Harris CPAs Announces a Merger with Two Firms in the Twin Falls Region

Harris CPAs has announced a merger with Deagle Ames, LLC and Ataraxis Accounting and Advisory, Chtd of Twin Falls, Idaho effective October 16, 2021. The mergers add a total of 22 professionals to the Harris CPAs team, and a new office location in Twin Falls.

Deagle Ames, LLC 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 nearly 65 years from two office in Twin Falls and Buhl. “This merger provided a unique opportunity for us to expand our service offerings to our clients. Their core values strongly mirror our own and we are excited to be a part of their continuous growth,” said Pam McClain, managing partner of Deagle Ames. Pam and her team of 12 other professionals remain in their current office locations in Twin Falls on 5th Ave S and in Buhl on Main St.

Ataraxis Accounting and Advisory Services, Chtd is located in Twin Falls 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. “We are enthusiastic to continue the high level of service we have provided our clients for nearly 50 years,” said Lisa Donnelley, Managing Partner at Ataraxis. “Joining the team at Harris CPAs will allow us to take advantage of their advanced technology in service delivery and provide our clients additional technical resources.” Lisa and her team of 7 other professionals have relocated to the new Harris location at 161 5th Ave S, Suite 200 in the historic downtown Twin Falls.

Harris CPAs has been a leading provider of assurance, tax, accounting, and advisory services in Idaho since 1996 with additional offices in Meridian, Boise and Coeur d’Alene. They serve clients throughout the United States and in all stages of the business cycle. The merger also provides Harris CPAs with a new competitive advantage in the agriculture industry.

A ribbon cutting with the Twin Falls Chamber of Commerce will take place on December 2, 2021 at 161 5th Ave S, Suite 200, Twin Falls, ID 83301, followed by a welcoming reception.

For more information, please contact Tara Davis, Marketing Manager for Harris CPAs at (208) 333-8965 or taradavis@harriscpas.com.

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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...
May 18, 2022WHICH METHOD OF ACCOUNTING IS RIGHT FOR YOUR CONSTRUCTION COMPANY? by Megan McDonald For construction companies and contractors, there are more options available for accounting methods than other business entities due to the nature of construction activities and the timing of profit at different points during a construction contract. Methods include cash and accrual, and more specifically, accrual methods include percentage of completion and completed contract method. But which method is right for your company? The answer to that will mostly depend on your size in revenue, but in this article, we will highlight some of the important aspects of each. Cash Method Under the cash method, revenue is recognized upon receipt and expenses are recognized when paid. The cash method can be used by a small contractor for both short-term and long-term contracts as long as the average gross receipts do not exceed $5 million and sales revenue from merchandise does not exceed 10 to 15 percent of the gross income. Many small construction companies opt to use the cash method for their short-term contracts and an accrual method for their long term contracts. There is a rule in cash basis that is often overlooked- if a business receives a check at the end of the year but does not deposit it until the next year, the business must report the income in the first year, when the money changes hands. Accrual Method Under the accrual method, income is recognized when earned and expenses when incurred. If a contractor is unable to use the cash method based on gross receipts, they must choose between the percentage of completion method or the completed contract method of accrual accounting. Percentage of Completion Method If a contractor’s average annual gross receipts exceed $10 million then the Internal Revenue Service will consider that a large contractor. Large contractors must use the percentage of completion method, which is a type of accrual accounting. The percentage of completion method involves estimating the finish date of the contract and recognizing income based on the work completed. The contractor will need to have an idea of when the contract will be completed to determine a percentage of how much was completed at year end when it comes to tax time. Using this method, the contractor reports income earned as well as expenses related to those jobs rather than deferring those. The main tax advantage to the percentage of completion method is that it allows you to report your expenses each year against the income rather than all at once as the completed contract method. According to the IRS, this method is preferred by most banks and bonding companies. Completed Contract Method Completed contract method allows taxpayers to defer the taxes in the year in which the contract is completed. However, the expenses directly related to the jobs are also deferred until the end when the contract is completed. Completed contract is an available option to smaller contractors (under $10 million in average gross receipts over the last 3 years) or if the project has at least 80 percent of costs arising from construction of residential homes and buildings with no more than four dwelling units. The downside of the completed contract method is a contractor could end up completing several jobs in one year which could result in an unexpected jump in the contractor’s tax bracket. As a taxpayer in the construction industry, there are various accounting methods to choose from that will have an impact on tax-related cash flow over the life of your business. It is important for contractors to be aware of the methods and together with their tax advisors, determine which method best suits their business need and growth goals. Construction & Engineering Page [...] Read more...
February 7, 2022This year we sift through the noise of headlines to understand what is actually happening in the economy. Steve Scranton, CFA from Washington Trust Bank dives into the economic outlook for the Treasure Valley and also insight into Supply Chain issues around the world. We concluded with a tax update by our very own Robert Shappee, CPA, CCIFP reviewing recent legislation, and what strategies you might be able to take advantage of in 2022. Below is a video of our full presentation. [...] Read more...
February 7, 2022To stay abreast of the continuing impacts the coronavirus is having on the nonprofit industry and ways to adapt to all the changes, as well as to catch up on key trends in the nonprofit industry!   HIGHLIGHTS FROM THIS ISSUE: Triaging Data Breaches: Part Two Tax Exempt & Government Entities Division Releases 2022 Program Letter Top Considerations for the Nonprofit Sector: Part Two Nonprofit & Education Webinar Series  Thinking Ahead: Colleges & Universities Can Plan for Long-Term Services BDO’s 2021 Nonprofit Benchmarking Survey Click below to view the file.   Nonprofit and Government Page [...] Read more...
January 21, 2022Employers have spent the last two years dealing with many challenges and disruptions, and they are now looking to move forward in 2022 against a backdrop of economic and pandemic-related uncertainty and market volatility. To help plan sponsors navigate the challenging road ahead, professionals from BDO’s ERISA Center of Excellence recently held a year-end webinar: ERISA Update—Past, Present and Future. Here, we outline four themes that plan sponsors should be keeping a close eye on in 2022. The #1 Financial Story of the Year: Inflation You can’t go anywhere without hearing about inflation—and for a good reason. The Consumer Price Index (CPI) rose 6.8% from November 2020 to November 2021, the largest 12-month increase in nearly 40 years. But how do increases in prices for gas (up 58%), meat (up 13%) and cars (up 31%) affect retirement accounts? For participants in defined contribution plans, these price hikes mean that their paychecks don’t go as far in covering living expenses. As a result, some participants may choose to decrease their plan contribution rates to increase the amount of take-home pay. A significant number of participants may stop contributing altogether, which could alter the plan’s fee structures. Rising prices could also lead to increases in loans and hardship withdrawals. Finally, while financial wellness plans have been in place at many organizations for some time, plan sponsors should consider whether such benefits properly address participants’ concerns about inflation. New Strategies for Massive Shifts in the Labor Market The coronavirus pandemic caused many companies to shut their doors and employees to work from home. As a result, the hybrid and remote work environment evolved faster than expected. In addition, there was a massive exodus from traditional 9-to-5 jobs in America. According to data from the Bureau of Labor Statistics (BLS), 6.3 million people left the workforce in November 2021 alone. In response to the tight labor market, employers should consider a variety of strategies to attract and retain top talent. Potential solutions include stronger retirement benefits (such as matching contributions), referral bonuses, more flexible hours, remote work stipends, childcare assistance or parental family leave and shorter work days around holiday time. Cybersecurity Practices Draw Increasing DOL Scrutiny Last April, the Department of Labor (DOL) released its first-ever guidance on cybersecurity best practices for fiduciaries, recordkeepers and participants. Soon after that, the DOL began conducting investigations on retirement plan cybersecurity practices. The DOL has asked for a comprehensive set of documents related to the plan’s cybersecurity or data security practices to assess cybersecurity risk and the safety of plan data. The DOL is also reviewing relationships with service providers, such as recordkeepers, attorneys, investment managers, and advisors, to ensure that they are doing their part to protect plan data. Plan sponsors should take a proactive approach to cybersecurity in 2022, including reviewing the DOL’s guidance and comparing it to their plan operations to determine whether operational changes are required. Plan sponsors also should discuss cyber risk measures with service providers to learn about their cybersecurity protocols. In particular, plan sponsors should review whether service providers are contractually permitted to cross-sell participant data. Lastly, plan sponsors should carefully review providers’ SOC1 reports, which is an essential step to monitor service providers properly. Growing Interest in ESOPs We are receiving many inquiries about setting up and administering Employee Stock Ownership Plans (ESOPs), which are qualified defined contribution plans available for S corporations and C corporations. Starting in 2020, the Setting Every Community Up for Retirement Enhancement (SECURE) Act of 2019 allows employers to retroactively adopt and fund a tax-qualified retirement plan, including an ESOP, by the extended due date of the employer’s federal tax return, creating a retroactively effective tax deduction. The National Defense Authorization Act signed into law on December 27, 2021 contains the first-ever government contracting program to specifically encourage ESOPs. Section 874 of the new law creates a five-year Department of Defense pilot program that allows companies that are or become 100% ESOP-owned to receive noncompete follow-on contracts for federal government work. In addition, pending bills in Congress include provisions that may encourage more employers to pursue this structure. ESOPs can be an attractive exit strategy for employers who want to leave their business in employees’ hands, protect their legacy and continue to influence the company’s trajectory after the transaction. The latest figures (2019) show that there are nearly 6,600 ESOPs in the U.S., covering 14 million participants with $1.7 billion in plan assets. Insight: Do Your Homework to Hit the Ground Running in 2022 While the direct health implications of the COVID-19 pandemic continue to dominate headlines, issues created in the wake of this crisis will garner increased attention in 2022. Inflation, the rapidly changing workforce, cybersecurity and other audit concerns are areas that plan sponsors will need to focus on in the upcoming year. Employee Benefit Plan Page [...] Read more...
December 8, 2021Over the past few years, several laws and regulations were passed to loosen rules on hardship distributions for 401(k) and 403(b) retirement plans. These new provisions came in handy for many participants who needed an easier way to access retirement accounts during the pandemic. While there was an extension to give plan sponsors more time to revise plans to reflect the changes, the final day to amend pre-approved qualified retirement plans that adopted hardship distribution regulations is Dec. 31, 2021. While it is not required, plans can include provisions that allow in-service distributions if the participant has an immediate and heavy need and the withdrawal is necessary to meet that need. In summary, here are the five ways that plans could have been changed to make hardship withdrawals: Eliminate the six-month suspension on contributions after hardship withdrawal Expand safe harbors to include federally declared disaster-related expenses Replace facts and circumstances test with three-part test to determine financial need Eliminate need of loan requirement prior to hardship distribution Expand sources of funds for hardship distributions Plans need to have the proper amendments if hardship withdrawals were allowed on or after Jan. 1, 2020. With the Dec. 31 deadline approaching, plan sponsors should act quickly to examine whether these changes were made to their plans. As listed in a previous Insight, some of these changes were mandatory, while others were optional. Pre-approved plans should contact service providers to see whether amendments were added to the plan document. In addition, safe harbor plans should ensure that the safe harbor notice includes the proper hardship withdrawal information. Employee Benefit Plan Page [...] Read more...
December 3, 2021As 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. [...] Read more...
December 3, 2021As we approach year end, now is the time for individuals, business owners, and family offices to review their 2021 and 2022 tax situations and identify opportunities for reducing, deferring, or accelerating tax obligations. Areas potentially impacted by proposed tax legislation still in play should be reviewed, as well as applicable opportunities and relief granted under legislation enacted during the past year.   The information contained within this article is based on tax proposals as presented in the November 3, 2021, version of the Build Back Better Act. Our guidance is subject to change when final legislation is passed. Taxpayers should consult with a trusted advisor when making tax and financial decisions regarding any of the items below.   Individual Tax Planning Highlights   2021 Federal Income Tax Rate Brackets 2022 Federal Income Tax Rate Brackets Proposed Surcharge on High-Income Individuals, Estates and Trusts The draft Build Back Better Act released on November 3, 2021 would impose a 5% surcharge on modified adjusted gross income that exceeds $5 million for married individuals filing separately, $200,000 for estates and trusts and $10 million for all other individuals. An additional 3% surcharge would be imposed on modified adjusted gross income in excess of $12.5 million for married individuals filing separately, $500,000 for estates and trusts and $25 million for all other individuals. The proposal would be effective for taxable years beginning after December 31, 2021 (i.e., beginning in 2022). While keeping the proposed surcharges in mind, taxpayers should consider whether they can minimize their tax bills by shifting income or deductions between 2021 and 2022. Ideally, income should be received in the year with the lower marginal tax rate, and deductible expenses should be paid in the year with the higher marginal tax rate. If the marginal tax rate is the same in both years, deferring income from 2021 to 2022 will produce a one-year tax deferral and accelerating deductions from 2022 to 2021 will lower the 2021 income tax liability. Actions to consider that may result in a reduction or deferral of taxes include:  Delaying closing capital gain transactions until after year end or structuring 2021 transactions as installment sales so that gain is deferred past 2021 (also see Long Term Capital Gains, below).  Considering whether to trigger capital losses before the end of 2021 to offset 2021 capital gains.  Delaying interest or dividend payments from closely held corporations to individual business-owner taxpayers.  Deferring commission income by closing sales in early 2022 instead of late 2021.  Accelerating deductions for expenses such as mortgage interest and charitable donations (including donations of appreciated property) into 2021 (subject to AGI limitations).  Evaluating whether non-business bad debts are worthless by the end of 2021 and should be recognized as a short-term capital loss.  Shifting investments to municipal bonds or investments that do not pay dividends to reduce taxable income in future years. On the other hand, taxpayers that will be in a higher tax bracket in 2022 or that would be subject to the proposed 2022 surcharges may want to consider potential ways to move taxable income from 2022 into 2021, such that the taxable income is taxed at a lower tax rate. Current year actions to consider that could reduce 2022 taxes include: Accelerating capital gains into 2021 or deferring capital losses until 2022.  Electing out of the installment sale method for 2021 installment sales.  Deferring deductions such as large charitable contributions to 2022. Long-Term Capital Gains The long-term capital gains rates for 2021 and 2022 are shown below. The tax brackets refer to the taxpayer’s taxable income. Capital gains also may be subject to the 3.8% Net Investment Income Tax. 2021 Long-Term Capital Gains Rate Brackets 2022 Long-Term Capital Gains Rate Brackets Long-term capital gains (and qualified dividends) are subject to a lower tax rate than other types of income. Investors should consider the following when planning for capital gains: Holding capital assets for more than a year (more than three years for assets attributable to carried interests) so that the gain upon disposition qualifies for the lower long-term capital gains rate. Considering long-term deferral strategies for capital gains such as reinvesting capital gains into designated qualified opportunity zones. Investing in, and holding, “qualified small business stock” for at least five years. (Note that the November 3 draft of the Build Back Better Act would limit the 100% and 75% exclusion available for the sale of qualified small business stock for dispositions after September 13, 2021.) Donating appreciated property to a qualified charity to avoid long term capital gains tax (also see Charitable Contributions, below). Net Investment Income Tax An additional 3.8% net investment income tax (NIIT) applies on net investment income above certain thresholds. For 2021, net investment income does not apply to income derived in the ordinary course of a trade or business in which the taxpayer materially participates. Similarly, gain on the disposition of trade or business assets attributable to an activity in which the taxpayer materially participates is not subject to the NIIT. The November 3 version of the Build Back Better Act would broaden the application of the NIIT. Under the proposed legislation, the NIIT would apply to all income earned by high income taxpayers unless such income is otherwise subject to self-employment or payroll tax. For example, high income pass-through entity owners would be subject to the NIIT on their distributive share income and gain that is not subject to self-employment tax. In conjunction with other tax planning strategies that are being implemented to reduce income tax or capital gains tax, impacted taxpayers may want to consider the following tax planning to minimize their NIIT liabilities: Deferring net investment income for the year. Accelerating into 2021 income from pass-through entities that would be subject to the expanded definition of net investment income under the proposed tax legislation. Social Security Tax The Old-Age, Survivors, and Disability Insurance (OASDI) program is funded by contributions from employees and employers through FICA tax. The FICA tax rate for both employees and employers is 6.2% of the employee’s gross pay, but only on wages up to $142,800 for 2021 and $147,000 for 2022. Self-employed persons pay a similar tax, called SECA (or self-employment tax), based on 12.4% of the net income of their businesses. Employers, employees, and self-employed persons also pay a tax for Medicare/Medicaid hospitalization insurance (HI), which is part of the FICA tax, but is not capped by the OASDI wage base. The HI payroll tax is 2.9%, which applies to earned income only. Self-employed persons pay the full amount, while employers and employees each pay 1.45%. An extra 0.9% Medicare (HI) payroll tax must be paid by individual taxpayers on earned income that is above certain adjusted gross income (AGI) thresholds, i.e., $200,000 for individuals, $250,000 for married couples filing jointly and $125,000 for married couples filing separately. However, employers do not pay this extra tax. Long-Term Care Insurance and Services Premiums an individual pays on a qualified long-term care insurance policy are deductible as a medical expense. The maximum deduction amount is determined by an individual’s age. The following table sets forth the deductible limits for 2021 and 2022 (the limitations are per person, not per return): Retirement Plan Contributions Individuals may want to maximize their annual contributions to qualified retirement plans and Individual Retirement Accounts (IRAs) while keeping in mind the current proposed tax legislation that would limit contributions and conversions and require minimum distributions beginning in 2029 for large retirement funds without regard to the taxpayer’s age. The maximum amount of elective contributions that an employee can make in 2021 to a 401(k) or 403(b) plan is $19,500 ($26,000 if age 50 or over and the plan allows “catch up” contributions). For 2022, these limits are $20,500 and $27,000, respectively. The SECURE Act permits a penalty-free withdrawal of up to $5,000 from traditional IRAs and qualified retirement plans for qualifying expenses related to the birth or adoption of a child after December 31, 2019. The $5,000 distribution limit is per individual, so a married couple could each receive $5,000. Under the SECURE Act, individuals are now able to contribute to their traditional IRAs in or after the year in which they turn 70½. The SECURE Act changes the age for required minimum distributions (RMDs) from tax-qualified retirement plans and IRAs from age 70½ to age 72 for individuals born on or after July 1, 1949. Generally, the first RMD for such individuals is due by April 1 of the year after the year in which they turn 72. Individuals age 70½ or older can donate up to $100,000 to a qualified charity directly from a taxable IRA. The SECURE Act generally requires that designated beneficiaries of persons who die after December 31, 2019, take inherited plan benefits over a 10-year period. Eligible designated beneficiaries (i.e., surviving spouses, minor children of the plan participant, disabled and chronically ill beneficiaries and beneficiaries who are less than 10 years younger than the plan participant) are not limited to the 10-year payout rule. Special rules apply to certain trusts. Small businesses can contribute the lesser of (i) 25% of employees’ salaries or (ii) an annual maximum set by the IRS each year to a Simplified Employee Pension (SEP) plan by the extended due date of the employer’s federal income tax return for the year that the contribution is made. The maximum SEP contribution for 2021 is $58,000. The maximum SEP contribution for 2022 is $61,000. The calculation of the 25% limit for self-employed individuals is based on net self-employment income, which is calculated after the reduction in income from the SEP contribution (as well as for other things, such as self-employment taxes). 2021 could be the final opportunity to convert non-Roth after-tax savings in qualified plans and IRAs to Roth accounts if legislation passes in its current form. Proposed legislation would prohibit all taxpayers from funding Roth IRAs or designated Roth accounts with after-tax contributions starting in 2022, and high-income taxpayers from converting retirement accounts attributable to pre-tax or deductible contributions to Roths starting in 2032. Proposed legislation would require wealthy savers of all ages to substantially draw down retirement balances that exceed $10 million after December 31, 2028, with potential income tax payments on the distributions. As account balances approach the mandatory distribution level, extra consideration should be given before making an annual contribution. Foreign Earned Income Exclusion The foreign earned income exclusion is $108,700 in 2021, to be increased to $112,000 in 2022. Alternative Minimum Tax A taxpayer must pay either the regular income tax or the alternative minimum tax (AMT), whichever is higher. The established AMT exemption amounts for 2021 are $73,600 for unmarried individuals and individuals claiming head of household status, $114,600 for married individuals filing jointly and surviving spouses, $57,300 for married individuals filing separately and $25,700 for estates and trusts. For 2022, those amounts are $75,900 for unmarried individuals and individuals claiming the head of household status, $118,100 for married individuals filing jointly and surviving spouses, $59,050 for married individuals filing separately and $26,500 for estates and trusts. Kiddie Tax The unearned income of a child is taxed at the parents’ tax rates if those rates are higher than the child’s tax rate. Limitation on Deductions of State and Local Taxes (SALT Limitation) For individual taxpayers who itemize their deductions, the Tax Cuts and Jobs Act (TCJA) introduced a $10,000 limit on deductions of state and local taxes paid during the year ($5,000 for married individuals filing separately). The limitation applies to taxable years beginning on or after December 31, 2017 and before January 1, 2026. Various states have enacted new rules that allow owners of pass-through entities to avoid the SALT deduction limitation in certain cases. The November 3 draft of the Build Back Better Act would extend the TCJA SALT deduction limitation through 2031 and increase the deduction limitation amount to $72,500 ($32,250 for estates, trusts and married individuals filing separately). An amendment currently on the table proposes increasing the deduction limitation amount to $80,000 ($40,000 for estates, trusts and married individuals filing separately). The proposal would be effective for taxable years beginning after December 31, 2020, therefore applying to the 2021 calendar year. Charitable Contributions The Taxpayer Certainty and Disaster Relief Act of 2020 extended the temporary suspension of the AGI limitation on certain qualifying cash contributions to publicly supported charities under the CARES Act. As a result, individual taxpayers are permitted to take a charitable contribution deduction for qualifying cash contributions made in 2021 to the extent such contributions do not exceed the taxpayer’s AGI. Any excess carries forward as a charitable contribution that is usable in the succeeding five years. Contributions to non-operating private foundations or donor-advised funds are not eligible for the 100% AGI limitation. The limitations for cash contributions continue to be 30% of AGI for non-operating private foundations and 60% of AGI for donor advised funds. The temporary suspension of the AGI limitation on qualifying cash contributions will no longer apply to contributions made in 2022. Contributions made in 2022 will be subject to a 60% AGI limitation. Tax planning around charitable contributions may include: Maximizing 2021 cash charitable contributions to qualified charities to take advantage of the 100% AGI limitation. Deferring large charitable contributions to 2022 if the taxpayer would be subject to the proposed individual surcharge tax. Creating and funding a private foundation, donor advised fund or charitable remainder trust. Donating appreciated property to a qualified charity to avoid long term capital gains tax. Estate and Gift Taxes The November 3 draft of the Build Back Better Act does not include any changes to the estate and gift tax rules. For gifts made in 2021, the gift tax annual exclusion is $15,000 and for 2022 is $16,000. For 2021, the unified estate and gift tax exemption and generation-skipping transfer tax exemption is $11,700,000 per person. For 2022, the exemption is $12,060,000. All outright gifts to a spouse who is a U.S. citizen are free of federal gift tax. However, for 2021 and 2022, only the first $159,000 and $164,000, respectively, of gifts to a non-U.S. citizen spouse are excluded from the total amount of taxable gifts for the year. Tax planning strategies may include: Making annual exclusion gifts. Making larger gifts to the next generation, either outright or in trust. Creating a Spousal Lifetime Access Trust (SLAT) or a Grantor Retained Annuity Trust (GRAT) or selling assets to an Intentionally Defective Grantor Trust (IDGT). Net Operating Losses The CARES Act permitted individuals with net operating losses generated in taxable years beginning after December 31, 2017, and before January 1, 2021, to carry those losses back five taxable years. The unused portion of such losses was eligible to be carried forward indefinitely and without limitation. Net operating losses generated beginning in 2021 are subject to the TCJA rules that limit carryforwards to 80% of taxable income and do not permit losses to be carried back. Excess Business Loss Limitation A non-corporate taxpayer may deduct net business losses of up to $262,000 ($524,000 for joint filers) in 2021. The limitation is $270,000 ($540,000 for joint filers) for 2022. The November 3 draft of the Build Back Better Act would make permanent the excess business loss provisions originally set to expire December 31, 2025. The proposed legislation would limit excess business losses to $500,000 for joint fliers ($250,000 for all other taxpayers) and treat any excess as a deduction attributable to a taxpayer’s trades or businesses when computing excess business loss in the subsequent year. [...] Read more...

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