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).

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.

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February 21, 2024by Terry Kissler, CPA Insights on 2023 tax return changes and anticipated tax revisions post-2025, including adjustments to deductions, tax bracket and estate tax limits. As we turn the calendar and gear up for another tax season, it’s never too soon to look ahead and prepare for the upcoming landscape of the tax world. Our profession and taxpayers alike can take some solace in the fact that for 2023, there weren’t a whole lot of changes that will impact the 2024 filing season. By now, the COVID-19 relief packages, which so abruptly altered our rules and filings, have since fizzled out for the most part. I’ll touch on a couple of those changes that we as taxpayers got to enjoy the last few years that no longer are in effect. However, the purpose of this article is to look ahead to what’s changing down the road. Let’s start with the immediate changes you’ll notice on your 2023 tax returns. As part of the COVID-19 relief tax packages, the IRS incentivized business owners to spend money at their local restaurants. For 2021 and 2022, business meals were 100% deductible to the business. For 2023, the deductibility of business meal expenses reverted back to 50%. You also may notice some standard inflation adjustments for various retirement plans and health savings plans. On your individual returns, there will be an increase in the standard deduction and, of course, a shift in tax brackets. To highlight a few of these changes, this is what you’ll see: The standard deduction for married couples has increased from $25,900 to $27,700, while single individuals will see that rise from $12,950 to $13,850 The maximum 401(k) contribution limit has gone from $20,500 in 2022, up to $22,500 in 2023. For your Roth and traditional IRAs, you’ll see that limit go from $6,000 ($7,000 if age 50 or older) to $6,500 ($7,000 if age 50 or older) in 2023. Keep in mind, you have until April 15 of 2024 to max out your 2023 IRA contribution. Changes to Know Let’s shift gears to tax changes a little further on the horizon. These we can actually plan for and be prepared when it happens. The Tax Cuts and Job Act (TCJA), put into action on Jan. 1, 2018, drastically changed the federal tax code. These changes, however, will sunset after 2025, meaning in 2026 our tax laws as we’ve grown to know and understand will shift back to how it was in 2017 – adjusted for inflation, of course. Here is what to expect, just to name a few important points: The tax bracket rates will change. The lowest bracket of 10% for low-income earners should remain the same. But the rates on the various brackets working up to the highest earners will increase by 1% to 4%, depending on the bracket. The high standard deductions that taxpayers have enjoyed over the past several years, along with the increased child tax credit, are set to expire and return back to pre-TCJA levels. This means it’s likely more individuals will be itemizing deductions again. Charitable donations have been deductible as an itemized deduction up to 60% of your adjusted gross income (100% during the COVID-19 relief years) and will return back to 50% of adjusted gross income after the TCJA expires. For example, if your adjusted gross income (AGI) is $100,000, you could deduct up to $50,000 as charitable donations on your tax return. Any donations above that would be carried forward to deduct in a later year. Since the TCJA rules came into effect, we’ve seen drastic changes in estate tax exemption limits. Pre-TCJA, the estate tax exemption for individuals was $5.49 million, and married couples was $10.98 million. We’ve seen those figures climb to $13.61 million for individuals and $27.22 million for married couples in 2024. The inflation-adjusted estimate for 2026 estate tax exemption limits is currently around $7 million for individuals and $14 million for married couples. With the distinctly higher limits we’re experiencing now, the next two years may be your prime opportunity to transfer assets out of your control and into that of your heirs. As farmers and ranchers, your most valuable asset is likely the land you own. Keep in mind, that upon your passing, that land, along with all your other assets, gets valued as of the date of your death and added to that estate limit. So if you are someone whose land, investments, cash and other assets (including your ownership if these assets are held in LLCs or other entities) exceed those $7 or $14 million dollar values, it very well could impact those beneficiaries of your estate. Don’t wait to speak to your attorney and accountant about these possible issues. These are just a few examples of changes to be aware of. Your trusted tax adviser can help you navigate these changes, along with others that will change the tax landscape in the near future. This article was featured as a blog on the AG Proud Idaho website, February 12, 2024. Link to full article here.   Construction & Engineering Page Real Estate Page [...] Read more...
January 25, 2024  Beginning in 2024, small businesses will need to comply with the Corporate Transparency Act. Harris CPAs is excited to work with our clients that are impacted and we are close to selecting a third party provider to assist our clients with these filings. We will have that information available soon! In the meantime we wanted to provide a brief overview of the Act and its requirements. Corporate Transparency Act – What is it and what does it mean for me? In 2021, Congress enacted the Corporate Transparency Act. This now requires some businesses to file a Beneficial Ownership Information (BOI) report with FinCEN (Financial Crimes and Enforcement Network) of the United States Treasury. In preparing the filing, there are several steps to go through to be in compliance with the new reporting requirement. We hope to walk you through these important steps to make the process a bit more understandable. Here is an overview and checklist of the Corporate Transparency Act guidelines to follow: Determine if you are a “reporting company.” Define who the beneficial owners are – spoiler alert, it’s not just members of the LLC or shareholders. Identify up to two company applicants. Understand the timeline and file electronically on the Treasury Department’s website (which went live on January 1, 2024). How do I determine if I have a “reporting company”? A “reporting company” is a corporation, Limited Liability Company (LLC), or other entity created by filing a document. This must be filed with a Secretary of State, a similar office under the law of state or Indian tribe, or a foreign company registered to do business in the U.S. at any Secretary of State or Indian Tribe filing. There are twenty-three types of entities that are exempt from filing. Many of the exemptions are publicly traded companies, nonprofits (organized under 501(c) of the Internal Revenue Code) and certain large operating companies. Large operating companies are defined as having average gross receipts over the past three taxable years in excess of $5 million AND employing more than 20 full-time staff members. I have determined that I have a “reporting company”; who are my beneficial owners? Once you determine that you have a filing requirement, you must determine who has to be reported as a beneficial owner. A beneficial owner is defined as any individual who directly or indirectly exercises substantial control over a reporting OR owns at least 25% of the ownership interest in the company. Ownership interests include any items that may be converted to ownership in the future (i.e., stock options, restricted stock units or debt that may be converted to equity). There are 5 exceptions to the definition of a beneficial owner. This includes: (1) a minor child; (2) a nominee/intermediary/custodian/agent; (3) employees who are not senior officers, do not exercise substantial control over the business, or do not have an economic benefit of the business other than wages earned; (4) ownership through future inheritance; and (5) a creditor holding non-convertible debt instrument. Who are the company applicants? The company is able to report up to two applicants on the filing of the BOI. The company applicant would be the person(s) who filed the original organizational documents with the Secretary of State when the entity was created. If a third party was used, the individual within the company who authorized the third party to create the entity would be the applicant. Company applicants are only required to be disclosed if the entity was created on or after January 1, 2024. For entities created before this date, company applicants are not required to be disclosed. What information do I need to collect and report for the beneficial owners of my business? For a “reporting company”, you will need to report: (1) the full legal name of the business along with any trade names used; (2) the complete current U.S. address; (3) the state of registration; and (4) the taxpayer ID number used by the business for tax filings. For each beneficial owner, you will need their full legal name, date of birth, complete current address and a copy of one of the following non-expired documents: U.S. Passport, State Driver’s license or identification document issued by a state, local government or tribe. These documents will need to be uploaded to the Treasury Department portal. When is my report due? New entities filed with a Secretary of State after 12/31/2023 and before 12/31/2024 must file within 90 days of creation of the entity. Entities filed with a Secretary of State after 12/31/2024 will have to prepare the initial filing 30 days after the initial Secretary of State filing. However, existing companies created with a Secretary of State have to file their initial report by December 31, 2024. Once the initial report is filed, there is no additional filing needed until you experience a change in the BOI report. All companies who have a change in their BOI after initial filing are required to file an updated report within 30 days of the change. Examples of changes include changes to name, address, obtaining a new driver’s license or passport, changes to officer positions, and registering a DBA. If a beneficial owner becomes deceased, the report needs to be filed within 30 days of settling the owner’s estate. What happens if companies do not file? Penalties accrue at $591 per day, up to 2 years in prison, and/or up to $10,000 in fines. Hopefully the information provided below leaves you feeling a bit more informed on the steps needed to properly file with the new reporting requirement. Obviously working with your accountant can greatly help in navigating any questions or challenges that arise for your business, as it relates to the Corporate Transparency Act.   Harris will be providing more information to assist you in the filing requirement. Look for this communication to come soon.   [...] Read more...
January 23, 2024American workers are facing a savings crisis made more acute by soaring interest rates, persistent inflation, and other economic stressors. In its 2023 Workplace Wellness Survey, the Employee Benefit Research Institute (EBRI) found that 30% of workers could not pay for an unexpected $500 expense, while half of EBRI’s respondents considered their retirement savings to be their only “significant emergency savings.” This dependence on retirement savings is also rising according to Vanguard research that reveals hardship withdrawals from workplace retirement plans increased from 2021 to 2022. About 80% of those withdrawals were taken by lower-income participants (defined as the participants with an annual income of between $30,000 and $75,000) to avoid losing their home or to pay for unexpected medical bills. Further, one-third of the participants who took a hardship withdrawal in 2022 had previously taken a withdrawal in 2021. This data underscores an important challenge facing employees and employers alike: near-term financial needs may sabotage the long-term financial security and retirement outcomes of many Americans. And while today only 20% of workers have access to an emergency savings account at work, EBRI’s survey found that more than 80% of those without such a benefit want one and would prioritize it above other benefits, such as health savings accounts and additional paid time off. How Employers Can Help: The In-Plan Options To help address this issue, the Secure 2.0 Act of 2022 offers plan sponsors a way to include an emergency-savings benefit, also known as pension-linked emergency savings accounts or PLESAs, as an add-on to an existing retirement plan program. The Act permits PLESAs to be added as of January 1, 2024. Here are a few things to know about PLESAs: PLESAs are intended for non-highly-compensated employees (as defined by the IRS). Employees can contribute up to $2,500 (or a lesser amount determined by the plan sponsor) on an after-tax (Roth) basis. Employees may take withdrawals as frequently as monthly. Employers have the option of auto-enrolling employees in a PLESA up to a rate of 3% of compensation. Employers may match contributions to a PLESA, but must: Match at the same rate that applies to any retirement plan match. Make matching contributions to the participant’s retirement account, not the PLESA. Employees are not required to document a hardship or immediate financial need to take a withdrawal. PLESA contributions must be held as cash in interest-bearing deposit accounts or in regulated principal preservation investment products. While the intended goal of PLESAs is positive — to promote healthy saving habits while helping to preserve the retirement savings of employees — there remain many open questions about key aspects of the legislation including eligibility, employee and employer contributions, and distributions. The DOL and IRS have been directed to study emergency savings in defined-contribution plans and to report their findings to Congress, but the deadline for doing so isn’t until December 29, 2029. For plan sponsors concerned about the complexity and lack of regulatory clarity around setting up and administering PLESAs, a standalone emergency savings product is an alternative. Out-of-Plan Alternatives A growing number of retirement plan recordkeepers are partnering with plan sponsors to add out-of-plan (sometimes referred to as à la carte) emergency savings products to their menu of benefits. Financial wellness nonprofit Commonwealth interviewed plan recordkeepers and noted that eight out of nine recordkeepers offered or are planning to offer an emergency savings product. One such program recently initiated by some plan sponsors allows employees to contribute a portion of their net pay to an account maintained by the company’s 401(k) recordkeeper. Financial education modules and one-on-one financial coaching sessions are also being offered in conjunction with the program. Insight: Weigh the Pros and Cons When considering either approach, plan sponsors need to think through what they are trying to achieve. If it is a behavioral shift they are seeking, the in-plan option may make sense because once participants reach the $2,500 contribution limit, any overflow of funds automatically goes into the participant’s Roth retirement savings along with any employer matching contributions. In this way, plan sponsors are encouraging better short- and long-term saving habits, while also helping to reduce hardship withdrawals and loans from retirement plans along with the associated penalties and fees. For other employers, particularly smaller companies, the out-of-plan option may be a more easily implemented choice because employers are not required to already have a retirement plan in place. Also, because standalone savings plans are not subject to ERISA, there are no regulatory hurdles, auto-enrollment, auto-escalation, or fiduciary obligations for sponsors. The relative simplicity of implementing these out-of-plan savings vehicles could offer an attractive option for smaller employers. However, while out-of-plan products are attractive for their ease of use, they do not include an employer matching contribution feature. From a behavioral perspective, the out-of-plan product lacks the employee behavioral trigger that some employers want to achieve. Employers who are looking to modify employee savings habits could consider other options. We recommend sponsors clarify the goals for your employees and your benefits program and consider whether adding some type of emergency savings option (in or out-of-plan) may complement your overall objectives.   [...] Read more...
January 15, 2024While Accounting Standards Codification (ASC) Topic 842 is applicable to all entities, the adoption of the new leasing standard by nonprofit organizations is bringing into focus some unique considerations that may impact the conclusion of whether a contract actually contains a lease. What is a Lease? To set the stage for some of the nonprofit-specific lease considerations to follow, it is important to understand the definition of a lease under Topic 842. A lease is defined as follows: “A contract is or contains a lease if the contract conveys the right to control the use of identified property, plant, or equipment (an identified asset) for a period of time in exchange for consideration.” Free or Reduced Rent A nonprofit organization may be given space, equipment or other assets to use free of charge, or be charged below-market rates for these items. For these types of transactions, a nonprofit organization must consider whether to apply ASC Topic 842, Leases, ASC Topic 958-605, Not-for-Profit Entities Revenue Recognition – Contributions, or a combination of both standards. Let’s illustrate these concepts with some specific examples. Example 1: Free Rent Company A provides Nonprofit B with the right to use office space free of charge for five years. Company A retains legal title to the office building but allows Nonprofit B to use the space in furtherance of Nonprofit B’s mission. If Company A had rented the space to another entity, Company A would have charged $1,000 per month for the first year of the lease with a 3% annual escalation of rent for each additional year of the five-year term, which is considered to be the market value. What’s the accounting for that? On day one of the arrangement, Nonprofit B would record a contribution receivable, and related contribution revenue, for the full amount of rent payments over the five-year period ($63,710), discounted to present value using an appropriate discount rate. The revenue is donor-restricted due to time and is released from donor restrictions as the contributed asset (the office space) is used each period. On a straight-line basis each reporting period, Nonprofit B reduces the contribution receivable balance and records rent expense representing its use of the office space. What’s the basis for the accounting? The transaction in this example falls within the scope of contribution accounting under Topic 958-605 but not lease accounting under Topic 842, because Topic 842 requires an exchange of consideration. In other words, because Nonprofit B does not pay Company A cash (or other assets) for the use of the office space, the transaction falls outside of Topic 842. If the contributed assets are being provided for a specific number of periods (in this example, the period is five years), the contribution revenue (and related receivable) should be recorded in the period received for the market value of the lease payments discounted to present value. If the arrangement in this example had not specified the period of use, Nonprofit B would have recorded contribution revenue and the related rent expense each reporting period based on the fair value of the space for that period. Example 2: Below-Market Rent Company C provides Nonprofit D with the right to use office space for $250 per month for five years. Company C retains legal title to the office building, but allows Nonprofit D to use the space in furtherance of Nonprofit D’s mission. If Company C had rented the space to another entity instead, Company C would have charged $1,000 per month for the first year of the lease with a 3% annual escalation for each additional year of the five-year term, which is considered to be the market value. For purposes of this example, there is no variable lease cost, no non-lease components, no prepaid rent, no initial direct costs, and no lease incentives. We will assume a 3.5% risk-free rate for the calculation of the lease liability. We will also assume Nonprofit D will use 3.5% as the discount rate for the contribution. What’s the accounting for that? On the commencement date of the lease, Nonprofit D would record a lease liability equal to the present value of the lease payments totaling $13,550 (rounded) and a right-of-use asset in the same amount. For simplicity purposes, the present value calculations in this example are based on annual rather than monthly payment amounts. The contribution portion of this arrangement is calculated as the difference between the fair market value of rent ($63,710) and lease payments ($15,000) over the lease term totaling $48,710. Nonprofit D should record contribution revenue and a related contribution receivable at present value of $43,870 on the commencement date of the lease. Similar to the first example, the revenue is donor restricted due to time and would be released from donor restrictions as the contributed asset (the office space) is used each period. On a straight-line basis each reporting period, Nonprofit D reduces the contribution receivable balance and records rent expense representing its use of the office space. This example assumes a known fair market value for the rental payments. When such information is not known, organizations need to obtain such information directly from the lessor or find comparable market data for a similar asset with a similar rental term. What’s the basis for the accounting? The transaction above falls within the scope of both Topic 842 and Topic 958-605. Because ASC 842 defines consideration as cash or other assets exchanged, as well as non-cash consideration (subject to certain exceptions), only the portion of the transaction requiring payment is considered to be a lease within the scope of Topic 842. The fair value of the lease minus the cash payments made represents the contribution revenue and related receivable. In both of the illustrative examples above, the contribution of free or reduced-rate office space represents a non-financial asset. Nonprofit organizations must consider the revised presentation and disclosure requirements for contributed non-financial assets as outlined in Accounting Standards Update 2020-07, Not-for-Profit Entities (Topic 958): Presentation and Disclosures by Not-for-Profit Entities for Contributed Nonfinancial Assets. This standard is effective for periods beginning after June 15, 2021. Embedded Leases As nonprofit organizations review their activities and agreements to determine the universe of lease transactions, in both the year of adoption of Topic 842 and in subsequent periods, management should be aware that there may be leases “hiding” within service or other contracts. These types of contracts are referred to as contracts with embedded leases. The following chart provides some examples of service or other contracts where embedded leases may be present: Information Technology: May contain embedded assets like phones, computers, copies, servers, etc. Advertising: May contain embedded assets such as the use of a billboard. Inventory Management: Third parties may be engaged to assist a non-profit organization with inventory management. Use of warehouse space could be an embedded asset. Shipment of Goods or Materials: Use of a rail car or semi-truck. Food Service: Some organizations provide on-site cafeterias or vending machines. The use of the vending machines, freezers, refrigerators, soft-drink dispensers, etc. could represent an embedded lease. As part of internal policies and procedures related to accounting for leases, management should document, in the year of adoption and annually, how the universe of leases was determined, as well as how management considered the possible existence of embedded leases. While embedded leases may not be material to a nonprofit organization’s financial statements, an analysis to determine the relative value of such transactions should be performed nonetheless. Use of the Risk-Free Rate As an accounting policy election, Topic 842 permits nonprofit organizations (specifically entities that are not public business entities) to use a risk-free discount rate for leases instead of an incremental borrowing rate, determined using a period comparable with that of the lease term. The use of the risk-free rate may be a more expeditious approach for organizations that do not have a readily available incremental borrowing rate. As a reminder, Topic 842 defines the incremental borrowing rate as “the rate of interest that a lessee would have to pay to borrow on a collateralized basis over a similar term an amount equal to lease payments in a similar economic environment.” If an organization has a real estate lease with lease payments totaling $700,000 over the 10-year lease term, it would not be appropriate for the organization to use its $5 million, one-year, line-of-credit borrowing rate as the incremental borrowing rate because the term and amount of the borrowing is not similar. Organizations wishing to use an incremental borrowing rate that do not have such a rate readily available may need to use external parties such as banks or other lending institutions or valuation professionals to determine an appropriate collateralized rate for certain lease agreements. In summary, nonprofit organizations should take the time to examine all their agreements to assess whether they have any embedded leases or other arrangements that are subject to lease accounting. Written by Amy Duffin. © 2023 BDO USA, LLP. All rights reserved. www.bdo.com   See 1 ASC 842-10-15-3. [...] Read more...
December 16, 2023  As we approach the new year, it is time for businesses to review their 2023 and 2024 tax situations and identify opportunities to reducing, deferring or accelerating their tax obligations. Click the the picture below to read the full issue on 2023 Year-End Tax Planning for Businesses. This year’s guide is compiled into chapters for easy reference: Tax Accounting Methods Business Incentives & Tax Credits Customs & International Trade Financial Transactions & Instruments Global Employer Services Income Tax – ASC 740 International Tax Partnerships Real Estate State & Local Tax Transfer Pricing [...] Read more...
December 16, 2023As we approach the new year, it is time for individuals to review their 2023 and 2024 tax situations and identify opportunities to reducing, deferring or accelerating their tax obligations. Click the the picture below to read the full issue on 2023 Year-End Tax Planning for Individuals: Highlights from this guide: Individual Tax Planning Highlights with tax brackets Timing of Income and Deductions Long-Term Capital Gains with rate brackets Retirement Plan Contributions Foreign Earned Income Exclusion Kiddie Tax Alternative Minimum Tax Limitations on Deduction of State and Local Taxes ( Salt Limitations) Charitable Contributions Estate and Gift Taxes Net Operating Losses and Excess Business Loss Limitation [...] Read more...
December 11, 2023  While, the IRS’ announcement last month provides significant compliance relief for processing catch-up contributions as after-tax “Roth” contributions, the focus now for plan sponsors should be on proper implementation of the guidance. IRS Notice 2023-62 established a two-year administrative extension window for plan sponsors to delay their implementation of mandated changes required by the SECURE 2.0 Act of 2022 until January 1, 2026. It also clarified that the IRS will allow catch-up contributions to continue to be made under pre-SECURE 2.0 law for plan years starting in 2024. The IRS took this action to address a drafting mistake in Section 603 of SECURE 2.0 that technically eliminated all catch-up contributions by accidentally deleting IRC Section 402(g)(1)(C). Legislators have indicated Congress intends to resolve this error with a future technical correction. This extension was welcomed by the defined contribution retirement plan community, which had previously voiced concerns about having insufficient time to update their systems to implement the provision. Section 603 of SECURE 2.0 had originally required catch-up contributions made to a qualified retirement plan — such as 401(k), 403(b), or 457(b) plans — by higher income employees (who earned $145,000 or more in the prior year) to be made on a Roth basis beginning January 1, 2024. Despite the recent extension, additional clarification is needed for plan administrators, sponsors, and other key stakeholders to fully understand their regulatory burden. Execution Challenges The new so-called “Rothification” rules had generated numerous questions from key retirement plan industry stakeholders, including large employers. There were also requests for additional implementation time as well as for more detailed and clarifying regulatory guidance. For instance, the ERISA Industry Committee (ERIC) published an open letter in July 2023 that cited a number of administrative hurdles for implementation and the need for transition relief. One concern cited was the new $145,000 income limit imposed on Roth catch-up contributions. Because it is a brand-new threshold (and not part of any existing qualified plan rule or requirement), implementation would require plan sponsors to coordinate closely with their payroll administrators, recordkeepers, and other service providers to make the necessary system updates. The new income limit is also anticipated to have a significant trickle-down impact on both sponsor and provider systems and processes. Plan sponsors also need to develop and roll out communication of the changes to employees, which requires IRS guidance that had not yet been provided. As ERIC’s open letter indicated, the industry had concerns that starting implementation before the issuance of IRS guidance could result in costly re-work. Additionally, employers whose plans do not currently allow for Roth plan contributions faced a dilemma as to whether to eliminate catch-up contributions entirely (at least, until they were able to implement a Roth program) or attempt to quickly implement a Roth option. Welcome Relief The IRS notice provides a two-year administrative transition period during which qualified retirement plans offering catch-up contributions will be treated as satisfying the new rules in Section 414(v)(7)(A) even if the contributions are not designated as Roth contributions throughout the transition period (or until December 31, 2025). Additionally, a plan that does not currently provide for any designated Roth contributions will still be treated as satisfying the new requirements. The notice also identifies some topics for expected future regulatory guidance, including the following proposed IRS positions on important open questions: Higher-income employees with no FICA income in the preceding year would not be subject to the requirements of the new catch-up rules. Plan sponsors may treat higher-income earners’ pre-tax, catch-up contributions elections as default Roth catch-up elections when they become subject to the mandatory Roth catch-up treatment. For plans maintained by more than one employer, the preceding calendar year wages for an eligible participant would not be aggregated with wages from another participating employer for purposes of determining whether the participant’s income meets the $145,000 threshold.   [...] Read more...
November 6, 2023Stay abreast of the continuing new regulations impacting the nonprofit industry, and catch up on new key trends in our Nonprofit Fall 2023 Newsletter!   HIGHLIGHTS FROM THIS ISSUE Cash Benefits for Supporting ESG – New Markets Tax Credit The IRS Weighs in on Nonprofit NIL Collectives  GASB Implementation Guide No. 2023-1, Implementation Guidance Update-2023 The Evolving Role of CFOs in Driving ESG Initiatives Are Your Processes Innovative or Merely Electronic? Leverage Technology the Right Way BDO Professionals in the News Form 990 Review: What Nonprofit Boards Should Look For … Click below to view the file.   Nonprofit and Government Page   [...] Read more...
October 16, 2023Corporate sponsorships represents a significant funding source for tax exempt organizations and an important business strategy for taxable organizations. Sponsorships creates identification with charitable activity. This type of identification is valuable to those organizations. Sponsorship payments received by tax-exempt organizations has been an issue that the IRS has struggled with, first focusing the nature of the services provided by the exempt organization rather than the benefit received by the sponsor, and distinguishing advertising (which is an unrelated trade or business activity) from acknowledgements (which are not UBTI). Then section 513(i) was added to the law, which defines qualified sponsorship payments and provides that they are not subject to unrelated business income tax. What are Qualified Sponsorship Payments? Treas. Reg 1.513-4(c)(i) defines a qualified sponsorship payments as any payment of money, transfer of property or the performance of services, by any person engaged in a trade or business, where there is no arrangement or expectation that the person will receive any substantial return benefit in exchange for the payment. What are NOT Qualified Sponsorship Payments? Treas. Reg 1.513-4(b) states that a qualified sponsorship payment does not include: Any payment if the amount of such payment is contingent upon the level of attendance at one or more events, broadcast ratings, or other factors indicating the degree of public exposure to one or more events. Any payment which entitles the payor to the use or acknowledgement of the name or logo (or product lines) of the payor’s trade or business in regularly scheduled and printed material (periodicals) published by or on behalf of the exempt organization that is not related to and primarily distributed in connection with a specific event conducted by the payee organization; or Any payment made in connection with any qualified convention or trade show activity. (The term “convention and trade show activity” means any activity of a kind traditionally conducted at conventions, annual meetings, or trade shows.) Any payment which entitles the payor to acknowledgement containing qualitative or comparative language, price information or other indications of savings or value associated with a productor service, an endorsement or an inducement to purchase, sell or use the sponsor’s company, service, facility or product. These are considered advertising. A single message that contains both advertising and acknowledgement is considered advertising. What is Substantial Return Benefit? Treas. Reg 1.513-4(c)(2) provides that if there is an arrangement or expectation that the payor will receive a substantial return benefit with respect to any payment, then only the portion of the payment thatexceeds the fair market value of the substantial return benefit is a qualified sponsorship payment. However, if the exempt organization does not establish that the payment exceeds the fair market value of any substantial return benefits, the no portion of the payment constitutes a qualified sponsorship payment. More information on Qualified Sponsorship Payments can be found at https://www.irs.gov/charities-non-profits/advertising-orqualified-sponsorship-payments.   Nonprofit and Government Page   [...] Read more...
September 7, 2023What are In-Kind Contributions In-kind contributions are a wonderful way for your nonprofit organization to receive support that goes beyond monetary donations. These unique contributions involve the transfer of assets, such as goods or services, and can come from individuals, organizations, or companies. Goods: In-kind donations can include physical materials that can be of great value to your organization. For example, someone might generously donate office furniture or computer equipment, which you can use to further your mission. Services: Talented professionals can also contribute their skills and expertise as in-kind donations. This could be anything from accounting and legal assistance to free use of meeting spaces. Recording In-Kind Donations Properly documenting in-kind donations serves several important purposes. It ensures that both you and your donors have the necessary records for tax purposes, and it allows you to accurately report these contributions in your annual tax forms. Additionally, properly recording in-kind documents is arequirement for following Generally Accepted Accounting Principles (GAAP). When you receive in-kind donations, it’s essential to promptly estimate their value and record them in your organization’s chart of accounts. You can create separate accounts like “In-Kind Contributions – Goods” and “In-Kind Contributions – Services” in your chart of accounts to differentiate between tangible goods and professional services received. Let’s say a lawyer generously donates $2,000 worth of services. To record this in your books, you would make the following entry: Debit in-kind Contributions – Services $2,000 Credit in-kind Contributions – Services $2,000 Remember, the aim is to maintain a net zero balance in the account since the contribution doesn’t directly affect your bank account balance. While your cash remains the same, the in-kind donation enhances your flexibility by eliminating the need to spend money on the donated item or service. Tax Considerations There are two aspects to consider: the forms your nonprofit organization needs to submit annually, and the taxes your supporters pay. Are In-Kind Donations Tax-Deductible for Donors? Absolutely! In-kind donations are tax-deductible for your donors, which is a fantastic incentive for them to contribute. To help your supporters claim a tax deduction for their in-kind donations, it’s important to provide a written acknowledgment. This acknowledgment should include your nonprofit’s name, Employer Identification Number (EIN), date of receipt or service, a description of the donation or service contributed, and a statement confirming that the donor didn’t receive anything in return for their gift. Unlike monetary donations where your organization provides the value, in-kind donations require the donor to determine the fair value of their contribution. However, you can offer a good-faith estimate to assist them. When drafting your acknowledgment letters, make sure to review the IRS guidelines to ensure compliance and convey your appreciation effectively. Do In-Kind Donations Need to be Reported on the Form 990? Yes, they do! Tangible in-kind donations should be recorded and reported on Form 990. Keep in mind that if your in-kind donations are valued at more than $25,000 or include art or historical artifacts, there may be additional paperwork involved. Although intangible donations like services are not mandatory to report on this form, it’s still a good idea to record them to maintain compliance with GAAP standards. Remember to thoroughly research IRS guidelines to understand specific rules, regulations, and reporting requirements for different types of in-kind donations. For example, if you receive vehicle donations valued over $500, there are specific IRS rules you need to follow. Ensuring compliance with IRS guidelines is essential to properly accept and report in-kind contributions. Nonprofit and Government Page [...] Read more...
August 22, 2023    The U.S. Department of Labor (DOL) has issued its long-awaited Final Rule to revise the Davis Bacon Act (DBA) regulations. The Final Rule will be effective 60 days after the date of publication in the Federal Register, which currently is scheduled for August 23rd. While we are still analyzing all the regulatory changes in the 812 pages Final Rule, it is clear (like the DOL’s Notice of Proposed Rulemaking (NPRM) issued March 18, 2022) that the Final Rule contains only a few changes that will be beneficial to contractors, while most of the changes heavily favor workers and unions and enhance the DOL’s enforcement tools. Examples of key changes in the latter category include: Changing the way wage and fringe rates are developed in wage determinations to favor adoption of union rates which will result in higher wage and benefits Broadening the definition of “site of the work” to include locations where “significant portions” of a project (such as prefabricated materials manufacturing facilities) are produced Expanding DBA coverage of truck drivers and material suppliers Making DBA contract clauses and applicable wage determinations effective by “operation of law” even where a contracting agency fails in include them in a contract or funding agreement Requiring DOL approval of vacation and holiday plans for fringe credit Requiring contractors to consent to cross withholding for back wages owed on contracts held by different but related legal entities (those controlled by the same controlling shareholder or entities that are joint venturers or partners on a federal contract) Expanding record-keeping obligations These changes in the DBA regulation will impact not only Davis Bacon Act contracts, but also the DBA requirements in over 70 statutes (DBA Related Acts). As a result, federal agencies provide funding assistance for construction projects primarily through direct funding, grants, loans, loan guarantees, or insurance. Also impacted, at least in part, will be the prevailing wages requirements of the Inflation Reduction Act, which provides enhanced tax credits for certain clean energy projects in exchange for compliance with prevailing wage and apprenticeship requirements. We anticipate multiple legal challenges to the Final Rule by construction trade associations and other interested parties, and that these court filings will be accompanied by requests for temporary injunctions of the Final Rule. Construction contractors and other impacted parties should start gearing up now for compliance with the Final Rule. Construction & Engineering Page Real Estate Page [...] Read more...
July 13, 2023The Department of Labor (DOL) released the final changes to Form 5500 relating to the September 2021 notice of proposed form revisions (NPFR) to amend the Form 5500. The changes fall into seven major categories. These changes are effective for plan years beginning on or after January 1, 2023 and will be incorporated into the 2023 Form 5500. As a reminder, the Form 5500 provides the DOL, Internal Revenue Service and the Pension Benefit Guaranty Corporation with information about a retirement plan’s operations, qualifications, financial condition, and compliance with government regulations. Below, we review some of the key changes to Form 5500 and what the adjustments are. Are You a Large Plan or a Small Plan? The Rules Have Changed Historically, determining whether your plan was “large” versus “small” was based on the number of eligible participants in your plan. If your plan had at least 100 eligible participants on the first day of the plan year, you were considered a large plan—regardless of how many participants had accounts or elected to participate in the plan. As a result, the DOL’s recent changes to Form 5500 redefine large plans by the number of participants with account balances on the first day of the plan year. If your plan has at least 100 participants with active accounts, then you are a large plan, and an annual audit is required. (Note that this provision only applies to defined contribution plans and is in effect for plan years that begin on or after January 1, 2023.)This provision will significantly change the threshold for the status of large versus small plans. The DOL estimates 19,500 large plans will no longer be subject to the annual audit requirement relating to this participant-count methodology change. While this change is likely good news for many plan sponsors, there are some potential issues. For example, a failed compliance test or the allocation of forfeitures could push plans over the 100-participant threshold. If a plan fails the Actual Deferral Percentage or the Actual Contribution Percentage test, participants who closed out their accounts may need to be reinstated for reimbursement purposes. To avoid this issue, plan sponsors should carefully review their plan documents to determine whether they are able to “push out” participants with account balances under $5,000. More Updates Coming Down the Pike The DOL’s final changes includes several other changes. Mock-ups of the new forms and instructions for the following items will be available later this year at Reginfo.gov: Consolidated Form 5500 for Defined Contribution Groups Streamlined reporting on the 5500 for pooled employer plans and multiple-employer plans New breakout categories for administrative expenses (Schedule H) Revisions to the financial and funding reporting requirements for defined benefit plans New Internal Revenue Code (IRC) compliance questions to improve tax oversight Certain revisions from the NPFR have been delayed including proposed revisions to the content requirements for the schedules of assets filed by large plans. The DOL wants to modernize data reported in a plan’s individual investments to improve consistency, transparency, and usability of plan investment information, but feedback revealed that service providers need more time. Insight: Partner With Service Providers to Build Your Strategy Most plan sponsors process distributions with the help of service providers, so it is important to partner with such service providers to keep an eye on your number of participants—especially if you are close to the threshold of 100 active plan participants. Plan sponsors should clarify if it is their goal to remain a small plan, familiarize themselves with the options presented in the plan document to move participants out of the plan, and determine the procedure for a potential distribution. Learn how Harris CPAs can help you here! Employee Benefit Plan Page   [...] Read more...
May 31, 2023Stay abreast of the continuing new regulations impacting the nonprofit industry, and catch up on new key trends!   HIGHLIGHTS FROM THIS ISSUE Is that a Lease? A Focus on Nonprofit Lease Considerations under ASC Topic 842 The Great Resignation, Talent Shortages, Inflation, Recession … Maybe Bonuses Can Help! Pay Transparency –  Is Your Organization Ready? The Inflation Reduction Act of 2022: New Incentives for your College or University Implementation of GASB Statement No. 94, Public and Public-Public Partnerships and Availability Payment Arrangements Updates Guidance: Federal Perkins Loan Closeout Endowment Woes! Navigating the Nuances With Endowments ESG: An Opportunity for Nonprofits Click below to view the file.   Newsletter Nonprofit and Government Page   [...] Read more...
May 18, 2023by Drew Mansell, CPA Introduction The Inflation Reduction Act (IRA) increased the potential benefit of several energy efficiency tax incentives. These include the Section 179D energy efficient commercial buildings deduction and the Section 45L new energy efficient home credit. A more detailed description of these incentives is below. These changes warrant a renewed look at these incentives by companies looking to build or remodel real property. The Inflation Reduction Act’s stated goals include reducing carbon emissions and encouraging domestic energy production and manufacturing. The law introduces and expands existing tax incentives available for those investing in clean energy projects. It also increased the time horizon for these incentives, in many cases by up to 10 years. Importance of Extension Many tax credits and incentives available have limited time horizons, often requiring annual renewal by congress. This has caused uncertainty about their benefits, especially in industries where projects typically take multiple years to complete. With the extension of these incentives for the next ten years, that uncertainty is eliminated and developers can build these incentives into project costs for the foreseeable future. Tax Incentives to Watch New Energy Efficient Home Credit (IRC Sec. 45L) A $2,000 credit per single family residential housing unit. Available to multifamily developers, investors, and construction companies that build energy efficient properties sold or leased through Dec. 31, 2022. Increased to $2,500 per unit under Energy Star and $5,000 per unit under the Zero Energy Ready Homes program from Jan. 1, 2023, through Dec. 31, 2032. Energy Efficient Commercial Buildings Deduction (IRC Sec. 179D) Deduction available to building owners for installing qualifying energy systems. The deduction can be up to $1.88 per sq. ft. through Dec. 31, 2022 and increases up to $5.00 per sq. ft. beginning in 2023 if the project meets prevailing wage, and apprenticeship requirements. See below. The Feasibility Study Real estate and construction companies should discuss these incentives with their tax advisors who can connect them with experts to determine project feasibility. These professionals, usually engineers, evaluate a company’s projects and consider incentives that are likely applicable. The study can be used to make businesses decisions about next steps. A feasibility analysis can follow five simple steps: Consider the project’s goals. Look into intended investments your company plans to make for its building project. Split investments up into distinct groups. Section off relevant investments into qualifying and nonqualifying categories. Match investments to potential IRA incentives. Compare the list of planned investments with the list of available tax incentives and determine overlap. Conduct a cost-benefit analysis of implementing a tax incentive. Calculate the degree of investment required to achieve eligibility and the return on investment the tax incentives would offer. Identify requirements to substantiate claims to incentives. Pull together the documentation required to prove existing or intended adherence to tax incentive requirements. Prevailing Wage & Apprenticeship Requirements A key hurdle to qualify for these incentives are the prevailing wage and apprenticeship requirements. Companies must pay workers wages and benefits that meets standards for their geographical area set by the government. A certain portion of the labor on each project must also be performed by certified apprentices. It is important to understand these requirements before beginning a project. A feasibility study could include an analysis of these requirements and whether adjustments would be required to meet them. Conclusion These incentives have often been overlooked by taxpayers and practitioners alike due to their relatively minor potential benefits and complex rules to navigate. However, after the “remodel” of these incentives in the IRA, they deserve another look. We recommend reaching out to Harris or your preferred advisor if you think a project in your pipeline could qualify for one of these incentives.   Full Magazine Issue here: https://www.idahoagc.org/blog/spring-2023-buildingidaho   Construction & Engineering Page   Real Estate Page   [...] Read more...
February 21, 2023SECURE 2.0 was signed into law on December 29, 2022, makes sweeping changes to retirement savings plans. Before plan sponsors can take advantage of the many provisions in SECURE 2.0, the DOL will need to provide additional regulations and guidance on some of the provisions. In other words, there is more to come on SECURE 2.0. In the meantime, the DOL is focused on 17 items recently released in its biannual regulatory agenda. Plan sponsors and other industry experts should pay attention to this agenda to be sure they understand how these changes may affect them—particularly in areas such as changes to the fiduciary rule, updates on pooled employer plans, and final rules on lifetime income illustrations. In total, the Employee Benefits Security Administration (EBSA) listed three pre-rule stage items, nine proposed rule stage items, and five final rule stage items in its recently released regulatory agenda. Pre-Rule Stage: Improving Participant Engagement and Effectiveness: The DOL’s EBSA has been tasked with finding ways to improve retirement plan disclosures to enhance outcomes for employees. The EBSA will start by consulting with plan sponsors and other stakeholders to explore ways to improve such disclosures. Pooled Employer Plans: The SECURE Act of 2019 amended the Employee Retirement Income Security Act of 1974 (ERISA) to allow pooled employer plans to be a type of single employer pension benefit plan. The EBSA will begin exploring the need for regulatory guidance to run these plans. Requirements Related to Advanced Explanation of Benefits and Other Provisions Under the Consolidated Appropriations Act of 2021: The EBSA is reviewing whether regulation or guidance is needed to ensure patients have transparency in their health care treatment options and expected costs before a scheduled service. Request for comments closed in November 2022 and an analysis is expected in April 2023. Proposed-Rule Stage Definition of the Term “Fiduciary”: The DOL’s is proposing to amend ERISA’s definition of fiduciary to more closely reflect today’s relationships between participants, service providers, and others who provide investment advice for a fee. This proposal has been carried over since the Spring 2021 regulatory agenda and has no timeline for completion. Improvement of the Form 5500 and Implementing Related Regulations: Working with the Internal Revenue Service and Pension Benefit Guaranty Corporation, the DOL intends to modernize the Form 5500 to make investment data more mineable. This proposal has been carried over since Fall 2021 and movement on it is expected by June 2023. Definition of Employer Under Section 3(5) of ERISA – Association Health Plans: The EBSA will explore whether to replace or remove its 2018 final rule that set alternative criteria when an employer association could act on behalf of an employer to create a multiple employer group health plan. Action on this is expected in March 2023. Adoption of Amended and Restated Voluntary Fiduciary Correction Program: The EBSA took public comments until January 20, 2023 on its plan to expand the scope of transactions eligible for self-correction. Final Rule Stage Pension Benefit Statements – Lifetime Income Illustrations: The SECURE Act added a lifetime income illustration requirement for certain defined contribution plans. The final rule is expected to be released in May 2023. Prohibited Transaction Exemption Procedures: An April 2023 final rule is expected that would modify the DOL’s process for granting prohibited transaction exemption. Independent Contractor Classification Under the Wage and Hour Division agenda, the DOL announced that it expects to issue a final rule clarifying independent contractor status in May 2023. This ruling has been issued, delayed, and debated in court by the Biden and Trump administrations. The current administration believes the 2021 regulation does not reflect what is written in the Fair Labor Standards Act and will issue its updated rule to complement the law. Employee Benefit Plan Page [...] Read more...
January 11, 2023Harris CPAs has announced a merger with HH & Associates, Inc. of Meridian, Idaho and Thomas & Johnston, Chtd of Ketchum, Idaho. The mergers add a total of 8 professionals to the Harris CPAs team, and a new office location in Ketchum. HH & Associates offers tax planning and preparation, advisory and accounting services and has worked side by side with their business owners to help them stay competitive and profitable for over 30 years. David Hutchison and his team of 2 other professionals have relocated to Harris’ Meridian office. Thomas & Johnston, Chtd is located in Ketchum, Idaho, and provides tax planning and preparation, advisory and accounting services. They have an established reputation for quality service and deep client relationships in the area. Ryan Still, Tim Thomas, Lori Johnston and their team of professionals remain in their current location at 680 N Second Ave in Ketchum. Harris CPAs has been a leading provider of assurance, tax, accounting, and advisory services in Idaho since 1996. They serve clients throughout the United States and in all stages of the business cycle. “Creating a positive impact throughout Idaho has been a priority for Harris, and we are excited to now be able to service our clients in the Wood River Valley from our new office, as well as welcome the clients of both Thomas & Johnston and HH & Associates. Both firms have a deep commitment to their client relationships, which mirror our own values. In addition, this merger allows us to add industry-leading expertise to our team with the addition of 4 new partners with decades of experience,” said Josh Tyree, CEO at Harris CPAs. An open house reception for clients and the community will take place on January 19, 2023 at 680 N Second Ave, Ketchum. For more information, please contact Tara Davis, Marketing Manager for Harris CPAs at (208) 333-8965 or taradavis@harriscpas.com. [...] Read more...
January 9, 2023The Winter Nonprofit Standard Newsletter 2022 is here! Stay abreast of the continuing new regulations impacting the nonprofit industry, and catch up on new key trends in the nonprofit industry!   HIGHLIGHTS FROM THIS ISSUE How Will CECL Affect Your Non-For-Profit? Presentation and Disclosure Examples for FASBA ASU on Contributed Nonfinancial Assets GASB Statement No. 101 Compensated Absences New Data on Nonprofit Challenges and Opportunities; Benchmark Yourself Against Industries Peers Navigating FEMA’s COVID-19 Appeals Process Click below to view the file.   Winter Nonprofit Standard Newsletter 2022   Nonprofit and Government Page   [...] Read more...
December 9, 2022by Kevin Hatrick Small business owners are always looking for ways to protect against catastrophic risks while improving cash flows. One tool that can help you do both is using a captive insurance company. A captive insurance company is a small insurance company created by a business to help hedge against specific risks – generally risks that a company cannot protect against using available insurance, such as supply-chain interruption or key employee loss. It is an increasingly popular tool for risk management, currently being used by over 90% of Fortune 1000 companies. By creating and using a captive insurance company, a business essentially pays insurance premiums to a company they own. The insurance company then keeps that money available – usually in low risk investment vehicles – to be used to protect against the specified risks if and when they occur.There are three main advantages of captive insurance: Increased protection – Captive insurance companies allow businesses to be ready for business disruptions that would previously have gone uninsured. Also, because captive insurance inherently offers financial rewards for effectively controlling losses, safety and loss control get a higher level of attention. Improved profitability – There are a number of ways in which captive insurance companies help businesses increase profitability.a. They provide the opportunity to capture investment income from the reserves.b. They reduce the expense factors associated with commercial insurance.c. They minimize the impact of specific losses and risks. Tax savings – Captive insurance companies can elect to be taxed only on its investment income and not on the insurance premiums it receives. This allows for potential short-term and long-term tax savings opportunities. If you want to minimize risks while simultaneously improving cash flows, protect your business against disruptions, increase profitability, and increase your company’s tax savings; using a captive insurance company can be extremely beneficial. If you think this may be an option for your company, consult with your tax professional for more guidance.   Construction & Engineering Page   Real Estate Page   [...] Read more...
December 8, 2022Help your neighbors in need this holiday season! We are partnering with various organizations across Idaho to help provide books and meals for kids from food-insecure homes this holiday season! Each office is holding their own drive, let us know how you can help! Meridian Office Book Drive (Benefiting Book it Forward! Idaho): Did you know that in low-income homes there is on average only 1 book for every 300 children? Kids who only read in school will rarely be great readers. The availability of reading material in the home is directly associated with children’s achievement in reading. The Details: All books will be donated to Book it Forward! Idaho Donated books should be for kids age 1-18 Books should be in nearly new condition Books can be dropped off at our Meridian office through December 15th Location:Harris CPAs Meridian – 1120 S Rackham Way, Suite 100 (In the Kiln Building) Coeur d’Alene Office book Drive (Benefiting the Coeur d’Alene Public Library) Help us support the Coeur d’Alene Public Library Book drive, Jólabókaflóð (pronounced yo-la-bok-a-flot). This is an Icelandic tradition of book giving. It began in WWII, when paper was far cheaper than imported goods. People began giving books as gifts. The Coeur d’Alene Library is bringing this tradition to you! Books will be wrapped and given away by the Library for free in late December! The Details: All books will be donated to Coeur D’Alene Library to support their Jólabókaflóð Holiday Book Giveaway Donated books should be for kids age 1-18 Books should be new, or mint condition Books can be dropped off at our Meridian office through December 13th Location:Harris CPAs – 560 W Canfield Ave, Coeur d’Alene Twin Falls, Buhl, and Ketchum Office Food Drives Help your neighbors in need this holiday season! We are partnering with the Harrison Elementary Food Pantry in Twin Falls, the West End Ministerial Association Food Pantry in Buhl, and the Hunger Coalition in the Wood River Valley to help provide meals for kids from food-insecure homes this holiday season. Most Needed Items: Granola bars Boxed mac and cheese Canned fruit (w/ pop tops preferred) Canned pasta (w/ pop tops preferred) Chili with meat Soup with meat (w/ pop tops preferred) Boxed oatmeal packets Cold cereal Peanut butter Applesauce But we’ll take all non-perishable foods! Items can be dropped off at our Twin Falls, Buhl, or Ketchum offices through December 15th! We appreciate your support, and hope you have a wonderful holiday season! Locations:Harris CPAs Twin Falls – 161 5th Ave S, Ste 200Harris CPAs Buhl – 1020 Main StreetHarris CPAs Ketchum – 680 Second Ave Don’t have books or food but still want to donate? Monetary donations are accepted too! Use the “Pay Online” button at www.harriscpas.com, and we’ll deliver the donated amount in your name! Just include “Holiday Drive” and the office name you are donating to in the invoice field. [...] Read more...
November 11, 2022As we approach the new year, it is time for individuals to review their 2022 and 2023 tax situations and identify opportunities to reducing, deferring or accelerating their tax obligations. Click the the picture below to read the full issue on 2022 Year-End Tax Planning for Individuals: Highlights from this guide: Individual Tax Planning Highlights with tax brackets Timing of Income and Deductions Long-Term Capital Gains with rate brackets Retirement Plan Contributions Foreign Earned Income Exclusion Kiddie Tax Alternative Minimum Tax Limitations on Deduction of State and Local Taxes ( Salt Limitations) Charitable Contributions Net Operating Losses and Excess Busoness Loss Limitation Estate and Gift Taxes [...] Read more...
November 11, 2022As we approach the new year, it is time for businesses to review their 2022 and 2023 tax situations and identify opportunities to reducing, deferring or accelerating their tax obligations. Click the the picture below to read the full issue on 2022 Year-End Tax Planning for Individuals: Highlights from this guide: Recent Legislative Changes – The Inflations Reductions Act and Chips Act Claim Available Tax Credits Partnerships and S Corporations Considerations For Employers State and Local Taxes [...] Read more...
October 26, 2022Stay abreast of the continuing new regulations impacting the nonprofit industry, and catch up on new key trends in the nonprofit industry!   HIGHLIGHTS FROM THIS ISSUE Implementing FASB ASU on Contributed Nonfinancial Assets GASB Statement No. 100, Accounting Changes and Error Corrections “Is there Something I Can Read That Describes Our Compensation Program?” Implications and Impacts NSPM-33 on Research Institutions Cybersecurity Best Practices For Your Organization How Technology & Culture Support Sustainability Click below to view the file.     Nonprofit and Government Page   [...] Read more...
September 23, 2022by Drew Mansell, CPA – Harris CPAs The Tax Cuts and Jobs Act (TCJA), passed in 2017, was the most significant amendment to the Internal Revenue Code since the 1980s. The majority of the changes have already gone in to effect, and taxpayers and practitioners alike are familiar with most of them, as we’re four tax years in to the law’s implementation. However, a set of amendments seldom discussed until now are the amendments to Internal Revenue Code Section 174. These changes go in to effect for tax years beginning after 12/31/21 and may impact some construction and engineering firms with R&D. Section 174 defines which expenditures are qualifying research and development expenditures associated with claiming an R&D Tax Credit under Section 41 on form 6765. These costs include costs incurred related to the development or improvement of a product, including costs associated with improving the production process, and costs incurred for internally developed software. Starting in 2022, these costs can no longer be expensed in the year incurred. The amendments to Section 174 require these costs to be amortized over 5 years for costs incurred domestically, and 15 years for costs incurred outside the US. These costs must be capitalized as of the midpoint of the tax year when the expenses were incurred. This means the 60 or 180 month amortization period will begin July 1st for most taxpayers. A key point about the changes to Section 174 is that even if a taxpayer is not eligible to take the R&D tax credit under Section 41, the requirement to capitalize Section 174 costs still applies. A requirement to file an Accounting Method Change (Form 3115) may exist for taxpayers who have historically expensed Section 174 costs in the year incurred. Companies impacted by the above changes should contact Harris prior to the end of 2022 to ensure these costs are being accurately captured, as well as to discuss any potential 3115 filing requirement and materiality of book to tax differences.     Construction & Engineering Page   [...] Read more...
August 12, 2022Stay abreast of the continuing new regulations impacting the nonprofit industry, and catch up on new key trends in the nonprofit industry!   HIGHLIGHTS FROM THIS ISSUE Engaging Donors at Every Level: A Checklist OMB Issues the 2022 Compliance Supplement GASB Statement No. 99  Executive Compensation Excise Tax: Challenging and Strategies Salary Increase Budgets Jump for Nonprofits Click below to view the file.     Nonprofit and Government Page   [...] Read more...
July 20, 2022by Alison Suko   Do you own an interest in an S Corporation, Partnership, or Limited Liability Company taxed as a Partnership? If it operates in Idaho, it may qualify as an Affected Business Entity (ABE). Many businesses taxed as S Corporations or Partnerships, currently pay distributions to their owners in order to pay the taxes on the business taxable income. Because distributions are not deductible from taxable income, the taxes are paid by the source, but there is no tax benefit. On April 15, 2021, Governor Little signed House Bill 317, now Idaho Code Section 63-3026B “Affected Business Entities – State and Local Taxation Treatment.” This new law allows certain pass through entities like those mentioned above to pay Idaho state income taxes on the owner’s share of the business income at a flat 6.5% rate. This tax is deductible on the pass through owner’s federal tax return. It is not deductible on the owner’s Idaho tax return, but instead is treated as a credit toward the taxes due by the owner. An annual election must be made on the pass through entity’s original, timely-filed Idaho tax return. Once the election is made, it is irrevocable for that tax year. The election must be signed by all members of the electing entity or by an officer, manager, or member with authorization to make these decision on behalf of all other owners. Payments can be made using the Idaho State Tax Commission’s QuickPay, a business’ existing TAP account, or by mailing in a check with Idaho Form 41ES. The entity’s tax must be paid prior to the filing of the owner’s tax return in order to be applied to a return filed for the same year. ABE payments are deductible in the year they are paid, so a payment made before December 31, 2022 will be deducted on the owners 2022 tax return. If the amount paid is more than the owner’s Idaho tax liability, the excess is refunded. If you own an interest in a pass through entity and are looking for ways to lower your federal income tax bill, you may want to consider whether an ABE election would work for you. Contact your tax professional to see if this is an option for you and how much tax could be saved.   Construction & Engineering Page   [...] Read more...
June 30, 2022With the dust settling after another tax season, all our offices will be implementing new post-tax season office hours effective July 1st. Our offices will be open Monday – Thursday, 8:00am – 5:00pm, and will now be closed on Fridays. This means doors will be locked on Fridays, phones will not be answered, and we are closed for appointments. Rest assured our team will still be working diligently on your projects behind closed doors on Fridays, and this will allow us dedicated uninterrupted time to focus on completing projects more efficiently. If you have documents to drop off, we encourage you to send them through the “Send Us a File” button on our website, or drop them off during normal business hours. If documents need to be dropped off outside of office hours, please continue to use the drop slot near the front door.  We will re-open Fridays during tax season, January through April. Thank you for your continued trust and confidence and if you have any questions, please don’t hesitate to ask! Sincerely,  Robert ShappeeChief Operating Officer [...] Read more...
June 27, 2022by Margaret Flowers Are you holding onto an investment property and looking at the property values climbing? Have you considered if this is the time to sell the property? Do the taxes on the gain from the schedule have you sweating buckets? Have you considered the possibility of doing a 1031 exchange to cash in the gains and avoid the taxes on the gains, but realized that you would have to buy a new property? If you have looked at possibly selling your existing investment property, you may have considered doing a tax-free exchange under section 1031 to avoid the tax on the large capital gains on the property (and the potential recapture of the depreciation you have claimed over the years). In researching the rules for the 1031 exchange, you may have come across the requirement to identify the replacement property within 45 days of the close date of the sale. In this real estate market, properties are selling quickly upon listing so to identify the replacement property and actually close on that property are getting extremely difficult. You can identify multiple properties to help protect your 1031 transaction, but once you identify more than three properties, there are rules about the market value of the identified properties exceeding the value of the property you want to sell. This can create a stressful environment or can be downright prohibitive from successfully executing a 1031 exchange. Another issue to consider is if you are considering selling an investment property because you no longer want to be involved in the management of said property, you are looking to retire or reduce the amount of time spent on the property. In order to have a successful 1031 exchange you need a replacement investment property which will create the need to manage the property, thereby undermining your goals in selling your original property. Enter the Delaware Statutory Trust (DST). Since 2004, the IRS has allowed investors to do a 1031 exchange from an investment property into a DST and continue to defer the gain. The Delaware Statutory Trust is a fractional ownership in an packaged investment of real estate properties. The Companies that offer these have several options depending on your desired investment term and investment goals. The properties generally are managed by the companies offering the investment so you can step back into a more passive role while maintaining the integrity of the 1031 transaction and maintaining cash flow from the properties. Because the packages are generally established, the identification requirement of the replacement property is able to be done quickly so that you can meet the rules required under section 1031. If you have been debating doing a 1031 exchange but thought that the market forces currently at play were prohibiting you from successfully completing a 1031 transaction, you may want to consider looking into the Delaware Statutory Trust. You will want to consult your tax professional to see what the implications of doing so are and how much the tax savings would be to see if this is something you should consider.     Construction & Engineering Page   Real Estate Page   [...] Read more...
June 15, 2022The Internal Revenue Service on June, 9th announced an increase in the optional standard mileage rate for the final 6 months of 2022. Taxpayers may use the optional standard mileage rates to calculate the deductible costs of operating an automobile for business and certain other purposes. For the final 6 months of 2022, the standard mileage rate for business travel will be 62.5 cents per mile, up 4 cents from the rate effective at the start of the year. The new rate for deductible medical or moving expenses (available for active-duty members of the military) will be 22 cents for the remainder of 2022, up 4 cents from the rate effective at the start of 2022. These new rates become effective July 1, 2022. In recognition of recent gasoline price increases, the IRS made this special adjustment for the final months of 2022. The IRS normally updates the mileage rates once a year in the fall for the next calendar year. For travel from Jan. 1 through June 30, 2022. While fuel costs are a significant factor in the mileage figure, other items enter into the calculation of mileage rates, such as depreciation and insurance and other fixed and variable costs. The optional business standard mileage rate is used to compute the deductible costs of operating an automobile for business use in lieu of tracking actual costs. This rate is also used as a benchmark by the federal government and many businesses to reimburse their employees for mileage. Taxpayers always have the option of calculating the actual costs of using their vehicle rather than using the standard mileage rates. The 14 cents per mile rate for charitable organizations remains unchanged as it is set by statute. Midyear increases in the optional mileage rates are rare, the last time the IRS made such an increase was in 2011. Mileage Rate Changes PurposeRates 1/1 through 6/30/22Rates 7/1 through 12/31/22Business58.562.5Medical/Moving1822Charitable1414 Link to the full article on the IRS website: https://www.irs.gov/newsroom/irs-increases-mileage-rate-for-remainder-of-2022 Link to Optional Standard Mileage Rates IRS Announcement: https://www.irs.gov/pub/irs-drop/a-22-13.pdf Tax Planning & Compliance [...] Read more...
June 8, 2022David Hegstrom from Harris CPAs goes over the audit and process and how to be prepared. Focusing on understanding an audit, the value of an audit, and tips for an effective audit. Below is the full webinar video. Nonprofit and Government Page [...] Read more...
June 6, 2022by David Hegstrom Unless you have been living under a rock for the last year, you have noticed costs in the Treasure Valley are rising rapidly. Everything from gas, materials, and equipment prices in the construction industry, to your bill at the grocery store are being affected. And now, for a variety of reasons, the prices for your accounting fees and services are following suit. But what are the major factors contributing to this escalation and what can you do to help reduce costs? RISING COST FACTORS Inflation: You have probably already seen the impact of inflation affecting multiple aspects of your business. According to the U.S. Bureau of Labor Statistics, the annual inflation rate for the United States for the 12 months ending December 2021 was seven percent. This is the largest inflation rate for a singlecalendar year in nearly 40 years. The Great Resignation: Employees are leaving their jobs at an unprecedented rate across all industries, or leaving their local jobs to work remotely for companies in states with higher wages. The effect of this trend is compounded by the fact that the accounting profession has one of the most aged workforces in the nation. The American Institute of CPAs (AICPA) estimates that over 75 percent of current CPAs will retire in the next 10 to 15 years. Changes to the Tax Code: Every year there are amendments to the tax code. Typically these are small changes and the additional time required to prepare a tax return would be modest at best. Then in late 2017, the Trump administration passed the Tax Cuts and Jobs Act (TCJA), which was effective for the calendar year 2018. It was a massive overhaul to the US Tax Code. Enter the 2019 tax season; by most estimates, the TCJA increased tax preparation time by 30 percent. And since that time CPA firms havebeen in hyperdrive due to the CARES Act, Employee Retention Tax Credit, PPP Loans, and all the amended tax returns that come with an ever-changing regulatory landscape. IRS Backlog: If you have received a letter from the IRS, you are not alone. The IRS has been understaffed and underfunded for decades. Right now the IRS is sitting on literal trailer-loads of notification responses and other correspondence. On February 10, 2022, the IRS determined that they would stop sending automated notifications for most tax related issues until their current backlog has been “sufficiently” resolved. It is important to note, however, the IRS has not suspended assessing fees and penalties; they are simply not communicating the fees and penalties they are assessing and effectively creating more backlog for later. Other Regulatory Updates: The GAAP framework, the standardized rules required when presenting financial information for audits, review, and compilations, has adopted some major updates over the lastfew years with more changes on the way (i.e. financial reporting leasing standards which must be adopted for 2022). And as we already talked about, more changes equals more time required for your CPA. To sum it all up, costs are on the rise because of higher operating costs, more work, increasing complexity in tax codes, and less staff to do it all.  SO WHAT CAN BE DONE? Now that we have identified why fees are on the rise, lets discuss what can be done to reduce costs. Interim Work: If you are required to obtain an audit, review, or compilation ask your CPA if there is work that can be done outside of the typical CPA “busy season”. This may allow you to complete a portion of the engagement at a time of the year when there is additional staff availability and flexibility. This is evenmore important if you are required to adopt a new ASU (Accounting Standards Update). Make a plan, identify a timeline, and then execute. Regular Communication: The old process of only speaking to your CPA once a year during tax season doesn’t work anymore. Aside from the increasing regulatory hurdles for businesses, you may also be missing out on time-sensitive tax planning opportunities. So instead of waiting until the end of the year to bring in that old file full of receipts, begin consulting with your CPA in real time as financial situations change and events occur that financially impact your organization. Systems Upgrade: When was the last time you took a hard look at your accounting procedures to findefficiencies? There are many new tools that can increase a company’s accounting capability while also reducing the time and administrative burden of maintaining accurate financial records. Having your CPA clean up your books at the end of the year only increases your costs. Have an open conversation with them about what you can improve year-round to reduce the year-end burden. Keep in mind your CPA most likely also works with many other construction companies and is a great resource when looking fornew software to improve efficiencies, or for other accounting best practices. With all the changes we have seen the last few years, one thing can be sure it’s unlikely we will ever operate our businesses like we did pre-2019. And that’s okay. Your CPA isn’t the same professional that they were three years ago either, and have had to adapt to a vastly changing industry. It’s time to find a better way of managing our businesses,of being more intentional, and of shaping the environment we all find ourselves in. This article can be found on The Idaho AGC Building Idaho Magazine Link to full magazine: https://www.idahoagc.org/sites/default/files/u-23/SP2022%20buildingIdaho.pdf Construction & Engineering Page Real Estate Page [...] Read more...

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