0 – $11,600

$0 – $3,100

12%

$23,201 –
$94,300

$11,601 –
$47,150

$16,551 – 63,100

$11,601 –
$47,150

-

22%

$94,301 –
$201,050

$47,151 – $100,525

$63,101 – $100,500

$47,151 –
$100,525

-

24%

$201,051 –
$383,900

$100,526 – $191,950

$100,501 – $191,950

$100,526 –
$191,950

$3,101 – $11,150

32%

$383,901 –
$487,450

$191,951 – $243,725

$191,951 – $243,700

$191,951 –
$243,725

-

35%

$487,451 –
$731,200

$243,726 – $609,350

$243,701 – $609,350

$243,726 –
$365,600

$11,151 – $15,200

37%

Over $731,200

Over $609,350

Over $609,350

Over $365,600

Over $15,200


Timing of Income and Deductions

Taxpayers should consider whether they can minimize their tax bills by shifting income or deductions between 2023 and 2024. Ideally, income should be received in the year with the lower marginal tax rate, and deductible expenses should be paid in the year with the higher marginal tax rate. If the marginal tax rate is the same in both years, deferring income from 2023 to 2024 will produce a one-year tax deferral, and accelerating deductions from 2024 to 2023 will lower the 2023 income tax liability.

Actions to consider that may result in a reduction or deferral of taxes include:
    Delaying closing capital gain transactions until after year end or structuring 2023 transactions as installment sales so that gain is deferred past 2023 (also see Long Term Capital Gains, below).
  • Considering whether to trigger capital losses before the end of 2023 to offset 2023 capital gains.
  • Delaying interest or dividend payments from closely held corporations to individual business-owner taxpayers.
  • Deferring commission income by closing sales in early 2024 instead of late 2023.
  • Accelerating deductions for expenses such as mortgage interest and charitable donations (including donations of appreciated property) into 2023 (subject to AGI limitations).
  • Evaluating whether non-business bad debts are worthless by the end of 2023 and should be recognized as a short-term capital loss.
  • Shifting investments to municipal bonds or investments that do not pay dividends to reduce taxable income in future years.
  • On the other hand, taxpayers that will be in a higher tax bracket in 2024 may want to consider potential ways to move taxable income from 2024 into 2023, such that the taxable income is taxed at a lower tax rate. Current year actions to consider that could reduce 2024 taxes include:
  • Accelerating capital gains into 2023 or deferring capital losses until 2024.
  • Electing out of the installment sale method for 2023 installment sales.
  • Deferring deductions such as large charitable contributions to 2024.  

Long-Term Capital Gains
The long-term capital gains rates for 2023 and 2024 are shown below. The tax brackets refer to the taxpayer’s taxable income. Capital gains also may be subject to the 3.8% Net Investment Income Tax.
2023 Long-Term Capital Gains Rate Brackets

Long-Term Capital Gains Tax Rate

Joint/Surviving Spouse

Single

Head of Household

Married Filing Separately

Estates & Trusts

0%

$0 – $89,250

$0 – $44,625

$0 – $59,750

$0 – $44,625

$0 – $3,000

15%

$89,251 – $553,850

$44,626 – $492,300

$59,751 – $523,050

$44,626 – $276,900

$3,001 – $14,650

20%

Over $553,850

Over $492,300

Over $523,050

Over $276,900

Over $14,650

2024 Long-Term Capital Gains Rate Brackets

Long-Term Capital Gains Tax Rate

Joint/Surviving Spouse

Single

Head of Household

Married Filing Separately

Estates & Trusts

0%

$0 – $94,050

$0 – $47,025

$0 – $63,000

$0 – $47,025

$0 – $3,150

15%

$94,051 – $583,750

$47,026 – $518,900

$63,001 – $551,350

$47,026 – $291,850

$3,151 – $15,450

20%

Over $583,750

Over $518,900

Over $551,350

Over $291,850

Over $15,450

Long-term capital gains (and qualified dividends) are subject to a lower tax rate than other types of income. Investors should consider the following when planning for capital gains:

    Holding capital assets for more than a year (more than three years for assets attributable to carried interests) so that the gain upon disposition qualifies for the lower long-term capital gains rate.
  • Considering long-term deferral strategies for capital gains such as reinvesting capital gains into designated qualified opportunity zones.
  • Investing in, and holding, “qualified small business stock” for at least five years.
  • Donating appreciated property to a qualified charity to avoid long term capital gains tax (also see Charitable Contributions, below).

Net Investment Income Tax

An additional 3.8% net investment income tax (NIIT) applies on net investment income above certain thresholds. Net investment income does not apply to income derived in the ordinary course of a trade or business in which the taxpayer materially participates. Similarly, gain on the disposition of trade or business assets attributable to an activity in which the taxpayer materially participates is not subject to the NIIT.

In conjunction with other tax planning strategies that are being implemented to reduce income tax or capital gains tax, impacted taxpayers may want to consider deferring net investment income for the year.

Social Security Tax

The Old-Age, Survivors, and Disability Insurance (OASDI) program is funded by contributions from employees and employers through FICA tax. The FICA tax rate for both employees and employers is 6.2% of the employee's gross pay, but only on wages up to $160,200 for 2023 and $168,600 for 2024. Self-employed persons pay a similar tax, called SECA (or self-employment tax), based on 12.4% of the net income of their businesses.

Employers, employees, and self-employed persons also pay a tax for Medicare/Medicaid hospitalization insurance (HI), which is part of the FICA tax, but is not capped by the OASDI wage base. The HI payroll tax is 2.9%, which applies to earned income only. Self-employed persons pay the full amount, while employers and employees each pay 1.45%. An extra 0.9% Medicare (HI) payroll tax must be paid by individual taxpayers on earned income that is above certain adjusted gross income (AGI) thresholds, i.e., $200,000 for individuals, $250,000 for married couples filing jointly and $125,000 for married couples filing separately. However, employers do not pay this extra tax.

Long-Term Care Insurance and Services
Premiums an individual pays on a qualified long-term care insurance policy are deductible as a medical expense. The maximum deduction amount is determined by an individual’s age. The following table sets forth the deductible limits for 2023 and the estimated deductible limits for 2024 (the limitations are per person, not per return):

Age

Deduction Limitation 2023

Deduction Limitation 2024

40 or under

$480

$470

Over 40 but not over 50

$890

$880

Over 50 but not over 60

$1,790

$1,760

Over 60 but not over 70

$4,770

$4,710

Over 70

$5,960

$5,880

Retirement Plan Contributions
Individuals may want to maximize their annual contributions to qualified retirement plans and Individual Retirement Accounts (IRAs).  
    The maximum amount of elective contributions that an employee can make in 2023 to a 401(k) or 403(b) plan is $22,500 ($30,000 if age 50 or over and the plan allows “catch up” contributions). For 2024, these limits are $23,000 and $30,500, respectively.
  • The SECURE Act permits a penalty-free withdrawal of up to $5,000 from traditional IRAs and qualified retirement plans for qualifying expenses related to the birth or adoption of a child after December 31, 2019. The $5,000 distribution limit is per individual, so a married couple could each receive $5,000.
  • Under the SECURE Act, individuals are now able to contribute to their traditional IRAs in or after the year in which they turn 70½.
  • Beginning in 2023, the SECURE Act 2.0 raised the age that a taxpayer must begin taking required minimum distributions (RMDs) to age 73. If the individual reaches age 72 in 2023, the required beginning date for the first RMD is April 1, 2025, for 2024. If the taxpayer reaches age 73 in 2023, the taxpayer was 72 in 2022 and subject to the age 72 RMD rule in effect for 2022. If the taxpayer reached age 72 in 2022, the first RMD was due April 1, 2023, and the second RMD is due December 31, 2023.
  • Individuals age 70½ or older can donate up to $100,000 to a qualified charity directly from a taxable IRA.
  • The SECURE Act generally requires that designated beneficiaries of persons who died after December 31, 2019, take inherited plan benefits over a 10-year period. Eligible designated beneficiaries (i.e., surviving spouses, minor children of the plan participant, disabled and chronically ill beneficiaries and beneficiaries who are less than 10 years younger than the plan participant) are not limited to the 10-year payout rule. Special rules apply to certain trusts.
  • Under proposed Treasury Regulations (issued February 2022) that address required minimum distributions from inherited retirement plans of persons who died after December 31, 2019, and after their required beginning date, designated and non-designated beneficiaries will be required to take annual distributions, whether subject to a ten-year period or otherwise.
  • Small businesses can contribute the lesser of (i) 25% of employees’ salaries or (ii) an annual maximum set by the IRS each year to a Simplified Employee Pension (SEP) plan by the extended due date of the employer’s federal income tax return for the year that the contribution is made. The maximum SEP contribution for 2023 is $66,000. The maximum SEP contribution for 2024 is $69,000. The calculation of the 25% limit for self-employed individuals is based on net self-employment income, which is calculated after the reduction in income from the SEP contribution (as well as for other things, such as self-employment taxes).

Foreign Earned Income Exclusion
The foreign earned income exclusion is $120,000 in 2023 and increases to $126,500 in 2024.

Alternative Minimum Tax
A taxpayer must pay either the regular income tax or the alternative minimum tax (AMT), whichever is higher. The established AMT exemption amounts for 2023 are $81,300 for unmarried individuals and individuals claiming head of household status, $126,500 for married individuals filing jointly and surviving spouses, $63,250 for married individuals filing separately and $28,400 for estates and trusts. The AMT exemption amounts for 2024 are $85,700 for unmarried individuals and individuals claiming head of household status, $133,300 for married individuals filing jointly and surviving spouses, $66,650 for married individuals filing separately and $29,900 for estates and trusts.

Kiddie Tax
The unearned income of a child is taxed at the parents’ tax rates if those rates are higher than the child’s tax rate.

Limitation on Deductions of State and Local Taxes (SALT Limitation)

For individual taxpayers who itemize their deductions, the Tax Cuts and Jobs Act introduced a $10,000 limit on deductions of state and local taxes paid during the year ($5,000 for married individuals filing separately). The limitation applies to taxable years beginning on or after December 31, 2017, and before January 1, 2026. Various states have enacted new rules that allow owners of pass-through entities to avoid the SALT deduction limitation in certain cases.

Charitable Contributions
Cash contributions made to qualifying charitable organizations, including donor advised funds, in 2023 and 2024 will be subject to a 60% AGI limitation. The limitations for cash contributions continue to be 30% of AGI for contributions to non-operating private foundations. Tax planning around charitable contributions may include:
    Creating and funding a private foundation, donor advised fund or charitable remainder trust.
  • Donating appreciated property to a qualified charity to avoid long term capital gains tax.

Estate and Gift Taxes
For gifts made in 2023, the gift tax annual exclusion is $17,000 and for 2024 is $18,000. For 2023, the unified estate and gift tax exemption and generation-skipping transfer tax exemption is $12,920,000 per person. For 2024, the unified estate and gift tax exemption and generation-skipping transfer tax exemption is $13,610,000. All outright gifts to a spouse who is a U.S. citizen are free of federal gift tax. However, for 2023 and 2024, only the first $175,000 and $185,000, respectively, of gifts to a non-U.S. citizen spouse is excluded from the total amount of taxable gifts for the year. Tax planning strategies may include:
    Making annual exclusion gifts.
  • Making larger gifts to the next generation, either outright or in trust.
  • Creating a Spousal Lifetime Access Trust (SLAT) or a Grantor Retained Annuity Trust (GRAT) or selling assets to an Intentionally Defective Grantor Trust (IDGT).

Net Operating Losses and Excess Business Loss Limitation

Net operating losses (NOLs) generated in 2023 are limited to 80% of taxable income and are not permitted to be carried back. Any unused NOLs are carried forward subject to the 80% of taxable income limitation in carryforward years.

A non-corporate taxpayer may deduct net business losses of up to $289,000 ($578,000 for joint filers) in 2023. The limitation is $305,000 ($610,000 for joint filers) for 2024. A disallowed excess business loss (EBL) is treated as an NOL carryforward in the subsequent year, subject to the NOL rules. With the passage of the Inflation Reduction Act, the EBL limitation has been extended through the end of 2028.

2021 Year-End Tax Planning for Businesses

Posted by BOOSCPA Strategic Tax Services Group Posted on Dec 20 2021
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2021 Year-End Tax Planning for Businesses

As the U.S. entered 2021, many assumed that newly elected President Joe Biden along with Democratic majorities in the House and Senate would swiftly enact tax increases on both corporations and individuals to pay for the cost of proposed new infrastructure and social spending plans, potentially using the budget reconciliation process to do so. Since then, various versions of tax and spending measures have been negotiated and debated by members of Congress and the White House. As 2021 heads to a close, tax increases are still expected, but the timing and content of final changes are still not certain.
 
On November 5, 2021, the U.S. House of Representatives delayed voting on its version of the Build Back Better Act (H.R. 5376), a package of social spending measures funded by tax increases. The delay allows members more time to review the budget impact of the provisions in the bill. Some of the legislation’s major tax proposals, which mainly target large profitable corporations and high-income individuals, include:

    A 15% corporate alternative minimum tax on companies that report financial statement profits of over $1 billion.
  • A 1% surtax on corporate stock buybacks.
  • A 15% country-by-country minimum tax on foreign profits of U.S. corporations.
  • A 5% surtax on individual incomes over $10 million, an additional 3% surtax on incomes over $25 million and expansion of the 3.8% Net Investment Income Tax.


At the time of writing, the House had not yet voted on the Build Back Better Act. Once the House votes, the legislation will be taken up by the Senate. If enacted in its current form, the legislation would generally be effective for taxable years beginning after December 31, 2021; however, many of the corporate and international proposals affecting businesses would apply for taxable years beginning after December 31, 2022 – i.e., they would be deferred for one year.

The information contained in this article is based on tax proposals as of November 4, 2021 and is subject to change based on final legislation. Businesses should continue to track the latest tax proposals to understand the impacts of possible new legislation, particularly when engaging in tax planning. Despite the delays and uncertainty around exactly what tax changes final legislation will contain, there are actions that businesses can consider taking to minimize their tax liabilities.

Consider tax accounting method changes and strategic tax elections
The 2017 Tax Cuts and Jobs Act (TCJA) lowered the regular corporate tax rate to 21% and eliminated the corporate alternative minimum tax beginning in 2018. The current version of the proposed Build Back Better Act would leave the 21% regular corporate tax rate unchanged but, beginning in 2023, would create a new 15% corporate alternative minimum tax on the adjusted financial statement income of corporations with such income over $1 billion. Companies with adjusted financial statement income over $1 billion, therefore, should take into account the proposed 15% corporate alternative minimum tax when considering 2021 tax planning actions that could affect future years.

Companies that want to reduce their 2021 tax liability should consider traditional tax accounting method changes, tax elections and other actions for 2021 to defer recognizing income to a later taxable year and accelerate tax deductions to an earlier taxable year, including the following:

    Changing from recognizing certain advance payments (e.g., upfront payments for goods, services, gift cards, use of intellectual property, sale or license of software) in the year of receipt to recognizing a portion in the following taxable year.
  • Changing from the overall accrual to the overall cash method of accounting.
  • Changing from capitalizing certain prepaid expenses (e.g., insurance premiums, warranty service contracts, taxes, government permits and licenses, software maintenance) to deducting when paid using the “12-month rule.”
  • Deducting eligible accrued compensation liabilities (such as bonuses and severance payments) that are paid within 2.5 months of year end.
  • Accelerating deductions of liabilities such as warranty costs, rebates, allowances and product returns under the “recurring item exception.”
  • Purchasing qualifying property and equipment before the end of 2021 to take advantage of the 100% bonus depreciation provisions and the Section 179 expensing rules.
  • Deducting “catch-up” depreciation (including bonus depreciation, if applicable) by changing to shorter recovery periods or changing from non-depreciable to depreciable.
  • Optimizing the amount of uniform capitalization costs capitalized to ending inventory, including changing to simplified methods available under Section 263A.
  • Electing to fully deduct (rather than capitalize and amortize) qualifying research and experimental (R&E) expenses attributable to new R&E programs or projects that began in 2021. Similar planning may apply to the deductibility of software development costs attributable to new software projects that began in 2021. (Note that capitalization and amortization of R&E expenditures is required beginning in 2022, although the proposed Build Back Better Act would delay the effective date until after 2025).
  • Electing to write-off 70% of success-based fees paid or incurred in 2021 in connection with certain acquisitive transactions under Rev. Proc. 2011-29.
  • Electing the de minimis safe harbor to deduct small-dollar expenses for the acquisition or production of property that would otherwise be capitalizable under general rules.

Is “reverse” planning better for your situation?

Depending on their facts and circumstances, some businesses may instead want to accelerate taxable income into 2021 if, for example, they believe tax rates will increase in the near future or they want to optimize usage of NOLs. These businesses may want to consider “reverse” planning strategies, such as:

    Implementing a variety of “reverse” tax accounting method changes.
  • Selling and leasing back appreciated property before the end of 2021, creating gain that is taxed currently offset by future deductions of lease expense, being careful that the transaction is not recharacterized as a financing transaction.
  • Accelerating taxable capital gain into 2021. 
  • Electing out of the installment sale method for installment sales closing in 2021.
  • Delaying payments of liabilities whose deduction is based on when the amount is paid, so that the payment is deductible in 2022 (e.g., paying year-end bonuses after the 2.5-month rule).

Tax accounting method changes – is a Form 3115 required and when?

Some of the opportunities listed above for changing the timing of income recognition and deductions require taxpayers to submit a request to change their method of tax accounting for the particular item of income or expense. Generally, tax accounting method change requests require taxpayers to file a Form 3115, Application for Change in Accounting Method, with the IRS under one of the following two procedures:

    The “automatic” change procedure, which requires the taxpayer to attach the Form 3115 to the timely filed (including extensions) federal tax return for the year of change and to file a separate copy of the Form 3115 with the IRS no later than the filing date of that return; or
  • The “nonautomatic” change procedure, which applies when a change is not listed as automatic and requires the Form 3115 (including a more robust discussion of the legal authorities than an automatic Form 3115 would include) to be filed with the IRS National Office during the year of change along with an IRS user fee. Calendar year taxpayers that want to make a nonautomatic change for the 2021 taxable year should be cognizant of the accelerated December 31, 2021 due date for filing Form

Only certain changes may be implemented without a Form 3115.

Write-off bad debts and worthless stock

Given the economic challenges brought on by the COVID-19 pandemic, businesses should evaluate whether losses may be claimed on their 2021 returns related to worthless assets such as receivables, property, 80% owned subsidiaries or other investments.

    Bad debts can be wholly or partially written off for tax purposes. A partial write-off requires a conforming reduction of the debt on the books of the taxpayer; a complete write-off requires demonstration that the debt is wholly uncollectible as of the end of the year.
  • Losses related to worthless, damaged or abandoned property can generate ordinary losses for specific assets.
  • Businesses should consider claiming losses for investments in insolvent subsidiaries that are at least 80% owned and for certain investments in insolvent entities taxed as partnerships (also see Partnerships and S corporations, below).
  • Certain losses attributable to COVID-19 may be eligible for an election under Section 165(i) to be claimed on the preceding taxable year’s return, possibly reducing income and tax in the earlier year or creating an NOL that may be carried back to a year with a higher tax rate.


Maximize interest expense deductions
The TCJA significantly expanded Section 163(j) to impose a limitation on business interest expense of many taxpayers, with exceptions for small businesses (those with three-year average annual gross receipts not exceeding $26 million ($27 million for 2022), electing real property trades or businesses, electing farming businesses and certain utilities. 

    The deduction limit is based on 30% of adjusted taxable income. The amount of interest expense that exceeds the limitation is carried over indefinitely.
  • Beginning with 2022 taxable years, taxpayers will no longer be permitted to add back deductions for depreciation, amortization and depletion in arriving at adjusted taxable income (the principal component of the limitation).
  • The Build Back Better Act proposes to modify the rules with respect to business interest expense paid or incurred by partnerships and S corporations (see Partnerships and S corporations, below).


Maximize tax benefits of NOLs
Net operating losses (NOLs) are valuable assets that can reduce taxes owed during profitable years, thus generating a positive cash flow impact for taxpayers. Businesses should make sure they maximize the tax benefits of their NOLs.

    Make sure the business has filed carryback claims for all permitted NOL carrybacks. The CARES Act allows taxpayers with losses to carry those losses back up to five years when the tax rates were higher. Taxpayers can still file for “tentative” refunds of NOLs originating in 2020 within 12 months from the end of the taxable year (by December 31, 2021 for calendar year filers) and can file refund claims for 2018 or 2019 NOL carrybacks on timely filed amended returns.
  • Corporations should monitor their equity movements to avoid a Section 382 ownership change that could limit annual NOL deductions.
  • Losses of pass-throughs entities must meet certain requirements to be deductible at the partner or S corporation owner level (see Partnerships and S corporations, below).


Defer tax on capital gains

Tax planning for capital gains should consider not only current and future tax rates, but also the potential deferral period, short and long-term cash needs, possible alternative uses of funds and other factors.

Noncorporate shareholders are eligible for exclusion of gain on dispositions of Qualified Small Business Stock (QSBS). The Build Back Better Act would limit the gain exclusion to 50% for sales or exchanges of QSBS occurring after September 13, 2021 for high-income individuals, subject to a binding contract exception. For other sales, businesses should consider potential long-term deferral strategies, including:

    Reinvesting capital gains in Qualified Opportunity Zones.
  • Reinvesting proceeds from sales of real property in other “like-kind” real property.
  • Selling shares of a privately held company to an Employee Stock Ownership Plan.
  • Businesses engaging in reverse planning strategies (see Is “reverse” planning better for your situation?  above) may instead want to move capital gain income into 2021 by accelerating transactions (if feasible) or, for installment sales, electing out of the installment method.


Claim available tax credits
The U.S. offers a variety of tax credits and other incentives to encourage employment and investment, often in targeted industries or areas such as innovation and technology, renewable energy and low-income or distressed communities. Many states and localities also offer tax incentives. Businesses should make sure they are claiming all available tax credits for 2021 and begin exploring new tax credit opportunities for 2022.

    The Employee Retention Credit (ERC) is a refundable payroll tax credit for qualifying employers that have been significantly impacted by COVID-19. Employers that received a Paycheck Protection Program (PPP) loan can claim the ERC but the same wages cannot be used for both programs. The Infrastructure Investment and Jobs Act signed by President Biden on November 15, 2021, retroactively ends the ERC on September 30, 2021, for most employers.
  • Businesses that incur expenses related to qualified research and development (R&D) activities are eligible for the federal R&D credit.
  • Taxpayers that reinvest capital gains in Qualified Opportunity Zones may be able to defer the federal tax due on the capital gains. An additional 10% gain exclusion also may apply if the investment is made by December 31, 2021. The investment must be made within a certain period after the disposition giving rise to the gain.
  • The New Markets Tax Credit Program provides federally funded tax credits for approved investments in low-income communities that are made through certified “Community Development Entities.”
  • Other incentives for employers include the Work Opportunity Tax Credit, the Federal Empowerment Zone Credit, the Indian Employment Credit and credits for paid family and medical leave (FMLA).
  • There are several federal tax benefits available for investments to promote energy efficiency and sustainability initiatives. In addition, the Build Back Better Act proposes to extend and enhance certain green energy credits as well as introduce a variety of new incentives. The proposals also would introduce the ability for taxpayers to elect cash payments in lieu of certain credits and impose prevailing wage and apprenticeship requirements in the determination of certain credit amounts.


Partnerships and S corporations
The Build Back Better Act contains various tax proposals that would affect partnerships, S corporations and their owners. Planning opportunities and other considerations for these taxpayers include the following:

    Taxpayers with unused passive activity losses attributable to partnership or S corporation interests may want to consider disposing of the interest to utilize the loss in 2021.
  • Taxpayers other than corporations may be entitled to a deduction of up to 20% of their qualified business income (within certain limitations based on the taxpayer’s taxable income, whether the taxpayer is engaged in a service-type trade or business, the amount of W-2 wages paid by the business and the unadjusted basis of certain property held by the business). Planning opportunities may be available to maximize this deduction.
  • Certain requirements must be met for losses of pass-through entities to be deductible by a partner or S corporation shareholder. In addition, an individual’s excess business losses are subject to overall limitations. There may be steps that pass-through owners can take before the end of 2021 to maximize their loss deductions. The Build Back Better Act would make the excess business loss limitation permanent (the limitation is currently scheduled to expire for taxable years beginning on or after January 1, 2026) and change the manner in which the carryover of excess business losses may be used in subsequent years.
  • Under current rules, the abandonment or worthlessness of a partnership interest may generate an ordinary deduction (instead of a capital loss) in cases where no partnership liabilities are allocated to the interest. Under the Build Back Better Act, the abandonment or worthlessness of a partnership interest would generate a capital loss regardless of partnership liability allocations, effective for taxable years beginning after December 31, 2021. Taxpayers should consider an abandonment of a partnership interest in 2021 to be able to claim an ordinary deduction.
  • Following enactment of the TCJA, deductibility of expenses incurred by investment funds are treated as “investment expenses”—and therefore are limited at the individual investor level— if the fund does not operate an active trade or business (i.e., if the fund’s only activities are investment activities). To avoid the investment expense limitation, consideration should be given as to whether a particular fund’s activities are so closely connected to the operations of its portfolio companies that the fund itself should be viewed as operating an active trade or business.
  • Under current rules, gains allocated to carried interests in investment funds are treated as long-term capital gains only if the investment property has been held for more than three years. Investment funds should consider holding the property for more than three years prior to sale to qualify for reduced long-term capital gains rates. Although the Build Back Better Act currently does not propose changes to the carried interest rules, an earlier draft of the bill would have extended the current three-year property holding period to five years. Additionally, there are multiple bills in the Senate that, if enacted, would seek to tax all carry allocations at ordinary income rates.
  • Under the Build Back Better Act, essentially all pass-through income of high-income owners that is not subject to self-employment tax would be subject to the 3.8% Net Investment Income Tax (NIIT). This means that pass-through income and gains on sales of assets allocable to partnership and S corporation owners would incur NIIT, even if the owner actively participates in the business. Additionally, taxpayers that currently utilize a state law limited partnership to avoid self-employment taxes on the distributive shares of active “limited partners” would instead be subject to the 3.8% NIIT. If enacted, this proposal would be effective for taxable years beginning after December 31, 2021. Taxpayers should consider accelerating income and planned dispositions of business assets into 2021 to avoid the possible additional tax.
  • The Build Back Better Act proposes to modify the rules with respect to business interest expense incurred by partnerships and S corporations effective for taxable years beginning after December 31, 2022. Under the proposed bill, the Section 163(j) limitation with respect to business interest expense would be applied at the partner and S corporation shareholder level. Currently, the business interest expense limitation is applied at the entity level (also see Maximize interest expense deductions, above).
  • Various states have enacted PTE tax elections that seek a workaround to the federal personal income tax limitation on the deduction of state taxes for individual owners of pass-through entities. See State pass-through entity tax elections, below.


Planning for international operations
The Build Back Better Act proposes substantial changes to the existing U.S. international taxation of non-U.S. income beginning as early as 2022. These changes include, but are not limited to, the following:

    Imposing additional interest expense limitations on international financial reporting groups.
  • Modifying the rules for global intangible low-taxed income (GILTI), including calculating GILTI and the corresponding foreign tax credits (FTCs) on a country-by-country basis, allowing country specific NOL carryforwards for one taxable year and reducing the QBAI reduction to 5%.
  • Modifying the existing FTC rules for all remaining categories to be calculated on a country-by-country basis.
  • Modifying the rules for Subpart F, foreign derived intangible income (FDII) and the base erosion anti-abuse tax (BEAT).
  • Imposing new limits on the applicability of the Section 245A dividends received deduction (DRD) by removing the application of the DRD rules to non-controlled foreign corporations (CFCs).
  • Modifying the rules under Section 250 to remove the taxable income limitation as well as reduce the GILTI and FDII deductions to 28.5% and 24.8%, respectively.


Businesses with international operations should gain an understanding of the impacts of these proposals on their tax profile by modeling the potential changes and considering opportunities to utilize the favorable aspects of the existing cross-border rules to mitigate the detrimental impacts, including:

    Considering mechanisms/methods to accelerate foreign source income (e.g., prepaying royalties) and associated foreign income taxes to maximize use of the existing FTC regime and increase current FDII benefits.
  • Optimizing offshore repatriation and associated offshore treasury aspects while minimizing repatriation costs (e.g., previously taxed earnings and profits and basis amounts, withholding taxes, local reserve restrictions, Sections 965 and 245A, etc.).
  • Accelerating dividends from non-CFC 10% owned foreign corporations to maximize use of the 100% DRD currently available.
  • Utilizing asset step-up planning in low-taxed CFCs to utilize existing current year excess FTCs in the GILTI category for other CFCs in different jurisdictions.
  • Considering legal entity restructuring to maximize the use of foreign taxes paid in jurisdictions with less than a 16% current tax rate to maximize the GILTI FTC profile of the company.
  • If currently in NOLs, considering methods to defer income or accelerate deductions to minimize detrimental impacts of existing Section 250 deduction taxable income limitations in favor of the proposed changes that will allow a full Section 250 deduction without a taxable income limitation.
  • In combination with the OECD Pillar One/Two advancements coupled with U.S. tax legislation, reviewing the transfer pricing and value chain structure of the organization to consider ways to adapt to such changes and minimize the future effective tax rate of the organization.


Review transfer pricing compliance
Businesses with international operations should review their cross-border transactions among affiliates for compliance with relevant country transfer pricing rules and documentation requirements. They should also ensure that actual intercompany transactions and prices are consistent with internal transfer pricing policies and intercompany agreements, as well as make sure the transactions are properly reflected in each party’s books and records and year-end tax calculations. Businesses should be able to demonstrate to tax authorities that transactions are priced on an arm’s-length basis and that the pricing is properly supported and documented. Penalties may be imposed for non-compliance. Areas to consider include:

    Have changes in business models, supply chains or profitability (including changes due to the effects of COVID-19) affected arm’s length transfer pricing outcomes and support? These changes and their effects should be supported before year end and documented contemporaneously.
  • Have all cross-border transactions been identified, priced and properly documented, including transactions resulting from merger and acquisition activities (as well as internal reorganizations)?
  • Do you know which entity owns intellectual property (IP), where it is located and who is benefitting from it? Businesses must evaluate their IP assets — both self-developed and acquired through transactions — to ensure compliance with local country transfer pricing rules and to optimize IP management strategies.
  • If transfer pricing adjustments need to be made, they should be done before year end, and for any intercompany transactions involving the sale of tangible goods, coordinated with customs valuations.
  • Multinational businesses should begin to monitor and model the potential effects of the recent agreement among OECD countries on a two pillar framework that addresses distribution of profits among countries and imposes a 15% global minimum tax.

Considerations for employers
Employers should consider the following issues as they close out 2021 and head into 2022:

    Employers have until the extended due date of their 2021 federal income tax return to retroactively establish a qualified retirement plan and fund the plan for 2021.
  • Contributions made to a qualified retirement plan by the extended due date of the 2021 federal income tax return may be deductible for 2021; contributions made after this date are deductible for 2022.
  • The amount of any PPP loan forgiveness is excluded from the federal gross income of the business, and qualifying expenses for which the loan proceeds were received are deductible.
  • The CARES Act permitted employers to defer payment of the employer portion of Social Security (6.2%) payroll tax liabilities that would have been due from March 27 through December 31, 2020. Employers are reminded that half of the deferred amount must be paid by December 31, 2021 (the other half must be paid by December 31, 2022). Notice CP256-V is not required to make the required payment.
  • Employers should ensure that common fringe benefits are properly included in employees’ and, if applicable, 2% S corporation shareholders’ taxable wages. Partners should not be issued W-2s.
  • Publicly traded corporations may not deduct compensation of “covered employees” — CEO, CFO and generally the three next highest compensated executive officers — that exceeds $1 million per year. Effective for taxable years beginning after December 31, 2026, the American Rescue Plan Act of 2021 expands covered employees to include five highest paid employees. Unlike the current rules, these five additional employees are not required to be officers. 
  • Generally, for calendar year accrual basis taxpayers, accrued bonuses must be fixed and determinable by year end and paid within 2.5 months of year end (by March 15, 2022) for the bonus to be deductible in 2021. However, the bonus compensation must be paid before the end of 2021 if it is paid by a Personal Service Corporation to an employee-owner, by an S corporation to any employee-shareholder, or by a C corporation to a direct or indirect majority owner.
  • Businesses should assess the tax impacts of their mobile workforce. Potential impacts include the establishment of a corporate tax presence in the state or foreign country where the employee works; dual tax residency for the employee; and payroll tax, benefits, and transfer pricing issues.

State and local taxes
Businesses should monitor the tax rules in the states in which they operate or make sales. Taxpayers that cross state borders—even virtually—should review state nexus and other policies to understand their compliance obligations, identify ways to minimize their state tax liabilities and eliminate any state tax exposure. The following are some of the state-specific areas taxpayers should consider when planning for their tax liabilities in 2021 and 2022:

    Does the state conform to federal tax rules (including recent federal legislation) or decouple from them? Not all states follow federal tax rules. (Note that states do not necessarily follow the federal treatment of PPP loans. See Considerations for employers, above.)
  • Has the business claimed all state NOL and state tax credit carrybacks and carryforwards? Most states apply their own NOL/credit computation and carryback/forward provisions. Has the business considered how these differ from federal and the effect on its state taxable income and deductions?
  • Has the business amended any federal returns? Businesses should make sure state amended returns are filed on a timely basis to report the federal changes. If a federal amended return is filed, amended state returns may still be required even there is no change to state taxable income or deductions.
  • Has a state adopted economic nexus for income tax purposes, enacted NOL deduction suspensions or limitations, increased rates or suspended or eliminated some tax credit and incentive programs to deal with lack of revenues due to COVID-19 economic issues?
  • The majority of states now impose single-sales factor apportionment formulas and require market-based sourcing for sales of services and licenses/sales of intangibles using disparate sourcing methodologies. Has the business recently examined whether its multistate apportionment of income is consistent with or the effect of this trend?
  • Consider the state and local tax treatment of merger, acquisition and disposition transactions, and do not forget that internal reorganizations of existing structures also have state tax impacts. There are many state-specific considerations when analyzing the tax effects of transactions.
  • Is the business claiming all available state and local tax credits, e.g., for research activities, employment or investment?
  • For businesses selling remotely and that have been protected by P.L. 86-272 from state income taxes in the past, how is the business responding to changing state interpretations of those protections with respect to businesses engaged in internet-based activities?
  • Has the business considered the state tax impacts of its mobile workforce? Most states that provided temporary nexus and/or withholding relief relating to teleworking employees lifted those orders during 2021 (also see Considerations for employers, above).
  • Has the state introduced (or is it considering introducing) a tax on digital services? The definition of digital services can potentially be very broad and fact specific. Taxpayers should understand the various state proposals and plan for potential impacts.
  • Remote retailers, marketplace sellers and marketplace facilitators (i.e., marketplace providers) should be sure they are in compliance with state sales and use tax laws and marketplace facilitator rules.
  • Assessed property tax values typically lag behind market values. Consider challenging your property tax assessment.

State pass-through entity elections
The TCJA introduced a $10,000 limit for individuals with respect to federal itemized deductions for state and local taxes paid during the year ($5,000 for married individuals filing separately). At least 20 states have enacted potential workarounds to this deduction limitation for owners of pass-through entities, by allowing a pass-through entity to make an election (PTE tax election) to be taxed at the entity level. PTE tax elections present state and federal tax issues for partners and shareholders. Before making an election, care needs to be exercised to avoid state tax traps, especially for nonresident owners, that could exceed any federal tax savings. (Note that the Build Back Better Act proposes to increase the state and local tax deduction limitation for individuals to $80,000 ($40,000 for married individuals filing separately) retroactive to taxable years beginning after December 31, 2020. In addition, the Senate has begun working on a proposal that would completely lift the deduction cap subject to income limitations.)

Accounting for income taxes – ASC 740 considerations
The financial year-end close can present unique and challenging issues for tax departments. Further complicating matters is pending U.S. tax legislation that, if enacted by the end of the calendar year, will need to be accounted for in 2021. To avoid surprises, tax professionals can begin now to prepare for the year-end close:

    Evaluate the effectiveness of year-end tax accounting close processes and consider modifications to processes that are not ideal. Update work programs and train personnel, making sure all team members understand roles, responsibilities, deliverables and expected timing. Communication is especially critical in a virtual close.
  • Know where there is pending tax legislation and be prepared to account for the tax effects of legislation that is “enacted” before year end. Whether legislation is considered enacted for purposes of ASC 740 depends on the legislative process in the particular jurisdiction.
  • Document whether and to what extent a valuation allowance should be recorded against deferred tax assets in accordance with ASC 740. Depending on the company’s situation, this process can be complex and time consuming and may require scheduling deferred tax assets and liabilities, preparing estimates of future taxable income and evaluating available tax planning strategies.
  • Determine and document the tax accounting effects of business combinations, dispositions and other unique transactions.
  • Review the intra-period tax allocation rules to ensure that income tax expense/(benefit) is correctly recorded in the financial statements. Depending on a company’s activities, income tax expense/(benefit) could be recorded in continuing operations as well as other areas of the financial statements.
  • Evaluate existing and new uncertain tax positions and update supporting documentation.
  • Make sure tax account reconciliations are current and provide sufficient detail to prove the year-over-year change in tax account balances.
  • Understand required tax footnote disclosures and build the preparation of relevant documentation and schedules into the year-end close process.


Begin Planning for the Future
Future tax planning will depend on final passage of the proposed Build Back Better Act and precisely what tax changes the final legislation contains. Regardless of legislation, businesses should consider actions that will put them on the best path forward for 2022 and beyond. Business can begin now to:

    Reevaluate choice of entity decisions while considering alternative legal entity structures to minimize total tax liability and enterprise risk.
  • Evaluate global value chain and cross-border transactions to optimize transfer pricing and minimize global tax liabilities.
  • Review available tax credits and incentives for relevancy to leverage within applicable business lines.
  • Consider the benefits of an ESOP as an exit or liquidity strategy, which can provide tax benefits for both owners and the company.
  • Perform a cost segregation study with respect to investments in buildings or renovation of real property to accelerate taxable deductions, and identify other discretionary incentives to reduce or defer various taxes.
  • Perform a state-by-state analysis to ensure the business is properly charging sales taxes on taxable items, but not exempt or non-taxable items, and to determine whether the business needs to self-remit use taxes on any taxable purchases (including digital products or services).
  • Evaluate possible co-sourcing or outsourcing arrangements to assist with priority projects as part of an overall tax function transformation.

Need Help?

If you think your business can benefit or is interested in any of the above Year-End Planning for Businesses opportunities, BOOS & ASSOCIATES is here to help! To inquire more information please email us at askboos@booscpa.com.

2021 Year-End Tax Planning for Individuals

Posted by BOOSCPA Strategic Tax Services Group Posted on Dec 20 2021
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2021 Year-End Tax Planning for Individuals

As we approach year end, now is the time for individuals, business owners, and family offices to review their 2021 and 2022 tax situations and identify opportunities for reducing, deferring, or accelerating tax obligations. Areas potentially impacted by proposed tax legislation still in play should be reviewed, as well as applicable opportunities and relief granted under legislation enacted during the past year.

The information contained within this article is based on tax proposals as presented in the November 3, 2021, version of the Build Back Better Act. Our guidance is subject to change when final legislation is passed. Taxpayers should consult with a trusted advisor when making tax and financial decisions regarding any of the items below.

Individual Tax Planning Highlights

2021 Federal Income Tax Rate Brackets

Tax Rate

Joint/Surviving Spouse

Single

Head of Household

Married Filing Separately

Estate & Trusts

10%

$0 - $19,900

$0 - $9,950

$0 - $14,200

$0 - $9,950

$0 - $2,650

12%

$19,901 - 
$81,050

$9,951 -
$40,525

$14,201 -
$54,200

$9,951 -
$40,525

-

22%

$81,051 -
$172,750

$40,526 -
$86,375

$54,201 -
$86,350

$40,526 -
$86,375

-

24%

$172,751
$329,850

$86,376 - $164,925

$86,351 - $164,900

$86,376 -
$164,925

$2,651 - 
$9,550

32%

$329,851 -
$418,850

$164,926 - $209,425

$164,901 - $209,400

$164,926 -
$209,425

-

35%

$418,851 -
$628,300

$209,426 - $523,600

$209,401 - $523,600

$209,426 -
$314,150

$9,551 - $13,050

37%

Over $628,300

Over $523,600

Over $523,600

Over $314,150

Over $13,050


2022 Federal Income Tax Rate Brackets

Tax Rate

Joint/Surviving Spouse

Single

Head of Household

Married Filing Separately

Estates & Trusts

10%

$0 - $20,550

$0 - $10,275

$0 - $14,650

$0 - $10,275

$0 - $2,750

12%

$20,551 -   
$83,550

$10,276 -
$41,775

$14,651 - $55,900

$10,276 - 
$41,775

-

22%

$83,551 -
$178,150

$41,776 - $89,075

$55,901 - $89,050

$41,776 -
$89,075

-

24%

$178,151 -
$340,100

$89,076 - $170,050

$89,051 - $170,050

$89,076 -
$170,050

$2,751 - $9,850

32%

$340,101 -
$431,900

$170,051 - $215,950

$170,051 - $215,950

$170,051 -
$215,950

-

35%

$431,901 -
$647,850

$215,951 - $539,900

$215,951 - $539,900

$215,951 -
$323,925

$9,851 - $13,450

37%

Over $647,850

Over $539,900

Over $539,900

Over $323,925

Over $13,450


Proposed Surcharge on High-Income Individuals, Estates and Trusts
The draft Build Back Better Act released on November 3, 2021 would impose a 5% surcharge on modified adjusted gross income that exceeds $5 million for married individuals filing separately, $200,000 for estates and trusts and $10 million for all other individuals. An additional 3% surcharge would be imposed on modified adjusted gross income in excess of $12.5 million for married individuals filing separately, $500,000 for estates and trusts and $25 million for all other individuals. The proposal would be effective for taxable years beginning after December 31, 2021 (i.e., beginning in 2022).

While keeping the proposed surcharges in mind, taxpayers should consider whether they can minimize their tax bills by shifting income or deductions between 2021 and 2022. Ideally, income should be received in the year with the lower marginal tax rate, and deductible expenses should be paid in the year with the higher marginal tax rate. If the marginal tax rate is the same in both years, deferring income from 2021 to 2022 will produce a one-year tax deferral and accelerating deductions from 2022 to 2021 will lower the 2021 income tax liability.

Actions to consider that may result in a reduction or deferral of taxes include:
    Delaying closing capital gain transactions until after year end or structuring 2021 transactions as installment sales so that gain is deferred past 2021 (also see Long Term Capital Gains, below).
  • Considering whether to trigger capital losses before the end of 2021 to offset 2021 capital gains.
  • Delaying interest or dividend payments from closely held corporations to individual business-owner taxpayers.
  • Deferring commission income by closing sales in early 2022 instead of late 2021.
  • Accelerating deductions for expenses such as mortgage interest and charitable donations (including donations of appreciated property) into 2021 (subject to AGI limitations).
  • Evaluating whether non-business bad debts are worthless by the end of 2021 and should be recognized as a short-term capital loss.
  • Shifting investments to municipal bonds or investments that do not pay dividends to reduce taxable income in future years.

  • On the other hand, taxpayers that will be in a higher tax bracket in 2022 or that would be subject to the proposed 2022 surcharges may want to consider potential ways to move taxable income from 2022 into 2021, such that the taxable income is taxed at a lower tax rate. Current year actions to consider that could reduce 2022 taxes include:

  • Accelerating capital gains into 2021 or deferring capital losses until 2022.
  • Electing out of the installment sale method for 2021 installment sales.
  • Deferring deductions such as large charitable contributions to 2022.  

Long-Term Capital Gains
The long-term capital gains rates for 2021 and 2022 are shown below. The tax brackets refer to the taxpayer's taxable income. Capital gains also may be subject to the 3.8% Net Investment Income Tax.

2021 Long-Term Capital Gains Rate Brackets

Long-Term Capital Gains Tax Rate

Joint/Surviving Spouse

Single

Head of Household

Married Filing Separately

Estates & Trusts

0%

$0 - $80,800

$0 - $40,400

$0 - $54,100

$0 - $40,400

$0 - $2,700

15%

$80,801 - $501,600

$40,401 - $445,850

$54,101 - $473,750

$40,401 - $250,800

$2,701 - $13,250

20%

Over $501,600

Over $445,850

Over $473,750

Over $250,800

Over $13,250

 
2022 Long-Term Capital Gains Rate Brackets

Long-Term Capital Gains Tax Rate

Joint/Surviving Spouse

Single

Head of Household

Married Filing Separately

Estates & Trusts

0%

$0 - $83,350

$0 - $41,675

$0 - $55,800

$0 - $41,675

$0 - $2,800

15%

$83,351 - $517,200

$41,676 - $459,750

$55,801 - $488,500

$41,676 - $258,600

$2,801 - $13,700

20%

Over $517,200

Over $459,750

Over $448,500

Over $258,600

Over $13,700


Long-term capital gains (and qualified dividends) are subject to a lower tax rate than other types of income. Investors should consider the following when planning for capital gains:
    Holding capital assets for more than a year (more than three years for assets attributable to carried interests) so that the gain upon disposition qualifies for the lower long-term capital gains rate.
  • Considering long-term deferral strategies for capital gains such as reinvesting capital gains into designated qualified opportunity zones.
  • Investing in, and holding, "qualified small business stock" for at least five years. (Note that the November 3 draft of the Build Back Better Act would limit the 100% and 75% exclusion available for the sale of qualified small business stock for dispositions after September 13, 2021.)
  • Donating appreciated property to a qualified charity to avoid long term capital gains tax (also see Charitable Contributions, below).

Net Investment Income Tax
An additional 3.8% net investment income tax (NIIT) applies on net investment income above certain thresholds. For 2021, net investment income does not apply to income derived in the ordinary course of a trade or business in which the taxpayer materially participates. Similarly, gain on the disposition of trade or business assets attributable to an activity in which the taxpayer materially participates is not subject to the NIIT.

The November 3 version of the Build Back Better Act would broaden the application of the NIIT. Under the proposed legislation, the NIIT would apply to all income earned by high income taxpayers unless such income is otherwise subject to self-employment or payroll tax. For example, high income pass-through entity owners would be subject to the NIIT on their distributive share income and gain that is not subject to self-employment tax. In conjunction with other tax planning strategies that are being implemented to reduce income tax or capital gains tax, impacted taxpayers may want to consider the following tax planning to minimize their NIIT liabilities:
    Deferring net investment income for the year.
  • Accelerating into 2021 income from pass-through entities that would be subject to the expanded definition of net investment income under the proposed tax legislation.

Social Security Tax
The Old-Age, Survivors, and Disability Insurance (OASDI) program is funded by contributions from employees and employers through FICA tax. The FICA tax rate for both employees and employers is 6.2% of the employee's gross pay, but only on wages up to $142,800 for 2021 and $147,000 for 2022. Self-employed persons pay a similar tax, called SECA (or self-employment tax), based on 12.4% of the net income of their businesses.

Employers, employees, and self-employed persons also pay a tax for Medicare/Medicaid hospitalization insurance (HI), which is part of the FICA tax, but is not capped by the OASDI wage base. The HI payroll tax is 2.9%, which applies to earned income only. Self-employed persons pay the full amount, while employers and employees each pay 1.45%. An extra 0.9% Medicare (HI) payroll tax must be paid by individual taxpayers on earned income that is above certain adjusted gross income (AGI) thresholds, i.e., $200,000 for individuals, $250,000 for married couples filing jointly and $125,000 for married couples filing separately. However, employers do not pay this extra tax.

Long-Term Care Insurance and Services
Premiums an individual pays on a qualified long-term care insurance policy are deductible as a medical expense. The maximum deduction amount is determined by an individual's age. The following table sets forth the deductible limits for 2021 and 2022 (the limitations are per person, not per return):

Age

Deduction Limitation 2021

Deduction Limitation 2022

40 or under

$450

$450

Over 40 but not over 50

$850

$850

Over 50 but not over 60

$1,690

$1,690

Over 60 but not over 70

$4,520

$4,510

Over 70

$5,640

$5,640


Retirement Plan Contributions
Individuals may want to maximize their annual contributions to qualified retirement plans and Individual Retirement Accounts (IRAs) while keeping in mind the current proposed tax legislation that would limit contributions and conversions and require minimum distributions beginning in 2029 for large retirement funds without regard to the taxpayer's age.  
    The maximum amount of elective contributions that an employee can make in 2021 to a 401(k) or 403(b) plan is $19,500 ($26,000 if age 50 or over and the plan allows "catch up" contributions). For 2022, these limits are $20,500 and $27,000, respectively.
  • The SECURE Act permits a penalty-free withdrawal of up to $5,000 from traditional IRAs and qualified retirement plans for qualifying expenses related to the birth or adoption of a child after December 31, 2019. The $5,000 distribution limit is per individual, so a married couple could each receive $5,000.
  • Under the SECURE Act, individuals are now able to contribute to their traditional IRAs in or after the year in which they turn 70½.
  • The SECURE Act changes the age for required minimum distributions (RMDs) from tax-qualified retirement plans and IRAs from age 70½ to age 72 for individuals born on or after July 1, 1949. Generally, the first RMD for such individuals is due by April 1 of the year after the year in which they turn 72.
  • Individuals age 70½ or older can donate up to $100,000 to a qualified charity directly from a taxable IRA.
  • The SECURE Act generally requires that designated beneficiaries of persons who die after December 31, 2019, take inherited plan benefits over a 10-year period. Eligible designated beneficiaries (i.e., surviving spouses, minor children of the plan participant, disabled and chronically ill beneficiaries and beneficiaries who are less than 10 years younger than the plan participant) are not limited to the 10-year payout rule. Special rules apply to certain trusts.
  • Small businesses can contribute the lesser of (i) 25% of employees' salaries or (ii) an annual maximum set by the IRS each year to a Simplified Employee Pension (SEP) plan by the extended due date of the employer's federal income tax return for the year that the contribution is made. The maximum SEP contribution for 2021 is $58,000. The maximum SEP contribution for 2022 is $61,000. The calculation of the 25% limit for self-employed individuals is based on net self-employment income, which is calculated after the reduction in income from the SEP contribution (as well as for other things, such as self-employment taxes).
  • 2021 could be the final opportunity to convert non-Roth after-tax savings in qualified plans and IRAs to Roth accounts if legislation passes in its current form. Proposed legislation would prohibit all taxpayers from funding Roth IRAs or designated Roth accounts with after-tax contributions starting in 2022, and high-income taxpayers from converting retirement accounts attributable to pre-tax or deductible contributions to Roths starting in 2032.
  • Proposed legislation would require wealthy savers of all ages to substantially draw down retirement balances that exceed $10 million after December 31, 2028, with potential income tax payments on the distributions. As account balances approach the mandatory distribution level, extra consideration should be given before making an annual contribution.

Foreign Earned Income Exclusion
The foreign earned income exclusion is $108,700 in 2021, to be increased to $112,000 in 2022.

Alternative Minimum Tax
A taxpayer must pay either the regular income tax or the alternative minimum tax (AMT), whichever is higher. The established AMT exemption amounts for 2021 are $73,600 for unmarried individuals and individuals claiming head of household status, $114,600 for married individuals filing jointly and surviving spouses, $57,300 for married individuals filing separately and $25,700 for estates and trusts. For 2022, those amounts are $75,900 for unmarried individuals and individuals claiming the head of household status, $118,100 for married individuals filing jointly and surviving spouses, $59,050 for married individuals filing separately and $26,500 for estates and trusts.

Kiddie Tax
The unearned income of a child is taxed at the parents' tax rates if those rates are higher than the child's tax rate.

Limitation on Deductions of State and Local Taxes (SALT Limitation)
For individual taxpayers who itemize their deductions, the Tax Cuts and Jobs Act (TCJA) introduced a $10,000 limit on deductions of state and local taxes paid during the year ($5,000 for married individuals filing separately). The limitation applies to taxable years beginning on or after December 31, 2017 and before January 1, 2026. Various states have enacted new rules that allow owners of pass-through entities to avoid the SALT deduction limitation in certain cases.

The November 3 draft of the Build Back Better Act would extend the TCJA SALT deduction limitation through 2031 and increase the deduction limitation amount to $72,500 ($32,250 for estates, trusts and married individuals filing separately). An amendment currently on the table proposes increasing the deduction limitation amount to $80,000 ($40,000 for estates, trusts and married individuals filing separately). The proposal would be effective for taxable years beginning after December 31, 2020, therefore applying to the 2021 calendar year.

Charitable Contributions
The Taxpayer Certainty and Disaster Relief Act of 2020 extended the temporary suspension of the AGI limitation on certain qualifying cash contributions to publicly supported charities under the CARES Act. As a result, individual taxpayers are permitted to take a charitable contribution deduction for qualifying cash contributions made in 2021 to the extent such contributions do not exceed the taxpayer's AGI. Any excess carries forward as a charitable contribution that is usable in the succeeding five years. Contributions to non-operating private foundations or donor-advised funds are not eligible for the 100% AGI limitation. The limitations for cash contributions continue to be 30% of AGI for non-operating private foundations and 60% of AGI for donor advised funds. The temporary suspension of the AGI limitation on qualifying cash contributions will no longer apply to contributions made in 2022. Contributions made in 2022 will be subject to a 60% AGI limitation. Tax planning around charitable contributions may include:
    Maximizing 2021 cash charitable contributions to qualified charities to take advantage of the 100% AGI limitation.
  • Deferring large charitable contributions to 2022 if the taxpayer would be subject to the proposed individual surcharge tax.
  • Creating and funding a private foundation, donor advised fund or charitable remainder trust.
  • Donating appreciated property to a qualified charity to avoid long term capital gains tax.

Estate and Gift Taxes
The November 3 draft of the Build Back Better Act does not include any changes to the estate and gift tax rules. For gifts made in 2021, the gift tax annual exclusion is $15,000 and for 2022 is $16,000. For 2021, the unified estate and gift tax exemption and generation-skipping transfer tax exemption is $11,700,000 per person. For 2022, the exemption is $12,060,000. All outright gifts to a spouse who is a U.S. citizen are free of federal gift tax. However, for 2021 and 2022, only the first $159,000 and $164,000, respectively, of gifts to a non-U.S. citizen spouse are excluded from the total amount of taxable gifts for the year. Tax planning strategies may include:
    Making annual exclusion gifts.
  • Making larger gifts to the next generation, either outright or in trust.
  • Creating a Spousal Lifetime Access Trust (SLAT) or a Grantor Retained Annuity Trust (GRAT) or selling assets to an Intentionally Defective Grantor Trust (IDGT).

Net Operating Losses
The CARES Act permitted individuals with net operating losses generated in taxable years beginning after December 31, 2017, and before January 1, 2021, to carry those losses back five taxable years. The unused portion of such losses was eligible to be carried forward indefinitely and without limitation. Net operating losses generated beginning in 2021 are subject to the TCJA rules that limit carryforwards to 80% of taxable income and do not permit losses to be carried back.

Excess Business Loss Limitation
A non-corporate taxpayer may deduct net business losses of up to $262,000 ($524,000 for joint filers) in 2021. The limitation is $270,000 ($540,000 for joint filers) for 2022. The November 3 draft of the Build Back Better Act would make permanent the excess business loss provisions originally set to expire December 31, 2025. The proposed legislation would limit excess business losses to $500,000 for joint fliers ($250,000 for all other taxpayers) and treat any excess as a deduction attributable to a taxpayer's trades or businesses when computing excess business loss in the subsequent year.

Need Help?

If you think you can benefit or are interested in any of the above Year-End Planning for Individual opportunities, BOOS & ASSOCIATES is here to help! To inquire more information please email us at askboos@booscpa.com.


$2 Million SBA COVID-19 Economic Injury Disaster Loan (EIDL)

Posted by BOOSCPA Strategic Tax Services Group Posted on Nov 29 2021
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$2 Million SBA COVID-19 Economic Injury Disaster Loan (EIDL)

The U.S. Small Business Administration recently quadrupled the Covid-19 EIDL limit to $2 million and added business debt payments to the ways businesses can use the loan proceeds. This program ends December 31, 2021, or when funds are exhausted, if sooner.

Loan Details
  1. $2 million maximum loan amount
  2. 3.75 % fixed interest rate (2.75% nonprofit interest rate)
  3. 30-year term
  4. Loan proceeds can be used for ordinary and necessary operating expenses, and past, present, or future business debt payments
  5. Payments deferred for the first two years
  6. Minimal paperwork for approval
  7. Collateral required for loans > $25,000
  8. Personal guaranty required for loans > $200,000

General Requirements:
  1. Minimum Credit Score of 570 (625 for loans > $500,000)
  2. In business before April 2020
  3. If already received Covid financing from the SBA, this is an opportunity to receive additional financing up to $2 million
  4. If previously declined, you can now reapply

Additional Aspects of the EIDL Program:
  1. Targeted EIDL Advance - provides up to a $10,000 grant to applicants who qualify
  2. Supplemental Target Advance - provides a supplemental $5,000 grant to applicants who qualify

Need Help?
If you think your business may benefit from the EIDL, please contact us: askboos@booscpa.com

2021 Main Street Small Business Tax Credit II

Posted by BOOSCPA Strategic Tax Services Group Posted on Nov 16 2021
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2021 Main Street Small Business Tax Credit II
The Main Street Small Business Tax Credit II provides qualified small business employers in California with COVID-19 financial relief by allowing them to offset their income taxes or sales and use taxes with the credit when filing returns.

Qualified small business employers may apply to reserve $1,000 per net increase in qualified employees, not to exceed $150,000.

The credit will be allocated on a reservation basis to qualified small business employers on a first-come, first-served basis.

The reservation system will be available from November 1, 2021, through November 30, 2021, or an earlier date if the allocation limit is reached.

Qualifications
  • 500 or fewer employees
  • 20% or greater decrease in gross receipts (as reported to Franchise Tax Board (FTB) – 2019 vs. 2020, or fiscal year equivalent, as defined by FTB)
  • Net increase in number of qualified employees, as defined by FTB (see below)

Credit Calculation
The credit is calculated based on monthly, full-time equivalent (FTE) qualified employees. The net increase in qualified employees will be the amount equal to B minus A.
A. The average monthly FTE employed during the three-month period April 1, 2020, through June 30, 2020.
B. The lesser of either the following:
1. The average monthly FTE employees employed during the 12-month period July 1, 2020, through June 30, 2021.
2. The average monthly FTE employees employed during the three-month period April 1, 2021, through June 30, 2021.

Need Help?
This may provide significant opportunities for your company. However, the interplay between the Consolidated Appropriations Act, the CARES Act, the American Rescue Plan Act, and various Internal Revenue Code sections is nuanced and complicated so professional advice may be needed.

If you think your business may qualify and is potentially interested in claiming this Main Street Small Business Tax Credit, please email us at  askboos@booscpa.com.

Notice 2021-43: Work Opportunity Tax Credit (WOTC) 28-Day Deadline Extension

Posted by BOOSCPA Strategic Tax Services Group Posted on Oct 15 2021

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Current Opportunity

Let’s talk about the Work Opportunity Tax Credit (WOTC). This is a Federal Tax Credit available to employers for hiring individuals from certain targeted groups who have consistently faced significant barriers to employment. Currently, the WOTC can range between $1,200 and $9,600 (or more under certain circumstances) per qualified employee and the credit is available to all companies regardless of business location.

On August 10, 2021, the Department of the Treasury, and the Internal Revenue Service (IRS) issued Notice 2021-43. This notice provides transition relief by extending the 28-day deadline for employers hiring individuals who are Designated Community Residents or Qualified Summer Youth Employees who begin work on or after January 1, 2021, and before October 9, 2021, to submit a completed Form 8850 to the designated local agency (DLA) no later than November 8, 2021.

This means your business can now retroactively qualify employees that are a member of the designated community resident targeted group or the qualified summer youth employee targeted group who begin work on or after the beginning of the year until now.

Designated Community Resident (DCR)

A DCR is an individual who, on the date of hiring,
Is at least 18 years old and under 40, resides within one of the following:
  • An Empowerment zone
  • An Enterprise community
  • A Renewal community

AND continues to reside at the locations after employment.

Summer Youth Employee

A “qualified summer youth employee” is one who:

Is at least 16 years old, but under 18 on the date of hire or on May 1, whichever is later, AND is only employed between May 1 and September 15 (was not employed prior to May 1st) AND resides in an Empowerment Zone (EZ), enterprise community or renewal community.

The opportunity to retroactively qualify employees ends November 8, 2021. If your business has not taken advantage of the WOTC and would like to start, now is the time. Get caught up today and let our team of experts assist you in claiming this potentially significant tax credit opportunity.

Future Opportunity

After you take advantage of this current opportunity, our team at Boos & Associates will help you make sure your business continues to claim the WOTC. After November 8, 2021, businesses will only have a 28-day window to submit a completed Form 8850 to the designated local agency after a new hire’s start date. Our team will work closely with your management group to make sure that as your business expands with every new hire, we proactively assist you in determining whether the new hire qualifies you to receive the WOTC.

Note: the Consolidated Appropriation Act, 2021 (Section 113 of Division EE P.L. 116-260) authorized the extension of the WOTC until December 31, 2025.

Additionally, on September 12, 2021, the Congressional Committee released some of its proposed legislative language that is to be included in Biden’s “Build Back Better Act,” a $3.5 trillion reconciliation bill. Among many of the proposals is Section 138513 “Enhancement of Work Opportunity Credit During COVID-19 Recovery Period.” This proposal would:

1) eliminate the restriction against claiming the WOTC for rehired employees,
2) increase the amount of tax credit from 40% of $6,000 in qualified wages to 50% of $10,000, and
3) provide a similar credit for the second year of employment of qualified employees

This bill has not yet been signed into law; however, stay tuned as we are focused on and current with opportunities coming out of Washington.

Need Help?

If you think your business can benefit from the WOTC, please contact us:askboos@booscpa.com.

Act Quick - Apply For Final Round 9 COVID-19 Relief Grant

Posted by BOOSCPA Strategic Tax Services Group Posted on Sept 29 2021
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Last Chance To Apply For Final Round 9 COVID-19 Relief Grant

The FINAL round of funding for the California Small Business COVID-19 Relief Grant is now open! The online application is quick and only requires a few documents.

Last chance for up to $25,000 California COVID-19 Small business relief grant funding-open until Thursday, September 30 at 5pm.

Eligible Businesses Annual Revenue Grant Amount Available Per Business
$1,000 to $100,000 $5,000
Greater than $100,000 up to 1,000,000 $15,000
Greater than $1,000,000 up to $2,500,000  $25,000

How to apply?

Applications now open at www.CAReliefGrant.com. Apply here.

Need Help?
For more information, please email us at askboos@booscpa.com.

 

Expansion of the Employee Retention Credit

Posted by BOOSCPA Strategic Tax Services Group Posted on Apr 06 2021
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-You may be eligible for a credit up to $33,000 per employee

The ERC provides an opportunity you don’t want to pass up! The qualifications and calculations are complex, and the new interplay with the PPP only adds to that complexity, but Boos & Associates, PC is here to help! Our dedicated ERC and PPP teams are always up to date on the latest guidance and are experienced in helping businesses achieve the best possible benefit(s).

In a recent news release, the IRS implored businesses to take advantage of the newly enhanced and highly advantageous Employee Retention Credit (ERC), designed to provide direct aid and incentive to businesses that keep their employees on payroll during the pandemic. If your business has been impacted by the government shutdowns or taken a financial hit during 2020 or 2021, you may be eligible for a credit of up to $33,000 per employee! Do not miss out on this opportunity!

What is the ERC?

The ERC is a refundable payroll tax credit for wages paid and health coverage provided by an employer whose operations were either fully or partially suspended due to a COVID-19-related governmental order or that experienced a significant reduction in gross receipts. The ERC can be claimed quarterly to help offset the cost of retaining employees. Employers may use ERCs to offset federal payroll tax deposits, including the employee FICA and income tax withholding components of the employer’s federal payroll tax deposits. Unlike the PPP, which was on a first-come first-serve basis, the ERC can be claimed up to three years from the date in which your quarterly payroll return was filed.

Who is eligible for the ERC?

To claim the ERC in any given calendar quarter, organizations must meet one of the following criteria during that quarter:

  • Operations were fully or partially suspended as a result of orders from a governmental authority limiting commerce, travel or group meetings due to COVID-19; or
  • The organization experienced a significant decline in gross receipts during the calendar quarter compared to 2019. Specifically, for 2020, gross receipts for the 2020 quarter decline more than 50% when compared to the same 2019 quarter. Eligibility for the credit continues through the 2020 quarter in which gross receipts are greater than 80% of gross receipts in the same 2019 quarter.
  • For 2021, the gross receipts eligibility threshold for employers is reduced from a 50% decline to a 20% decline in gross receipts for the same calendar quarter in 2019, and a safe harbor is provided allowing employers to use prior quarter gross receipts compared to the same quarter in 2019 to determine eligibility.
  • Employers not in existence in 2019 may compare 2021 quarterly gross receipts to 2020 quarters to determine eligibility.

Can you claim the ERC if you receive a PPP loan? 

Yes! As described above, one of the most favorable provisions in the new law allows taxpayers to receive PPP loans and claim the ERC. This overlap was not permitted when the CARES Act was originally enacted, and organizations in need of cash infusions during 2020 more frequently turned to PPP loans as a source of funds rather than the ERC. Importantly, the Relief Act makes the ability to claim the ERC and receive PPP loans retroactive to March 12, 2020. As a result, organizations that received PPP loans in 2020 (and/or will receive new loans in 2021) can now explore potential ERC credits for 2020 and 2021. 

Which wages qualify for the ERC?

The answer depends on an organization’s employee count. Eligible organizations that are considered “Large Employers” can only claim the ERC for wages paid to employees for the time the employees are not providing services. This aligns with the purpose of the ERC, which is to encourage employers to retain and compensate employees during periods in which businesses are not fully operational.

Smaller eligible organizations may claim a credit for all wages paid to employees. The Relief Act increases the threshold used to determine Large Employer status for 2021 claims to an employee count of more than 500 (for 2020, it is more than 100). This favorable change broadens the number of eligible organizations that can claim the ERC for all wages paid to employees, including wages paid to employees who are providing services. Importantly, qualified healthcare expenses count as wages.

Boos Insight: If you furloughed your employees but continue to pay their health insurance, you can claim the ERC. Furloughed employees do not have to receive wages—health care expenses alone qualify as wages for purposes of the ERC.

How is the determination of Large Employer status made?

Large Employer status is determined by counting the average number of full-time employees employed during 2019.

For this purpose, “full-time employee” means an employee who, with respect to any calendar month in 2019, worked an average of at least 30 hours per week or 130 hours in the month. This is the same definition used for purposes of the Affordable Care Act. Importantly, aggregation rules apply when determining the number of full-time employees. In general, all entities are considered a single employer if they are a controlled group of corporations, are under common control or are aggregated for benefit plan purposes. 

Organizations that operated for the entire 2019 year compute the average number of full-time employees employed during 2019 by following the steps below:

Step 1: Count the number of full-time employees in each calendar month in 2019. Include only those employees that worked an average of at least 30 hours per week or 130 hours in the month.

Step 2: Add up each month’s employee count from Step 1 and divide by 12.

Boos Insight: Part-time employees that work, on average, less than 30 hours per week are not counted in the determination of Large Employer status. Omitting part-time employees from the computation should result in more organizations having 500 or fewer full-time employees and, therefore, being able to claim the ERC for all wages paid to employees in the first two quarters of 2021 (assuming eligibility criteria are met). 

Can the same wages be used for the computation of both the ERC and the amount of PPP loan forgiveness?

No. Simply put, there is no double dipping. Wages used to claim the ERC cannot also be counted as “payroll costs” for purposes of determining the amount of PPP loan forgiveness, and organizations that want to benefit from the ERC and have their PPP loans fully forgiven will need to have sufficient wages to cover both. To the extent an organization does not have sufficient wages, strategic planning will be needed to generate maximum benefits. 

 Summary of ERC Changes

Prior Law: 
3/13/20 – 12/31/20

New Law: 
3/13/20 – 12/31/20

New Law: 
 1/1/21-12/31/21

Interplay with PPP Loan

No ERC if a forgiven PPP loan was received

Taxpayers that receive a PPP loan can claim the ERC, but double dipping is not allowed

Maximum Creditable Wages per Employee

$10,000 per year

$10,000 per year

$10,000 per quarter

Maximum Credit

50% of eligible wages, up to $5,000 per employee

50% of eligible wages, up to $5,000 per employee

70% of eligible wages, up to $14,000 per employee

Threshold to be Considered a “Large Employer” (based on average full-time employees in 2019 and considering aggregation rules)

More than 100

More than 100

More than 500

 Boos Insight:

  • Employers that previously reached the credit limit on some of their employees in 2020 can continue to claim the ERC for those employees in 2021 to the extent the employer remains eligible for the ERC.
  • Qualification for employers in 2021 based on the reduction in gross receipts test may provide new opportunities for businesses in impacted industries.
  • Eligible employers with 500 or fewer employees may now claim up to $7,000 in credits per quarter, paid to all employees, regardless of the extent of services performed. This rule previously was applicable to employers with 100 or fewer employees and a maximum of $5,000 in credit per employee per year. Aggregation rules apply to determine whether entities under common control are treated as a single employer.

Need Help?

This may provide significant opportunities for your company. However, the interplay between the Consolidated Appropriations Act, the CARES Act, the American Rescue Plan Act, and various Internal Revenue Code sections is nuanced and complicated so professional advice may be needed.

If you think your business can benefit or is interested in claiming the Employee Retention Credit, BOOS & ASSOCIATES is here to help! To inquire more information please email us at askboos@booscpa.com.

Applying for PPP Funds and Forgiveness

Posted by BOOSCPA Strategic Tax Services Group Posted on Jan 22 2021
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The US Department of Treasury and the Small Business Administration have reauthorized the Paycheck Protection Program (PPP) and PPP applications are now open for eligible first- and second-time borrowers.

First Draw Loans
First draw PPP applicants should submit to any participating lender on SBA Form 2483 – available here (https://home.treasury.gov/system/files/136/PPP-Borrower-Application-Form.pdf).

These loans continue to use the original formulas under the CARES Act to determine the loan size, i.e., 2.5 times the average monthly payroll costs up to $10 million per borrower with an overall limit of $20 million when including loans to members of the same corporate group.

Second Draw Loans
Second draw applicants should submit to its participating lender on SBA Form 2483-SD – available here (https://home.treasury.gov/system/files/136/PPP-Second-Draw-Borrower-Application-Form.pdf).

Second draw loans use the same 2.5 times average monthly payroll costs for most borrowers, but restaurants, hotels and other establishments that provide lodging and/or food for immediate consumption (NAICS code 72 entities) are allowed a factor of 3.5 times the average monthly payroll costs. All second draw PPP loans are capped at a maximum of $2 million per borrower (per location for NAICS code 72, 511110 or 5151) up to an overall limit of $4 million when including loans to members of the same corporate group.

Finding a Lender
Applicants may use the SBA Lender Match Portal to find participating PPP lenders – available here (https://www.sba.gov/funding-programs/loans/lender-match). If you need additional assistance finding a participating PPP lender, Boos & Associates can help you with that.

HOW TO APPLY FOR PPP LOAN FORGIVENESS

Form 3508S - Simplified Rules for $150,000 or Less:
The SBA has updated the simplified PPP loan Forgiveness Application Form 3508S to include loans of $150,000 or less – available here (PPP Loan Forgiveness Form 3508S (sba.gov)).

You (the Borrower) can apply for forgiveness of your First or Second Draw PPP Loan using this SBA Form 3508S only if the loan amount you received from your Lender was $150,000 or less for an individual First or Second Draw PPP Loan. If you are not eligible to use this form, you must apply for forgiveness of your PPP loan using SBA Form 3508 or 3508EZ (or lender’s equivalent form). Each PPP loan must use a separate loan forgiveness application form. You cannot use one form to apply for forgiveness of both a First and Second Draw PPP loan.

SBA Form 3508S requires fewer calculations and less documentation for eligible borrowers. SBA Form 3508S does not require borrowers to show the calculations used to determine their loan forgiveness amount. However, the SBA may request information and documents to review those calculations as part of its loan review or audit processes. Complete this SBA Form 3508S in accordance with the instructions below, and submit it to your Lender (or the Lender that is servicing your loan). Borrowers may also complete this application electronically through their Lender.

It is estimated that approximately 75% of PPP loans should qualify for this simplified forgiveness process.

FORM 3508EZ:
If you do not qualify for 3508S, you will want to use the 3508EZ form – available here (https://www.sba.gov/sites/default/files/2020-06/PPP%20Forgiveness%20Application%203508EZ%20%28%20Revised%2006.16.2020%29%20Fillable-508.pdf), but to do so you must be able to answer affirmative to one of the following three questions:

1. The Borrower is a self-employed individual, independent contractor, or sole proprietor who had no employees at the time of the PPP loan application and did not include any employee salaries in the computation of average monthly payroll in the Borrower Application Form (SBA Form 2483).

2. The Borrower did not reduce annual salary or hourly wages of any employee by more than 25 percent during the Covered Period or the Alternative Payroll Covered Period (as defined below) compared to the period between January 1, 2020 and March 31, 2020 (for purposes of this statement, “employees” means only those employees that did not receive, during any single period during 2019, wages or salary at an annualized rate of pay in an amount more than $100,000);

AND

The Borrower did not reduce the number of employees or the average paid hours of employees between January 1, 2020 and the end of the Covered Period (ignore reductions: 1) that arose from an inability to rehire individuals who were employees on February 15, 2020 if the Borrower was unable to hire similarly qualified employees for unfilled positions on or before December 31, 2020, and 2) in an employee’s hours that the Borrower offered to restore and the employee refused). See 85 FR 33004, 33007 (June 1, 2020) for more details.

3. The Borrower did not reduce annual salary or hourly wages of any employee by more than 25 percent during the Covered Period or the Alternative Payroll Covered Period (as defined below) compared to the period between January 1, 2020 and March 31, 2020 (for purposes of this statement, “employees” means only those employees that did not receive, during any single period during 2019, wages or salary at an annualized rate of pay in an amount more than $100,000);

AND

The Borrower was unable to operate during the Covered Period at the same level of business activity as before February 15, 2020, due to compliance with requirements established or guidance issued between March 1, 2020 and December 31, 2020 by the Secretary of Health and Human Services, the Director of the Centers for Disease Control and Prevention, or the Occupational Safety and Health Administration, related to the maintenance of standards of sanitation, social distancing, or any other work or customer safety requirement related to COVID-19.

Form 3508:
If you do not qualify for either Form 3508S or Form 3508EZ, you will need to fill out the standard 3508 form – available here (https://www.sba.gov/sites/default/files/2020-06/PPP%20Loan%20Forgiveness%20Application%20%28Revised%206.16.2020%29-fillable_0-508.pdf).

Need Help?
If you are interested in obtaining a Payroll Protection Program first or second draw loan, or are in need of additional guidance related to your forgiveness application, Boos & Associates is happy to assist – please email us at askboos@booscpa.com.

Expansion of the Employee Retention Credit

Posted by BOOSCPA Strategic Tax Services Group Posted on Jan 18 2021
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Expansion of the Employee Retention Credit

The Consolidated Appropriations Act of 2021 (Act), signed into law on December 27, 2020, contains significant enhancements and improvements to the Employee Retention Credit (ERC).  The ERC, which was created by the CARES Act on March 27, 2020, is designed to encourage employers (including tax-exempt entities) to keep employees on their payroll and continue providing health benefits during the coronavirus pandemic. The ERC is a refundable payroll tax credit for wages paid and health coverage provided by an employer whose operations were either fully or partially suspended due to a COVID-19-related governmental order or that experienced a significant reduction in gross receipts.

Employers may use ERCs to offset federal payroll tax deposits, including the employee FICA and income tax withholding components of the employer’s federal payroll tax deposits.

ERC for 2020
The Act makes the following retroactive changes to the ERC, which apply during the period March 13, 2020 through December 31, 2020:

Employers that received PPP loans may qualify for the ERC with respect to wages that are not paid with proceeds from a forgiven PPP loan.
 
The Act clarifies how tax-exempt organizations determine “gross receipts.”

Group health care expenses are considered “qualified wages” even when no other wages are paid to the employee.

 
Insights

Employers that received a PPP loan and that were previously prohibited from claiming the ERC may now retroactively claim the ERC for 2020.
 
With respect to the retroactive measures in the Act, employers that paid qualified wages in Q1 through Q3 2020 may elect to treat the qualified wages as being paid in Q4 2020. This should allow employers to claim the ERC in connection with such qualified wages via a timely filed IRS Form 7200 or Form 941, as opposed to requiring an amended return (IRS Form 941-X) for the prior quarter(s) in 2020.

 
ERC for 2021 (January 1 – June 30, 2021)
In addition to the retroactive changes listed above, the following changes to the ERC apply from January 1 to June 30, 2021:
 

Increased Credit Amount

The ERC rate is increased from 50% to 70% of qualified wages and the limit on per-employee wages is increased from $10,000 for the year to $10,000 per quarter.

 
Broadened Eligibility Requirements

The gross receipts eligibility threshold for employers is reduced from a 50% decline to a 20% decline in gross receipts for the same calendar quarter in 2019.
 
A safe harbor is provided allowing employers to use prior quarter gross receipts compared to the same quarter in 2019 to determine eligibility.
 
Employers not in existence in 2019 may compare 2021 quarterly gross receipts to 2020 quarters to determine eligibility.
 
The credit is available to certain government instrumentalities, including colleges, universities, organizations providing medical or hospital care, and certain organizations chartered by Congress.

 
Determination of Qualified Wages

The 100-full time employee threshold for determining “qualified wages” based on all wages paid to employees is increased to 500 or fewer full-time employees.
 
The Act strikes the limitation that qualified wages paid or incurred by an eligible employer with respect to an employee may not exceed the amount that employee would have been paid for working during the 30 days immediately preceding that period (which, for example, allows employers to take the ERC for bonuses paid to essential workers).

 
Advance Payments

Under rules to be drafted by Treasury, employers with less than 500 full-time employees will be allowed advance payments of the ERC during a calendar quarter in which qualifying wages are paid. Special rules for advance payments are included for seasonal employees and employers that were not in existence in 2019.

 
Insights

Employers that previously reached the credit limit on some of their employees in 2020 can continue to claim the ERC for those employees in 2021 to the extent the employer remains eligible for the ERC.
 
Qualification for employers in 2021 based on the reduction in gross receipts test may provide new opportunities for businesses in impacted industries.
 
Eligible employers with 500 or fewer employees may now claim up to $7,000 in credits per quarter, paid to all employees, regardless of the extent of services performed. Previously this rule was applicable to employers with 100 or fewer employees and a maximum of $5,000 in credit per employee per year. Aggregation rules apply to determine whether entities under common control are treated as a single employer.


The Act may provide significant opportunities for your company. However, the interplay between the Act, the CARES Act and various Internal Revenue Code sections is nuanced and complicated so professional advice may be needed.

Need Help?
If you think your business can benefit or is interested in claiming the Employee Retention Credit, BOOS & ASSOCIATES is here to help! To inquire more information please email us at askboos@booscpa.com.

 

Notice 2020-78: Work Opportunity Tax Credit (WOTC) Transition Relief

Posted by BOOSCPA Strategic Tax Services Group Posted on Jan 14 2021
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Questions Can be Very Powerful

Here's a true story about a Fresno business owner making a routine delivery. Recently, an owner of a local restaurant delivered lunch to our office and commented on how busy we looked. At that time, our firm was working on a tax credit deadline and so we asked the owner a simple question: “Have you submitted all your work opportunity tax credits (WOTC)?” To our surprise, the owner told us that they just came from their accountant and this topic had not come up in the five years they’d been a client. Saving on taxes sparked the business owner’s interest. During a meeting with the owner the next day, we discussed the WOTC Federal tax credit. Based on their previous hires, this routine lunch delivery ultimately saved their business $25,000 in Federal taxes. Don't miss out on your opportunity to benefit from these powerful tax credits and incentives. Keep reading to find out more about how they may be able to work for you.

On December 11, 2020, the Department of the Treasury and the Internal Revenue Service (IRS) issued Notice 2020-78. This notice provided transition relief to employers that otherwise would be required to submit IRS Form 8850 to a State Workforce Agency no later than 28 days after an individual begins working for the employer. As a result, under this notice, employers that hired designated community resident(s) or summer youth employee(s) between January 1, 2018, and December 31, 2020, have until January 28, 2021, to submit a completed Form 8850 to a Designated Local Agency (DLA) to request certification.

About the Work Opportunity Tax Credit (WOTC)

The WOTC is a Federal tax credit available to employers for hiring individuals from certain targeted groups who have consistently faced significant barriers to employment.

 WOTC Federal tax credits can range between $1,200 and $9,600 (or more under certain circumstances) per qualified employee and credit is available to all companies regardless of their business location.

 Extension

 Specifically, Notice 2020-78 provides transition relief by extending the 28-day deadline for employers to request certification from a DLA that an individual hired on or after January 1, 2018, and before January 1, 2021, and is a member of the designated community resident targeted group or the qualified summer youth employee targeted group.

 Designated Community Resident (DCR)

 A DCR is an individual who, on the date of hiring,

Is at least 18 years old and under 40, resides within one of the following:
• An Empowerment zone
• An Enterprise community
• A Renewal community

AND continues to reside at the locations after employment.

Summer Youth Employee

A “qualified summer youth employee” is one who:

Is at least 16 years old, but under 18 on the date of hire or on May 1, whichever is later, AND Is only employed between May 1 and September 15 (was not employed prior to May 1st) AND Resides in an Empowerment Zone (EZ), enterprise community or renewal community.


Opportunity

The IRS has given employers a unique opportunity to retroactively qualify employees that are a member of the designated community resident targeted group or the qualified summer youth employee targeted group. This opportunity ends on January 28, 2021! If your business has not taken advantage of claiming tax credits in the past, use this lifeline from the IRS to catch up and claim what your business is entitled to under the law.

Need Help?

If you think your business can benefit or is interested in claiming the WOTC Federal tax credit, BOOS & ASSOCIATES is here to help! For more information, please email us at askboos@booscpa.com.

California Small Business COVID-19 Relief Grant Program

Posted by BOOSCPA Strategic Tax Services Group Posted on Dec 29 2020

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California Small Business COVID-19 Relief Grant Program

The State of California has enacted a grant program that can provide up to $25,000 to qualifying small businesses. Applications will begin to be accepted on December 30, 2020 and as of January 4th the closing date has been extended to January 13th, 2021

Grant Amounts:

The amount of grant funding ranges from $5,000 to $25,000. The eligible amount is based on the revenue documented in your businesses most recent tax return:
 

Eligible Business Revenue

Grant Amount Available Per Business

$1,000 to $100,000

$5,000

Greater than $100,000 up to $1,000,000

$15,000

Greater than $1,000,000 up to $2,500,000

$25,000

Eligibility:
 
A small business or small nonprofit must satisfy the following criteria to be eligible to receive a grant award:
 
Must meet the definition of an “eligible small business”. An “eligible small business” means (i) a “small business” (sole proprietor, independent contractor, 1099 work, and or registered “for-profit” business entity (e.g., C-corporation, S-corporation, limited liability company, partnership) that has yearly gross revenue of $2.5 million or less (but at least $1,000 in yearly gross revenue) based on most recently filed tax return) or (ii) a “small nonprofit” (registered 501(c)(3) or 501(c)(6) nonprofit entity having yearly gross revenue of $2.5 million or less (but at least $1,000 in yearly gross revenue) based on most recently filed Form 990)
 
Active businesses or nonprofits operating since at least June 1, 2019
 
Businesses must currently be operating or have a clear plan to re-open once the State of California permits re-opening of the business
 
Business must be impacted by COVID-19 and the health and safety restrictions such as business interruptions or business closures incurred as a result of the COVID-19 pandemic
 
Business must be able to provide organizing documents including 2018 or 2019 tax returns or Form 990s, copy of official filing with the California Secretary of State, if applicable, or local municipality for the business such as one of the following: Articles of Incorporation, Certificate of Organization, Fictitious Name of Registration or Government-Issued Business License
 
Business must be able to provide acceptable form of government-issued photo ID
 
Applicants with multiple business entities, franchises, locations, etc. are not eligible for multiple grants and are only allowed to apply once using their eligible small business with the highest revenue


Required Documents:
 
Application Certification: Signed certification used to certify your business
 
Business Financial Information:
 
Most recent tax return filed (2019 or 2018) – provided in an electronic form for online upload, such as PDF/JPEG or other approved upload format.
 
Copy of official filing with the California Secretary of State, if applicable, or local municipality for the business such as one of the following: Articles of Incorporation, Certificate of Organization, Fictitious Name of Registration or Government-Issued Business License.
 
Government Issued Photo ID: Such as a Driver’s License or Passport
 

To learn more about the program: California Small Business COVID-19 Relief Grant Program (careliefgrant.com)
 

As always, our team of experts are more than happy to walk you through the application process if needed. Please email us at askoos@booscpa.com and let us know how we can help!

 

NEW STIMULUS PACKAGE SIGNED DECEMBER 27, 2020

Posted by BOOSCPA Strategic Tax Services Group Posted on Dec 29 2020
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NEW STIMULUS PACKAGE SIGNED DECEMBER 27, 2020

On Sunday December 27th, President Trump signed a $2.3 trillion-dollar COVID-19 relief and government funding bill called the Consolidated Appropriations Act, 2021. Over 5,500 pages, this massive tax, funding, and spending package contains nearly $900 billion in coronavirus aid. The emergency coronavirus relief package aims to bolster the economy, provide relief to small businesses and the unemployed, deliver checks to individuals and provide funding for COVID-19 testing and the administration of vaccines.
 
The coronavirus relief package contains another round of financial relief for individuals in the form of cash payments and enhanced federal unemployment benefits. Individuals who earn $75,000 or less annually generally will receive a direct payment of $600. Qualifying families will receive an additional $600 for each child. According to Treasury Secretary Mnuchin, these checks could be distributed before the end of 2020. To provide emergency financial assistance to the unemployed, federal unemployment insurance benefits that expire at the end of 2020 will be extended for 11 weeks through mid-March 2021, and unemployed individuals will receive a $300 weekly enhancement in unemployment benefits from the end of December 2020 through mid-March. The CARES Act measure that provided $600 in enhanced weekly unemployment benefits expired on July 31, 2020.
 
This stimulus package earmarks an additional $284 billion for a new round of forgivable small-business loans under the Paycheck Protection Program (PPP) and contains several important changes to the PPP. It expands eligibility for loans, allows certain particularly hard-hit businesses to request a second loan, and provides that PPP borrowers may deduct PPP expenses attributable to forgiven PPP loans in computing their federal income tax liability and that such borrowers need not include loan forgiveness in income.
 
This stimulus package allocates $15 billion in dedicated funding to shuttered live venues, independent movie theaters and cultural institutions, with $12 billion allocated to help business in low-income and minority communities.
 
This stimulus package also extends and expands the employee retention credit (ERC) and extends a number of tax deductions, credits and incentives that are set to expire on December 31, 2020.
 
This alert highlights the main tax provisions included in the This stimulus package.
 

Paycheck Protection Program
The PPP, one of the stimulus measures created by the CARES Act, provides for the granting of federally guaranteed loans to small businesses, nonprofit organizations, veterans organizations and tribal businesses in an effort to keep businesses operating and retain staff during the COVID-19 pandemic. (PPP loans are administered by the Small Business Administration (SBA)).
 
A recipient of a PPP loan under the CARES Act (the first round) could use the funds to meet payroll costs, certain employee healthcare costs, interest on mortgage obligations, rent and utilities. At least 60% of the loan funds were required to be spent on payroll costs for the loan to be forgiven.
 

Eligible businesses

Business are eligible for the second round of PPP loans regardless of whether a loan was received in the first round. This stimulus package changes the definition of a “small business.” Small businesses are defined as businesses with no more than 300 employees and whose revenues dropped by 25% during one of the first three quarters of 2020 (or the fourth quarter if the business is applying after January 1, 2021). The decrease is determined by comparing gross receipts in a quarter to the same in the prior year. Businesses with more than 300 employees must meet the SBA’s usual criteria to qualify as a small business.
 
Borrowers may receive a loan amount of up to 2.5 (3.5 for accommodation and food services sector businesses) times their average monthly payroll costs in 2019 or the 12 months before the loan application, capped at $2 million per borrower, reduced from a limit of $10 million in the first round of PPP loans.  
 
This stimulus package also expands the types of organizations that may request a PPP loan. Eligibility for a PPP loan is extended to:
 
Tax-exempt organizations described in Internal Revenue Code (IRC) Section 501(c)(6) that have no more than 300 employees and whose lobbying activities do not comprise more than 15% of the organization’s total activities (but the loan proceeds may not be used for lobbying activities)
 
“Destination marketing organizations” that do not have more than 300 employees
 
Housing cooperatives that do not have more than 300 employees
 
Stations, newspapers, and public broadcasting organizations that do not have more than 500 employees


 
The following businesses, inter alia, are not eligible for a PPP loan:
 
 
Publicly-traded businesses and entities created or organized under the laws of the People’s Republic of China or the Special Administrative Region of Hong Kong that hold directly or indirectly at least 20% of the economic interest of the business or entity, including as equity shares or a capital or profit interest in a limited liability company or partnership, or that retain as a member of the entity’s board of directors a China-resident person
 
Persons required to submit a registration statement under the Foreign Agents Registration Act
 
Persons that receive a grant under the Economic Aid to Hard Hit Small Businesses, Nonprofits and Venues Act


 

Uses of loan proceeds

This stimulus package adds four types of non-payroll expenses that can be paid from and submitted for forgiveness, for both round 1 and round 2 PPP loans, but it is unclear whether borrowers that have already been approved for partial forgiveness can resubmit an application to add these new expenses:
 
Covered operational expenditures, i.e., payments for software or cloud computing services that facilitate business operations, product or service delivery, the processing, payment or tracking of payroll expenses, human resources, sales and billing functions, or accounting or tracking of supplies, inventory, records and expenses
 
Covered property damage, i.e., costs related to property damage and vandalism or looting due to public disturbances that took place in 2020, which were not covered by insurance or other compensation
 
Covered supplier costs, i.e., expenses incurred by a borrower under a contract or order in effect before the date the PPP loan proceeds were disbursed for the supply of goods that are essential to the borrower’s business operations
 
Covered worker protection equipment, i.e., costs of personal protective equipment incurred by a borrower to comply with rules or guidance issued by the Department of Health & Human Services, the Occupational Safety and Health Administration or the Centers for Disease Control, or a state or local government


 
To qualify for full forgiveness of a PPP loan, the borrower must use at least 60% of the funds for payroll-related expenses over the relevant covered period (eight or 24 weeks).
 

Increase in loan amount

This stimulus package contains a provision that allows an eligible recipient of a PPP loan to request an increased amount, even if the initial loan proceeds were returned in part or in full, and even if the lender of the original loan has submitted a Form 1502 to the SBA (the form sets out the identity of the borrower and the loan amount).
 

Expense deductions

This stimulus package confirms that business expenses (that normally would be deductible for federal income tax purposes) paid out of PPP loans may be deducted for federal income tax purposes and that the borrower’s tax basis and other attributes of the borrower’s assets will not be reduced as a result of the loan forgiveness. This has been an area of uncertainty because, while the CARES Act provides that any amount of PPP loan forgiveness that normally would be includible in gross income will be excluded from gross income, it is silent on whether eligible business expenses attributable to PPP loan forgiveness are deductible for tax purposes. The IRS took the position in guidance that because the proceeds of a forgiven PPP loan are not considered taxable income, expenses paid with forgiven PPP loan proceeds may not be deducted. This stimulus package clarifies that such expenses are fully deductible—welcome news for struggling businesses. Importantly, the effective date of this provision applies to taxable years ending after the date of the enactment of the CARES Act. Thus, taxpayers that filed tax returns without deducting PPP-eligible deductions should consider amending such returns to claim the expenses.
 

Loan forgiveness covered period

This stimulus package clarifies the rules relating to the selection of a PPP loan forgiveness covered period. Under the current rules, only borrowers that received PPP proceeds before June 5, 2020 could elect an eight-week covered period. This stimulus package provides that the covered period begins on the loan origination date but allows all loan recipients to choose the ending date that is eight or 24 weeks later.
 

Loan forgiveness

PPP loan recipients generally are eligible for loan forgiveness if they apply at least 60% of the loan proceeds to payroll costs (subject to the newly added eligible expenditures, as described above), with partial forgiveness available where this threshold is not met. Loans that are not forgiven must be repaid.
 
Currently, PPP loan recipients apply for loan forgiveness on either SBA Form 3508, Form 3508 EZ or Form 3508S, all of which required documentation that demonstrates that the claimed amounts were paid during the applicable covered period, subject to reduction for not maintaining the workforce or wages at pre-COVID levels.
 
This stimulus package provides a new simplified forgiveness procedure for loans of $150,000 or less. Instead of the documentation summarized above, these borrowers cannot be required to submit to the lender any documents other than a one-page signed certification that sets out the number of employees the borrower was able to retain because of the PPP loan, an estimate of the amounts spent on payroll-related costs, the total loan value and that the borrower has accurately provided all information required and retains all relevant documents. The SBA will be required to develop the simplified loan forgiveness application form within 24 days of the enactment of this stimulus package and generally may not require additional documentation. Lenders will need to modify their systems used for applications to make an electronic version of the new forgiveness application available to eligible borrowers.
 

Employment Retention Credit and Families First Coronavirus Response Credit

This stimulus package extends and expands the ERC and the paid leave credit under the Families First Coronavirus Response Act (FFCRA).
 

ERC

The ERC, introduced under the CARES Act, is a refundable tax credit equal to 50% of up to $10,000 in qualified wages (i.e., a total of $5,000 per employee) paid by an eligible employer whose operations were suspended due to a COVID-19-related governmental order or whose gross receipts for any 2020 calendar quarter were less than 50% of its gross receipts for the same quarter in 2019.
 
This stimulus package makes the following changes to the ERC, which will apply from January 1 to June 30, 2021:
 
 
The credit rate is increased from 50% to 70% of qualified wages and the limit on per-employee wages is increased from $10,000 for the year to $10,000 per quarter.
 
The gross receipts eligibility threshold for employers is reduced from a 50% decline to a 20% decline in gross receipts for the same calendar quarter in 2019, a safe harbor is provided allowing employers to use prior quarter gross receipts to determine eligibility and the ERC is available to employers that were not in existence during any quarter in 2019. The 100-employee threshold for determining “qualified wages” based on all wages is increased to 500 or fewer employees.
 
The credit is available to certain government instrumentalities.
 
This stimulus package clarifies the determination of gross receipts for certain tax-exempt organizations and that group health plan expenses can be considered qualified wages even when no wages are paid to the employee.
 
New, expansive provisions regarding advance payments of the ERC to small employers are included, such as special rules for seasonal employees and employers that were not in existence in 2019. This stimulus package also provides reconciliation rules and provides that excess advance payments of the credit during a calendar quarter will be subject to tax that is the amount of the excess.
 
Treasury and the SBA will issue guidance providing that payroll costs paid during the PPP covered period can be treated as qualified wages to the extent that such wages were not paid from the proceeds of a forgiven PPP loan. Further, this stimulus package strikes the limitation that qualified wages paid or incurred by an eligible employer with respect to an employee may not exceed the amount that employee would have been paid for working during the 30 days immediately preceding that period (which, for example, allows employers to take the ERC for bonuses paid to essential workers).


 
This stimulus package makes three retroactive changes that are effective as if they were included the CARES Act. Employers that received PPP loans may still qualify for the ERC with respect to wages that are not paid for with proceeds from a forgiven PPP loan. This stimulus package also clarifies how tax-exempt organizations determine “gross receipts” and that group health care expenses can be considered “qualified wages” even when no other wages are paid to the employee.
 

FFCRA

The FFCRA paid emergency sick and child-care leave and related tax credits are extended through March 31, 2021 on a voluntary basis. In other words, FFCRA leave is no longer mandatory, but employers that provide FFCRA leave from January 1 to March 31, 2021 may take a federal tax credit for providing such leave. Some clarifications have been made for self-employed individuals as if they were included in the FFCRA.
 

Other Tax Provisions in the CAA

This stimulus package includes changes to some provisions in the IRC:
 
Charitable donation deduction: For taxable years beginning in 2021, taxpayers who do not itemize deductions may take a deduction for cash donations of up to $300 made to qualifying organizations. The CARES Act revised the charitable donation deduction rules to encourage donations following a decline after the enactment of the Tax Cuts and Jobs Act in 2017.
 
Medical expense deduction: The income threshold for unreimbursed medical expense deductions is permanently reduced from 10% to 7.5% so that more expenses may be deducted.
 
Business meal deduction: Businesses may deduct 100% of business-related restaurant meals during 2021 and 2022 (the deduction currently is available only for 50% of those expenses).
 
Extenders: This stimulus package provides for a five-year extension of the following tax provisions that are scheduled to sunset on December 31, 2020:
 
The look-through rule for certain payments from related controlled foreign corporations in IRC Section 954(c)(6), which was extended to apply to taxable years of foreign corporations beginning before January 1, 2026 and to taxable years of U.S. shareholders with or within which such taxable years of foreign corporations end
 
New Markets Tax Credit
 
Work Opportunity Tax Credit
 
Health Coverage Tax Credit
 
Carbon Oxide Sequestration Credit
 
Employer credit for paid family and medical leave
 
Empowerment zone tax incentives
 
Exclusion from gross income of discharge of qualified principal residence indebtedness
 
Seven-year recovery period for motorsports entertainment complexes
 
Expensing rules for certain productions
 
Oil spill liability trust fund rate
 
Incentive for certain employer payments of student loans (notably, this stimulus package does not include other student loan relief so that borrowers will need to resume payments on such loans and interest will begin to accrue).
 
Permanent changes: This stimulus package makes several tax provisions permanent that were scheduled to expire in the future, in addition to the medical expense deduction threshold mentioned above:
 
The deduction of the costs of energy-efficient commercial building property (now subject to inflation adjustments)
 
The gross income deduction provided to volunteer firefighters and emergency medical responders for state and local tax benefits and certain qualified payments
 
The transition from a deduction for qualified tuition and related expenses to an increased income limitation on the lifetime learning credit
 
The railroad track maintenance credit
 
Certain provisions, refunds and reduced rates related to beer, wine, and distilled spirits, as well as minimum processing requirements for certain craft beverages produced outside the U.S.

Need Help?

If you think you can benefit or are interested in any of the above items within the new stimulus package, BOOS & ASSOCIATES is here to help! To inquire more information please email us at askboos@booscpa.com.

 

2020 Year-End Tax Planning for Individuals

Posted by BOOSCPA Strategic Tax Services Group Posted on Dec 11 2020
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2020 Year-End Tax Planning for Individuals

As the year-end approaches, individuals, business owners and family offices should be reviewing their situations to identify any opportunities for reducing, deferring, or accelerating tax obligations. Areas that should be looked at include tax reform provisions that remain in play, as well as new opportunities and relief granted earlier in 2020 under the CARES and SECURE Acts.

Individual’s Tax Planning Highlights

Long-Term Capital Gains
 
The brackets for long-term capital gains for 2020 and the projected 2021 rates are shown below. Long-term capital gains are subject to a lower tax rate, so investors may wish to consider holding on to assets for over a year to qualify for those rates. 
 
 
Long-Term Capital Gains Tax Rate

Single

Joint
 
Head of Household
 
2020
 
Projected 2021
 
2020
 
Projected 2021
 
2020
 
Projected 2021
 
0%
 
$0 - $40,000
 
$0 - $40,400
 
$0 - $80,000
 
$0 - $80,800
 
$0 - $53,600
 
$0 - $54,100
 
15% minimum income

$40,001 - $441,450
 
$40,401 - $445,850

$80,001 - $496,600
 
$80,801 - $501,600
 
$53,601 - $469,050
 
$54,101 - $473,750
 
20% minimum income
 
Over $441,450
 
Over $445,850
 
Over $496,600
 
Over $501,600
 
Over $469,050
 
Over $473,750

 

Social Security Tax (click for more information)

 

Long-Term Care Insurance and Services
 
Premiums an individual pays on a qualified long-term care insurance policy are deductible as a medical expense. The maximum amount of a deduction is determined by an individual’s age. The following table sets forth the deductible limits for 2020 and 2021:
 
 
Age
 
Deduction Limitation 2020

Projected Deduction Limitation 2021
 
40 or under

$430
 
$450
 
Over 40 but not over 50
 
$810
 
$850
 
Over 50 but not over 60
 
$1,630

$1,690

Over 60 but not over 70

$4,350

$4,520

Over 70

$5,430

$5,650

 
These limitations are per person, not per return. Thus, a married couple, both spouses over 70 years old, has a combined maximum deduction of $10,860 ($11,300 projected for 2021), subject to the applicable AGI limit.


Retirement Plan Contributions (Click for more information)

Foreign Earned Income Exclusion
 
The foreign earned income exclusion is $107,600 in 2020, projected to increase to $108,700 in 2021.

 

Alternative Minimum Tax
 
A taxpayer must pay either the regular income tax or the alternative minimum tax, whichever is higher. The established exemption amounts for 2020 are $72,900 for unmarried individuals and individuals claiming head of household status, $113,400 for married individuals filing jointly and surviving spouses, and $56,700 for married individuals filing separately. For 2021, those amounts are projected to increase to $73,600 for unmarried individuals and individuals claiming the head of household status, $114,600 for married individuals filing jointly and surviving spouses, and $57,300 for married individuals filing separately.
 
 
Kiddie Tax
 
The SECURE Act reinstates the kiddie tax previously suspended by the Tax Cuts and Jobs Act (TCJA). For tax years beginning after December 31, 2019, the unearned income of a child is no longer taxed at the same rates as estates and trusts. Instead, the unearned income of a child will be taxed at the parents’ tax rates if those rates are higher than the child’s tax rate. Taxpayers can elect to apply this provision retroactively to tax years that begin in 2018 or 2019 by filing an amended return.
 
 
Charitable Contributions
 
Currently, individuals who make cash contributions to publicly supported charities are permitted a charitable contribution deduction of up to 60% of their AGI. Contributions in excess of the 60% AGI limitation may be carried forward in each of the succeeding five years. The CARES Act suspends the AGI limitation for qualifying cash contributions and instead permits individual taxpayers to take a charitable contribution deduction for qualifying cash contributions made in 2020 to the extent such contributions do not exceed the taxpayer’s AGI. Any excess carries forward as a charitable contribution that is usable in the succeeding five years. Contributions to non-operating private foundations or donor-advised funds are not eligible for the 100% AGI limitation.
 
 
Estate and Gift Taxes
 
The unified estate and gift tax exclusion and generation-skipping transfer tax exemption is $11,580,000 per person in 2020. For 2021, the exemption is projected to increase to $11,700,000.
All outright gifts to a spouse who is a U.S. citizen are free of federal gift tax. However, for 2020 and 2021, only the first $157,000 and $159,000 (projected), respectively, of gifts to a non-U.S. citizen spouse are excluded from the total amount of taxable gifts for the year.
 
Simplified Employment Pension Plans
 
Small businesses can contribute up to 25% of employees’ salaries (up to an annual maximum set by the IRS each year) to a Simplified Employee Pension (SEP) plan. The SEP contribution must be made by the extended due date of the employer’s federal income tax return for the year that the contribution is made. The maximum SEP contribution for 2020 was $57,000. The maximum SEP contribution for 2021 is projected to be $58,000.
The calculation of the 25% limit for self-employed individuals is based on net self-employment income, which is calculated after the reduction in income from the SEP contribution (as well as for other things, such as self-employment taxes).
 
 
Net Operating Losses
 
Under the TCJA, net operating losses generated beginning in 2018 were limited to 80% of taxable income and could not be carried back but could be carried forward indefinitely. The CARES Act permits individuals with net operating losses generated in taxable years beginning after December 31, 2017, and before January 1, 2021, to carry those losses back five taxable years. The CARES Act also eliminates the 80% limitation on such losses.
 
 
Excess Business Loss Limitation
 
Under Section 461(l), a taxpayer will only be able to deduct net business losses of up to $262,000 (projected) in 2021 (joint filers can deduct $524,000 (projected) in 2021) for taxable years beginning after December 31, 2020, and before January 1, 2026. Excess business losses are normally disallowed and added to the taxpayer’s net operating loss carryforward, but the CARES Act suspends the application of this excess business loss rule for 2020, and retroactively suspends the excess business loss limitation rule for 2018 and 2019.

2020 Year-End Tax Planning for Businesses

Posted by BOOSCPA Strategic Tax Services Group Posted on Dec 11 2020
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2020 Year-End Tax Planning for Businesses
 
Tax Relief Strategies for Resilience

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As the world continues to contend with the COVID-19 pandemic and its economic fallout, businesses are doing all they can to mitigate risks and plan for a recovery that’s anything but certain.

The path forward will likely not be linear. Different regions, industries and business segments may be in different stages of recovery simultaneously.

The tax function plays a critical role in navigating recovery and positioning businesses to emerge from this crisis more resilient than before. Effective tax strategy can preserve liquidity, lower costs and work in tandem with overall business strategy.

Read on to explore the tax relief tactics that can help take your business from reacting to the day-to-day challenges to preparing for the future.

 

Finding Relief: Tax Strategies to Generate Immediate Cash Flow

During these challenging times, companies must have access to cash to help offset unforeseen costs, whether for buying personal protective equipment (PPE) for on-site employees or investing in the technology needed to keep a remote workforce safely and efficiently connected. Click here to find out more information about finding relief and different tax strategies to generate immediate cash flow!


Optimizing Operations: Uncover Tax Relief Opportunities

Despite the uncertainty, savvy companies can position themselves to outperform their competitors by capitalizing on market shifts and strengthening their core business models. To do so, liquidity will continue to be at a premium, but many companies at this stage should be able to spend a bit in order to reap considerable returns. The tax function is poised to help them do just that.

After taking advantage of tax solutions that are within reach, it’s time to consider low-risk strategies that will plant the seed for future growth. Click here to find out more information about optimizing operations to uncover tax relief opportunities!


Moving Forward: New Tax Strategies to Reimagine the Future

Plans made prior to spring 2020 may no longer make sense in a post-COVID world. To stand apart from competitors, companies need to not only recover from COVID-19, but also integrate the lasting forces of change brought on by the pandemic to emerge more resilient and agile than before.

It’s time to reset vision and strategy—and tax needs to be an integral part of that process. Click here to find out more information about moving forward and setting new tax strategies to reimagine the future!


Planning for What’s Next: Be Prepared to Seize Opportunities

The reality for many is that it may take years to get the phase when a business is meeting or even exceeding market growth. During this stage, a company has fully recovered from the business challenges of the pandemic-recession and is experiencing significant growth. It’s a time when many businesses will be executing the long-term plans they’ve crafted throughout their recovery journey. But companies should consider the tax effects of acting on these plans.  

Key Tax Strategies

 
Use tax transformation to maintain a broad view of your total tax liability.
 
Leverage automated solutions for manual and error-prone areas, including state and local sales and use taxation, value added tax, etc. as your business executes on tax transformation plans.
 
Consider the tax benefits of outsourcing non-essential functions to third parties to lower your company’s total tax liability.

 
Review federal Work Opportunity Credit criteria for eligible new hires.
 
Consider eligibility for paid family and medical leave. Under the new law, an eligible employer is allowed the paid family and medical leave credit, which is an amount equal to a percentage of wages paid (up to 25%) to qualifying employees during any period in which those employees are on family and medical leave due to a critical illness or the birth (or adoption or foster care) of a child.
 
The applicable percentage is 12.5%, increased (but not above 25%) by 0.25 percentage points for each percentage point by which the rate of payment exceeds 50%.
 
Consider alternative legal entity structures to minimize total tax liability and enterprise risk.
 
 
Regularly monitor and assess potential regulatory and legislative changes at the federal, state and local levels, as well as in other countries, if applicable.
 
Continually iterate and adjust tax strategies to align with overall business strategies.
 
Evaluate global supply chain and cross-border transactions to minimize global tax liability.

Most importantly, companies need to continue to plan for what’s next. While the immediate threat of the pandemic has abated in this stage, new threats are inevitable. But alongside those threats come new opportunities for those businesses poised to seize them.

 

Need Help?

If you think your business can benefit or is interested in any of the above Year-End Planning for Businesses opportunities, BOOS & ASSOCIATES is here to help! To inquire more information please email us at askboos@booscpa.com.




 

 

Tax Credits

Posted by BOOSCPA Strategic Tax Services Group Posted on Dec 03 2020



As an employer, you give many the opportunity to work. These opportunities created allows you to take advantage of many Federal, State, & Local tax incentives offered. At BOOS & ASSOCIATES, we have a dedicated tax credit team with decades of experience in assisting clients to help maximize these benefits. Due to COVID-19, the IRS and the State of California has offered two new tax credits.

New Credits Available


Employee Retention Credit

Allows for a refundable payroll tax credit for eligible employers harmed by COVID-19. The credit is equal to 50% of up to $10,000 in qualified wages per employee (i.e., a total of $5,000 per employee). Employers generally are not eligible for the Employee Retention Credit if any member of their controlled or affiliated service group obtained a PPP loan.

New Hiring Credit for Small Businesses

The Governor signed bill SB 1447 which allows Businesses to receive a $1,000 credit (up to a $100,000 maximum) for every net increase in full-time equivalent employees. The credit can only be claimed by businesses that reserve the credit and that:

Employed 100 or fewer employees as of December 31, 2019; and

Experienced a 50% decrease in gross receipts when comparing their 2020 second calendar quarter gross receipts with 2019 second calendar quarter gross receipts.

On top of the two new credits available to businesses, our team also offers the following services.

Other Tax Credit Services Offered

California New Employment Credit (“NEC”)

Federal Hiring Tax Credits

Work Opportunity Tax Credit ("WOTC")

Research & Development Tax Credits


Need Help?

If you think your business can benefit or is interested in any of the above tax credits, BOOS & ASSOCIATES is here to help! To inquire more information please email us at askboos@booscpa.com.

 

California Rebuilding Fund

Posted by BOOSCPA Strategic Tax Services Group Posted on Dec 02 2020



California Rebuilding Fund

Small businesses are the backbones of their communities. They create millions of jobs annually while catering specifically to the communities surrounding them. Many small businesses still need funding to help them weather today’s environment and ensure they can retain their employees, pay their rent, and survive. Due to this, the state of California has created the California Rebuilding Fund to support California’s small businesses. The experts at Boos can guide you through this process.

The California Rebuilding Fund is a loan program to support California’s small businesses—especially those located in economically disadvantaged and historically under-banked areas of the state. Businesses who employed 50 or less full-time equivalent employees (FTEs) and had gross revenues of less than $2.5 million or below in 2019 are eligible to apply.

The loans are flexible, transparent and are designed to help businesses access the capital and advisory services they need to get through these challenging economic times.

Loan Terms:

LOAN AMOUNT: The maximum available loan amount is $100,000 or up to 100% of your business’ average monthly revenues for three months prior to the COVID pandemic outbreak (in 2019 or early 2020), whichever is less. The maximum loan amount available under this program is $100,000.

INTEREST RATE: 4.25%

REPAYMENT: 36 months or 60 months (first year interest only)

Example:

An example of how your maximum loan amount is calculated:
To determine your business’s average monthly revenue for an estimate of potential loan size, the lender may use the following:

September 2019 Revenues: $10,000

October 2019 Revenues: $15,000

November 2019 Revenues: $20,000

Based on the above-referenced example, the average revenues for the period is $15,000 so 3-months of average revenues would be $45,000. In this example, the maximum loan size would be $45,000

Business Requirements:

The business must have employed 50 or fewer full-time equivalent (FTE) employees prior to March 2020; please note: any and all affiliates are counted in this total, including businesses with shared ownership;

The business must have had gross revenues of less than $2.5 million in 2019;

The business must have suffered a direct economic hardship as a result of COVID-19 which has materially impacted operations (as evidenced by at least a significant reduction in revenues since January 2020);

The business must have returned to or sustained, for at least one-month, at least 30% of pre-COVID revenues relative to a similar period in 2019

The business must have demonstrated positive net income in 2019 (not including depreciation and amortization expenses);

The business must have been in operation since at least June 30, 2019 and be operating at the time of application;

The main office or headquarters for the business must be in California. The loan must be used to support only a business’s California operations

 

Apply > https://www.connect2capital.com/p/californiarebuildingfund/

 

 

Need Help?

If your business is interested in applying for the California Rebuilding Fund loan program, BOOS & ASSOCIATES is here to help! To inquire more information or if you would like assistance with an application please email us at askboos@booscpa.com.

SBA Disaster Loan

Posted by BOOSCPA Strategic Tax Services Group Posted on Nov 30 2020
How To Qualify For SBA Loans In A Strong Economy

Philanthropy Delaware - SBA Economic Injury Disaster Loan


As communities continue recovering from the devastating effects of the wildfires, BOOS & ASSOCIATES has established a team to work with impacted businesses and individuals to be able to help provide them with support and make available important resources.

We are here to help – Our staff is prepared to streamline recovery efforts when businesses and individuals are ready to re-establish themselves.

One of the ways BOOS & ASSOCIATES can help individuals and businesses is by assisting them in acquiring a disaster loan from the U.S. Small Business Administration. Individuals and businesses may qualify for a loan up to 2 million dollars! If this interest you, keep reading to find out more.

U.S. SBA – Disaster loans Overview

Businesses, Private Nonprofits, Homeowners, and Renters that are located in the California wildfire disaster area may be eligible for financial assistance from the U.S. Small Business Administration (SBA). This is available for California wildfires occurring from:

August 14 through September 26, 2020 - Counties of: Butte, Lake, Lassen, Mendocino, Monterey, Napa, San Mateo, Santa Clara, Santa Cruz, Solano, Stanislaus, Sonoma, Trinity, Tulare & Yolo


September 4, 2020 and continuing - Counties of: Fresno, Los Angeles, Madera, Mendocino, Napa, San Bernardino, San Diego, Shasta, Siskiyou & Sonoma

Details

What Types of Disaster Loans are Available?

Business Physical Disaster Loans – Loans to businesses and non-profit organizations to repair or replace disaster-damaged property, including real estate, inventories, supplies, machinery, and equipment. The law limits business loans to $2,000,000.

Economic Injury Disaster Loans (EIDL) – Working capital loans available. The law limits EIDLs to $2,000,000 for alleviating economic injury caused by the disaster.

Wildfires occurring August 14 through September 26, 2020 - Economic injury only in the contiguous California counties of: Alameda, Calaveras, Colusa, Contra Costa, Fresno, Glenn, Humboldt, Inyo, Kern, Kings, Marin, Mariposa, Merced, Modoc, Plumas, Sacramento, San Benito, San Francisco, San Joaquin, San Luis Obispo, Shasta, Sierra, Siskiyou, Sutter, Tehama, Tuolumne & Yuba.

Wildfires occurring September 4, 2020 and November 17, 2020 - Economic injury only in the contiguous California counties of: Del Norte, Glenn, Humboldt, Imperial, Inyo, Kern, Kings, Lake, Lassen, Marin, Mariposa, Merced, Modoc, Mono, Monterey, Orange, Plumas, Riverside, San Benito, Solano, Tehama, Trinity, Tulare, Tuolumne, Ventura & Yolo.

Home Disaster Loans – Loans to homeowners or renters to repair or replace disaster-damaged real estate and personal property, including automobiles. Limits to $200,000 for the repair or replacement of real estate and $40,000 to repair or replace personal property.

Additional Assistance:

Additional funds are available to cover the cost of improvements that will protect your property against future damage.

Refinancing prior mortgages available for business and homeowners up to the amount of the loan for the repair or replacement.

You may use your SBA disaster loan to relocate. The amount of the relocation loan depends on whether you relocate voluntarily or involuntarily.

Application Deadline for wildfires occurring:

August 14 through September 26, 2020


Physical Damage: November 23, 2020

Economic Injury: May 24, 2021


September 4, 2020 and continuing


Physical Damage: December 15, 2020
Economic Injury: July 16, 2021

Need Help?

If you or your business has been impacted by the wildfires and are in need of a loan from the U.S. Small Business Administration, BOOS & ASSOCIATES is here to help! To inquire more information or if you would like assistance with an application please email us at askboos@booscpa.com .