Spring 2021 Nonprofit Standard Newsletter

To 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:
  • IRS Issues Final Regulations on UBTI “Silos”
  • Provider Relief Funds – Reporting and Audit Requirements
  • Higher Education Emergency Relief Fund II
  • Presentation of COVID-19 Related Federal Programs on the Schedule of Expenditures of Federal Awards
  • CARES Act Employee Retention Credits for Nonprofit Employers
  • Nonprofit Data Breach Vulnerabilities and How to Avoid Them
  • Assessing Risk to Maximize Cyber Insurance Coverage
  • Revisions to the Uniform Guidance Affecting Recipients

Click below to view the file.  


Latest Non-Profit / Government Blog Posts
April 10, 2024The qualified business income (QBI) deduction is available to eligible businesses through 2025. After that, it’s scheduled to disappear. So if you’re eligible, you want to make the most of the deduction while it’s still on the books because it can potentially be a big tax saver. Deduction Basics The QBI deduction is written off at the owner level. It can be up to 20% of: QBI earned from a sole proprietorship or single-member LLC that’s treated as a sole proprietorship for tax purposes, plus QBI from a pass-through entity, meaning a partnership, LLC that’s treated as a partnership for tax purposes or S corporation. How is QBI defined? It’s qualified income and gains from an eligible business, reduced by related deductions. QBI is reduced by: 1) deductible contributions to a self-employed retirement plan, 2) the deduction for 50% of self-employment tax, and 3) the deduction for self-employed health insurance premiums. Unfortunately, the QBI deduction doesn’t reduce net earnings for purposes of the self-employment tax, nor does it reduce investment income for purposes of the 3.8% net investment income tax (NIIT) imposed on higher-income individuals. Limitations At higher income levels, QBI deduction limitations come into play. For 2024, these begin to phase in when taxable income before any QBI deduction exceeds $191,950 ($383,900 for married joint filers). The limitations are fully phased in once taxable income exceeds $241,950 or $483,900, respectively. If your income exceeds the applicable fully-phased-in number, your QBI deduction is limited to the greater of: 1) your share of 50% of W-2 wages paid to employees during the year and properly allocable to QBI, or 2) the sum of your share of 25% of such W-2 wages plus your share of 2.5% of the unadjusted basis immediately upon acquisition (UBIA) of qualified property. The limitation based on qualified property is intended to benefit capital-intensive businesses such as hotels and manufacturing operations. Qualified property means depreciable tangible property, including real estate, that’s owned and used to produce QBI. The UBIA of qualified property generally equals its original cost when first put to use in the business. Finally, your QBI deduction can’t exceed 20% of your taxable income calculated before any QBI deduction and before any net capital gain (net long-term capital gains in excess of net short-term capital losses plus qualified dividends). Unfavorable Rules for Certain Businesses For a specified service trade or business (SSTB), the QBI deduction begins to be phased out when your taxable income before any QBI deduction exceeds $191,950 ($383,900 for married joint filers). Phaseout is complete if taxable income exceeds $241,950 or $483,900, respectively. If your taxable income exceeds the applicable phaseout amount, you’re not allowed to claim any QBI deduction based on income from a SSTB. Other Factors Other rules apply to this tax break. For example, you can elect to aggregate several businesses for purposes of the deduction. It may allow someone with taxable income high enough to be affected by the limitations described above to claim a bigger QBI deduction than if the businesses were considered separately. There also may be an impact for claiming or forgoing certain deductions. For example, in 2024, you can potentially claim first-year Section 179 depreciation deductions of up to $1.22 million for eligible asset additions (subject to various limitations). For 2024, 60% first-year bonus depreciation is also available. However, first-year depreciation deductions reduce QBI and taxable income, which can reduce your QBI deduction. So, you may have to thread the needle with depreciation write-offs to get the best overall tax result. Use it Or Potentially Lose it © 2024       [...] Read more...
April 10, 2024Your business should generally maximize current year depreciation write-offs for newly acquired assets. Two federal tax breaks can be a big help in achieving this goal: first-year Section 179 depreciation deductions and first-year bonus depreciation deductions. These two deductions can potentially allow businesses to write off some or all of their qualifying asset expenses in Year 1. However, they’re moving targets due to annual inflation adjustments and tax law changes that phase out bonus depreciation. With that in mind, here’s how to coordinate these write-offs for optimal tax-saving results. Sec. 179 Deduction Basics Most tangible depreciable business assets — including equipment, computer hardware, vehicles (subject to limits), furniture, most software and fixtures — qualify for the first-year Sec. 179 deduction. Depreciable real property generally doesn’t qualify unless it’s qualified improvement property (QIP). QIP means any improvement to an interior portion of a nonresidential building that’s placed in service after the date the building is placed in service — except for any expenditures attributable to the enlargement of the building, any elevator or escalator, or the internal structural framework. Sec. 179 deductions are also allowed for nonresidential building roofs, HVAC equipment, fire protection systems and security systems. The inflation-adjusted maximum Sec. 179 deduction for tax years beginning in 2024 is $1.22 million. It begins to be phased out if 2024 qualified asset additions exceed $3.05 million. (These are up from $1.16 million and $2.89 million, respectively, in 2023.) Bonus Depreciation Basics Most tangible depreciable business assets also qualify for first-year bonus depreciation. In addition, software and QIP generally qualify. To be eligible, a used asset must be new to the taxpayer. For qualifying assets placed in service in 2024, the first-year bonus depreciation percentage is 60%. This is down from 80% in 2023. Sec. 179 vs. Bonus Depreciation The current Sec. 179 deduction rules are generous, but there are several limitations: The phase-out rule mentioned above, A business taxable income limitation that disallows deductions that would result in an overall business taxable loss, A limited deduction for SUVs with a gross vehicle weight rating of more than 6,000 pounds, and Tricky limitation rules when assets are owned by pass-through entities such as LLCs, partnerships, and S corporations. First-year bonus depreciation deductions aren’t subject to any complicated limitations. But, as mentioned earlier, the bonus depreciation percentages for 2024 and 2023 are only 60% and 80%, respectively. So, the current tax-saving strategy is to write off as much of the cost of qualifying asset additions as you can with Sec. 179 deductions. Then claim as much first-year bonus depreciation as you can. Example: In 2024, your calendar-tax-year C corporation places in service $500,000 of assets that qualify for both a Sec. 179 deduction and first-year bonus depreciation. However, due to the taxable income limitation, the company’s Sec. 179 deduction is limited to only $300,000. You can deduct the $300,000 on your corporation’s 2024 federal income tax return. You can then deduct 60% of the remaining $200,000 ($500,000 − $300,000), thanks to first-year bonus depreciation. So, your corporation can write off $420,000 in 2024 . That’s 84% of the cost! Note that the $200,000 bonus depreciation deduction will contribute to a corporate net operating loss that’s carried forward to your 2025 tax year. Managing Tax Breaks As you can see, coordinating Sec. 179 deductions with bonus depreciation deductions is a tax-wise idea. We can provide details on how the rules work or answer any questions you have. © 2024       [...] Read more...
April 10, 2024If your small business is strapped for cash (or likes to save money), you may find it beneficial to barter or trade for goods and services. Bartering isn’t new — it’s the oldest form of trade — but the internet has made it easier to engage in with other businesses. However, if your business begins bartering, be aware that the fair market value of goods that you receive in these types of transactions is taxable income. And if you exchange services with another business, the transaction results in taxable income for both parties. Fair Market Value Here are some examples of an exchange of services: A computer consultant agrees to offer tech support to an advertising agency in exchange for free advertising. An electrical contractor does repair work for a dentist in exchange for dental services. In these cases, both parties are taxed on the fair market value of the services received. This is the amount they would normally charge for the same services. If the parties agree to the value of the services in advance, that will be considered the fair market value unless there’s contrary evidence. In addition, if services are exchanged for property, income is realized. For example: If a construction firm does work for a retail business in exchange for unsold inventory, it will have income equal to the fair market value of the inventory. If an architectural firm does work for a corporation in exchange for shares of the corporation’s stock, it will have income equal to the fair market value of the stock. Joining a Club Many businesses join barter clubs that facilitate barter exchanges. These clubs generally use a system of “credit units,” which are awarded to members who provide goods and services. The credits can be redeemed for goods and services from other members. In general, bartering is taxable in the year it occurs. But if you participate in a barter club, you may be taxed on the value of credit units at the time they’re added to your account, even if you don’t redeem them for actual goods and services until a later year. For example, let’s say that you earn 2,500 credit units one year, and that each unit is redeemable for $2 in goods and services. In that year, you’ll have $5,000 of income. You won’t pay additional tax if you redeem the units the next year, since you’ve already been taxed on that income. If you join a barter club, you’ll be asked to provide your Social Security number or Employer Identification Number. You’ll also be asked to certify that you aren’t subject to backup withholding. Unless you make this certification, the club is required to withhold tax from your bartering income at a 24% rate. Tax Reporting By January 31 of each year, a barter club will send participants a Form 1099-B, “Proceeds from Broker and Barter Exchange Transactions,” which shows the value of cash, property, services and credits that you received from exchanges during the previous year. This information will also be reported to the IRS. Exchanging Without Exchanging Money By bartering, you can trade away excess inventory or provide services during slow times, all while hanging on to your cash. You may also find yourself bartering when a customer doesn’t have the money on hand to complete a transaction. As long as you’re aware of the federal and state tax consequences, these transactions can benefit all parties involved. Contact us if you need assistance or would like more information. © 2024       [...] Read more...
April 10, 2024Here are some of the key tax-related deadlines that apply to businesses and other employers during the second quarter of 2024. Keep in mind that this list isn’t all-inclusive, so there may be additional deadlines that apply to you. Contact us to ensure you’re meeting all applicable deadlines and to learn more about the filing requirements. April 15th If you’re a calendar-year corporation, file a 2023 income tax return (Form 1120) or file for an automatic six-month extension (Form 7004) and pay any tax due. For corporations, pay the first installment of 2024 estimated income taxes. Complete and retain Form 1120-W (worksheet) for your records. For individuals, file a 2023 income tax return (Form 1040 or Form 1040-SR) or file for an automatic six-month extension (Form 4868) and pay any tax due. For individuals, pay the first installment of 2024 estimated taxes, if you don’t pay income tax through withholding (Form 1040-ES). April 30th Employers report income tax withholding and FICA taxes for the first quarter of 2024 (Form 941) and pay any tax due. May 10th Employers report income tax withholding and FICA taxes for the first quarter of 2024 (Form 941), if they deposited on time, and fully paid, all of the associated taxes due. May 15th Employers deposit Social Security, Medicare and withheld income taxes for April if the monthly deposit rule applies. June 17th Corporations pay the second installment of 2024 estimated income taxes. © 2024       [...] Read more...
April 8, 2024At Financial Executives International’s Corporate Financial Reporting Insights Conference last November, staff from the Securities and Exchange Commission (SEC) expressed concerns related to the use of financial metrics that don’t conform to U.S. Generally Accepted Accounting Principles (GAAP). Companies continue to have trouble complying with the SEC’s guidelines on non-GAAP reporting, said Lindsay McCord, chief accountant of the SEC’s Division of Corporation Finance. Here’s some guidance that may help as you prepare your company’s financial statements for the first quarter of 2024. Ongoing Concerns GAAP is a set of rules and procedures that accountants typically follow to record and summarize business transactions. These guidelines provide the foundation for consistent, fair, honest and accurate financial reporting. Private companies generally aren’t required to follow GAAP, but many do. Public companies don’t have a choice; they’re required by the SEC to follow GAAP. Over the years, the use of non-GAAP measures has grown. These unaudited figures can provide added insight when they’re used to supplement GAAP performance measures. But they can also be used to mislead investors and artificially inflate a public company’s stock price. Specifically, companies may include unaudited performance figures — such as earnings before interest, taxes, depreciation and amortization (EBITDA) — to cast the company in a more favorable light. Non-GAAP metrics may appear in the management, discussion and analysis section of their financial statements, earnings releases and investor presentations. For example, a company’s EBITDA is typically higher than its GAAP earnings. That’s because EBITDA is commonly adjusted for such items as stock-based compensation, nonrecurring items, intangibles and other company-specific items. In addition, non-GAAP metrics or adjustments may be cherry-picked to present a stronger financial picture than what appears in audited financial statements. Some companies also may erroneously present non-GAAP metrics more prominently than GAAP numbers — or fail to clearly label and describe non-GAAP measures. 10 Key Questions The Center for Audit Quality (CAQ) recommends considering the following 10 questions to help ensure transparent non-GAAP metric disclosures: What’s the purpose of the non-GAAP measure, and would a reasonable investor be misled by the information? Has the non-GAAP measure been given more prominence than the most comparable GAAP measure? How many non-GAAP measures have been presented, and are they all necessary and appropriate for investors to understand performance? Why has management selected a particular non-GAAP measure to supplement GAAP measures that are already established and consistently applied within its industry or across industries Does the company’s disclosure provide substantive detail on its purpose and usefulness for investors? How is the non-GAAP measure calculated, and does the disclosure clearly and adequately describe the calculation, as well as the reconciling items between the GAAP and non-GAAP measures? How does management use the measure and has that use been disclosed? Is the non-GAAP measure sufficiently defined and clearly labeled as non-GAAP or could it be confused with a GAAP measure? What are the tax implications of the non-GAAP measure, and does the calculation align with the tax consequences and the nature of the measure? Does the company have material agreements, such as a debt covenant, that require compliance with a non-GAAP measure? If so, are they disclosed? The CAQ provides additional questions that address the consistency and comparability of non-GAAP metrics. We Can Help Non-GAAP metrics can provide greater insight into the information that management considers important in running the business. However, care should be taken not to mislead investors and lenders. Contact us to discuss your company’s non-GAAP metrics and disclosures. © 2024       [...] Read more...
April 8, 2024When’s the last time you evaluated your not-for-profit’s social media strategy? Are you using the right platforms in the most effective way, given your mission, audience and staffing resources? Do you have controls to protect your nonprofit from reputation-damaging content? These are important questions — and it’s critical you review them regularly. At the very least, you need a social media policy that sets some ground rules Annual Reviews As you know, the social media landscape changes quickly. The platform that’s hot today may be decidedly not hot tomorrow. So review your online presence at least once a year to help ensure you’re dedicating resources to the right spaces. Most nonprofits maintain a presence on Facebook and LinkedIn because that’s where likely donors tend to be. But if you’re an arts nonprofit or visually oriented, Instagram may be a better venue. And if your constituents are teenagers or young adults, you’re most likely to find them on TikTok. In general, fresher, frequently updated accounts get more traffic and engagement. So try not to overextend your organization by posting on multiple platforms with only limited staff resources. Determine where you’ll get the most bang for your buck by surveying supporters and observing where peer nonprofits post. Content Monitoring Social media is 24/7, and incidents can escalate quickly. So closely monitor your accounts, as well as conversations that refer to your nonprofit. A “social listening” tool that scans the web for your nonprofit’s name can be extremely helpful. But the best defense against reputation-busting events is a formal social media policy. Your policy should set clear boundaries about the types of material that are and aren’t permissible on your nonprofit’s official accounts and those of staffers. For example, it should prohibit employees, board members and volunteers from discussing nonpublic information about your organization on their personal accounts. With organizational accounts, limit access to passwords and regularly check posts and comments. Content from your feeds can easily go viral and create controversy. Make sure your staff knows when to engage with visitors, particularly difficult ones, and maintains a zero-tolerance policy for offensive comments. Crisis Plan Mistakes, or even intentionally damaging posts, can occur despite comprehensive policies. Create a formal response plan so you’ll be able to weather such events. The plan should assign responsibilities and include contact information for multiple spokespersons, such as your executive director and board president. Identify specific triggers and a menu of potential responses, such as issuing a press release or bringing in a crisis management expert. Be sure to include IP staffers or consultants on your list. Hopefully, a crisis won’t occur. But if it does, you’ll want to sit down and review your plan’s effectiveness after the situation has been resolved. Select and Protect These days, no nonprofit can afford to ignore social media. Just make sure you’re applying your time and effort to the right platforms and protecting your accounts from those who would harm your organization. © 2024     [...] Read more...
April 8, 2024Even if your not-for-profit organization rarely needs to reimburse staffers, board members or volunteers, reimbursement requests almost certainly will occasionally appear. At that point, will you know how to pay stakeholders back for expenses related to your nonprofit’s operations? If you have a formal reimbursement policy, you will. Plus, you’ll be able to direct individuals with reimbursement questions to your formal document and minimize the risk of disagreements. 2 Categories In the eyes of the IRS, expense reimbursement plans generally fall into two main categories: 1. Accountable plans. Reimbursements under these plans generally aren’t taxable income for the employee, board member or volunteer. To secure this favorable tax treatment, accountable plans must satisfy three requirements: 1) Expenses must have a connection to your organization’s purpose; 2) claimants must adequately substantiate expenses within 60 days after they were paid or incurred; and 3) claimants must return any excess reimbursement or allowance within 120 days after expenses were paid or incurred. Arrangements where you advance money to an employee or volunteer meet the third requirement only if the advance is reasonably calculated not to exceed the amount of anticipated expenses. You must make the advance within 30 days of the time the recipient pays or incurs the expense. 2. Nonaccountable plans. These don’t fulfill the above requirements. Reimbursements made under nonaccountable plans are treated as taxable wages. Policy items Your reimbursement policy should make it clear which types of expenses are reimbursable and which aren’t. Be sure to include any restrictions. For example, you might set a limit on the nightly cost for lodging or exclude alcoholic beverages from reimbursable meals. Also be sure to require substantiation of travel, mileage and other reimbursable expenses within 60 days. The documentation should include items such as a statement of expenses, receipts (showing the date, vendor, and items or services purchased), and account book or calendar. Note that the IRS does allow some limited exceptions to its documentation requirements. Specifically, no receipts are necessary for: A per diem allowance for out-of-town travel, Non-lodging expenses less than $75, or Transportation expenses for which a receipt isn’t readily available. Your policy should require the timely (within 120 days) return of any amounts you pay that are more than the substantiated expenses. Standard Rate vs. Actual Costs Finally, address mileage reimbursement, including the method you’ll use. You can reimburse employees for vehicle use at the federal standard mileage rate of 67 cents per mile for 2024, and volunteers at the charity rate of 14 cents per mile. Unlike employees, however, volunteers can be reimbursed for commuting mileage. Alternatively, you can reimburse employees and volunteers for the actual costs of using their vehicles for your nonprofit’s purposes. For employees, you might reimburse gas, lease payments or depreciation, repairs, insurance, and registration fees. For volunteers, the only allowable actual expenses are gas and oil. What Makes Sense You don’t need to craft a reimbursement policy on your own. We can help ensure you include the elements that make sense given your nonprofit’s size, mission and activities and update it as your organization grows and evolves. © 2024     [...] 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 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...
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...
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...
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...
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...
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...
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...
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...
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...
November 12, 2021Harris 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. [...] Read more...
September 22, 2021Some businesses may not be aware of the tax credits offered by the Internal Revenue Service. For construction clients, there are a broad range of construction activities which qualify for the credits, from research and development to building green and energy efficiency. For all industries, there are credits for employers as well, including the work opportunity tax credit and the employee retention credit. This article identifies several of those tax credits and gives a brief overview of each. To learn more about these credits and others including proposed credits for the future, please contact us. – Ann Stratton, Harris CPAs   Tax credit programs provide opportunities to reduce tax expense, increase after-tax income and improve cash flow. The federal government 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, low-income communities and others. Many states and localities offer their own tax incentive programs. Taxpayers that are looking for ways to reduce their tax bill and boost their bottom line may still be able to take advantage of federal tax credits or incentive programs in 2021. In some cases, taxpayers also may still be able to claim benefits for prior years. Federal tax credits and incentives to consider include: Employee Retention Credit R&D credit Incentives for investment in low-income communities Energy efficiency and sustainability incentives Other credits for employers American Jobs Plan Employee retention creditThe employee retention credit (ERC) is a refundable payroll tax credit for wages paid and health coverage provided by an employer whose operations were either fully or partially suspended due to a COVID-19-related governmental order or that experienced a “significant” reduction in gross receipts as compared to 2019. Businesses may use ERCs to reduce federal payroll tax deposits, including deposits of employee FICA and income tax withholding. Eligible employers may claim a credit of up to $7,000 per employee in each quarter of 2021 (eligible start-upbusinesses can claim up to $35,000 per employee per quarter). For 2020, the annual per-employee credit is limited to $10,000. Businesses that have obtained a loan under the Payroll Protection Program (PPP) may also claim the ERC, provided that ERC wages are not also used for determining the amount of their PPP loan forgiveness. Employers should take steps now to make sure they are claiming all of the ERCs to which they are entitled. Businesses that were eligible for but did not claim the ERC in 2020 may be able to file amended payroll tax returns to claim 2020 benefits. Importantly, planning may be needed prior to filing PPP loan forgiveness applications to ensure maximum benefits of both the ERC and PPP programs. BDO’s ERC resource hub contains more information on how to qualify for, calculate and claim ERC benefits. Also, be sure to review the update of guidance issued in April 2021 by the IRS—see BDO’s article IRS Issues Guidance for Claiming Employee Retention Credit in 2021. R&D creditBusinesses in any industry are eligible for the federal R&D credit provided they incur expenses related to qualified R&D activities. Both in-house and contract research expenditures can qualify. Special rules apply for start-ups and qualified small businesses, which may be able to claim a credit of up to $250,000 against the employer portion of federal payroll taxes. Many states also offer their own R&D credits. R&D credits can reduce taxes by as much as 9% of qualified spending for federal taxes and as much as 40% in some states. Incentives for investment in low-income communities qualified opportunity zonesQualified opportunity zones (QOZs) present an opportunity for investors to defer (and potentially reduce) the federal tax due on certain capital gains. To qualify, a taxpayer must invest the capital gain in property or businesses located inside a QOZ, or in a “qualified opportunity fund” (QOF), shortly following the completed transaction that gave rise to the gain. (QOFs are investment vehicles that invest at least 90% of their capital in QOZ properties and businesses.) There are substantial tax benefits for investors: Tax deferral on capital gains until the earlier of the disposition of the investment in the QOZ/QOF (or other inclusion event), or December 31, 2026; Ten percent reduction of the deferred tax on the original gain when the investment in the QOZ/QOF is made by December 31, 2021 and is held for at least five years; and Exemption from tax on post-acquisition appreciation of the QOZ/QOF investment provided the investment is held for at least 10 years and is sold by December 31, 2047. New markets tax creditThe 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.” The credit generally equals 39% of the investment and is paid out over seven years. Energy efficiency and sustainability incentivesThere are a number of federal tax benefits available for investments to promote energy efficiency and sustainability initiatives, including: A deduction of up to $1.80 per square foot for investments in qualifying energy efficient systems (lighting, HVAC, etc.) installed in commercial, certain multi-family and government-owned buildings; A credit of $2,000 per home for the construction of energy efficient new homes; A credit of up to 26% of qualifying investments in solar, wind or other renewable energy equipment (the credit reduces further in 2023). Larger credit amounts may be available based on when the projects commenced construction and the application of the IRS regulations around this area; Cash grants for the development of products and technology that assist with energy efficiency and certain othersustainability goals; and Alternate fuel tax incentives. Other credits for employersEmployers may be able to take advantage of the following credits: The work opportunity tax credit (WOTC) program grants tax credits (of up to $9,600 per new hire) to employers that hire and retain individuals from any of 10 targeted employment groups—including veterans, ex-felons, long term family assistance or unemployment recipients, summer youth workers and others. Businesses operating within a federal empowerment zone may claim a 20% credit on up to the first $15,000 of wages paid to certain employees. The Indian employment credit may entitle an employer to a 20% tax credit on a portion of the qualified wages and employee health insurance costs paid to an enrolled member of an Indian tribe. (BDO’s article Three Tax Credit Opportunities Extended: WOTC, Federal Empowerment Zone and Indian Employment Credits contains more information on these three credits.) The family and medical leave (FMLA) tax credit provides employers a credit of up to 25% of paid family and medical leave taken as a result of the birth of a child, adoption or foster care, or to care for a spouse or child that has a serious health condition. The “FICA tip credit” gives tax relief to employers via a federal income tax credit that is based on the amount of FICA and Medicare taxes they have paid on reported tips. Credits may be available for providing access for disabled individuals or for providing employer provided childcare facilities and services. American Jobs PlanThe American Jobs Plan, introduced by President Biden on March 31, 2021, includes proposals that would create a number of new tax credits for businesses, such as credits for green energy initiatives, affordable housing, construction of childcare facilities and others. For more information on the American Jobs Plan, see BDO’s article Biden Administration Unveils Tax Blueprint as Part of American Jobs Plan. By Dan Fuller, Managing Partner, National Business Incentives & Tax Credits Practice Leader (This article was originally published https://www.bdo.com/insights/tax/. Harris CPAs is an independent member of the BDO Alliance USA.) [...] Read more...
September 13, 2021To 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: The Uniform Guidance – Some Ongoing Pitfalls Coronavirus State and Local Fiscal Recovery Funds (CSLFRF) Triaging Data Breaches What Higher Education Institutions Need to Know About Tuition Discounting Pulse Check: Is It Time to Update Your Spending Policy? 5 Steps to Maintain Donor Engagement in a Tumultuous Time Privacy by Design for Nonprofits Click below to view the file.   Nonprofit and Government Page [...] Read more...
September 13, 2021One of the provisions of the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) was to introduce the Paycheck Protection Program. This allowed small business to obtain crucial funding and keep their staff employed through the pandemic. Now that the dust has settled on the three rounds of PPP loan funding, it important to consider the tax implications of these loans and the forgiveness thereof. First off, if the loan was not forgiven (the business for whatever reason did not qualify for forgiveness), the loan is treated the same as any other debt. The principle will be required to be paid back and the interest will be deductible as a business expense. If the business does qualify for forgiveness, the amount forgiven will be treated as tax-exempt income. This created some initial confusion as expenses incurred to generate tax-exempt income are generally not deductible (thus making the forgiveness essentially taxable in a roundabout way). As this was not the intent of congress, the CARES Act was amended by the Tax Relief Act of 2020 to allow for these expenses to be fully deductible. This was a win-win for taxpayers as it allowed for the exclusion from income of the forgiveness while still being able to deduct the payroll, rent, utilities, and other qualifying expenses used to obtain the forgiveness. If you or your business has taken advantage of the tax-favorable provision and have questions or need assistance applying for forgiveness, please reach out to one of our advisors. We are always happy to help! By: Matt Goodfellow, CPA- Harris CPAs [...] Read more...
May 18, 2021To 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: IRS Issues Final Regulations on UBTI “Silos” Provider Relief Funds – Reporting and Audit Requirements Higher Education Emergency Relief Fund II Presentation of COVID-19 Related Federal Programs on the Schedule of Expenditures of Federal Awards CARES Act Employee Retention Credits for Nonprofit Employers Nonprofit Data Breach Vulnerabilities and How to Avoid Them Assessing Risk to Maximize Cyber Insurance Coverage Revisions to the Uniform Guidance Affecting Recipients Click below to view the file.   [...] Read more...
March 18, 2021The American Rescue Plan Act of 2021 (ARPA), signed into law by President Biden on March 11, 2021, provides additional major relief to individuals and businesses that continue to be impacted by the COVID-19 pandemic. The ARPA includes the following provisions related to individual taxpayers:​ Additional recovery rebate credit Unemployment compensation received in 2020 partially excluded from gross income Child tax credit expanded for 2021 Child and dependent care credit enhanced and refundable Student loan discharges excluded from gross income Additional Recovery/Rebate Credit Two rounds of economic impact payments have already been sent to individual taxpayers. The Coronavirus Aid, Relief, and Economic Security Act (CARES Act) enacted on March 27, 2020 granted eligible individuals a recovery rebate credit of $1,200 for single filers and $2,400 for joint filers (plus $500 per qualifying child). The rebate amount was advanced based on 2018 or 2019 income, but the credit is determined based on 2020 income. The Covid-Related Tax Relief Act of 2020 (CRTRA), enacted as part of the Consolidated Appropriations Act on December 27, 2020, granted eligible individuals a second refundable tax credit against their 2020 taxable income equal to $600 for single filers and $1,200 for joint filers (plus $600 per qualifying child). The CRTRA rebate amount is determined based on 2020 income, but the credit was advanced to taxpayers based on their 2019 income tax return. The ARPA grants eligible individuals a third refundable tax credit equal to $1,400 for single filers and $2,800 for joint filers, plus $1,400 for each dependent of the taxpayer. The credit is for the 2021 tax year; however, the rebate amount is advanced based on 2019 income, or 2020 income if the 2020 tax return has been filed. Similar to the CARES Act and CRTRA, the ARPA credit begins to phase out when the single filer’s adjusted gross income (AGI) exceeds $75,000 ($150,000 for joint filers and $112,500 for head of household filers). The credit completely phases out when a single filer’s AGI exceeds $80,000 ($160,000 for joint filers and $120,000 for head of household filers). Individuals eligible for the third economic impact payment do not include nonresident aliens, individuals who may be claimed as a dependent on another person’s return, estates or trusts. Children who are or can be claimed as dependents by their parents are not eligible individuals, even if the parent chooses not to claim the child as a dependent. A dependent of the taxpayer includes a qualifying child and a qualifying relative. A qualifying child includes a child, stepchild, eligible foster child, brother, sister, stepbrother or stepsister, or a descendent of any of them (i) who is under age 19 or a student under age 24 at the end of the year, (ii) who has not provided more than half of their own support, (iii) who has lived with the taxpayer for more than half of the year and (iv) who has not filed a joint return (other than only for a refund claim) with the individual’s spouse. For a qualifying child who is permanently and totally disabled at any time during the tax year, all of the foregoing requirements apply except for age—age is irrelevant. A qualifying relative includes a child, stepchild, eligible foster child, brother, sister, stepbrother or stepsister, father or mother, grandparent, stepfather or stepmother, or an individual with the same place of abode as taxpayer (i) whose gross income is less than $4,300 (excluding social security benefits), (ii) who has not provided more than half of their own support, and (iii) who is not a qualifying child. For a qualifying relative who is permanently and totally disabled at any time during the tax year, gross income does not include income for services performed at a school that provides special instruction or training designed to alleviate the disability of the individual and that is operated as a non-profit organization. The availability of medical care at the school must be the principal reason for the individual’s presence there, and the income must arise solely from activities at the school that are incidental to the medical care. The ARPA provides that no advance refund amount will be made if the taxpayer was deceased before January 1, 2021, nor will any amount be determined for a qualifying dependent of a taxpayer if the taxpayer (both taxpayers on a joint return) was deceased before January 1, 2021. Further, in the case of a joint return where only one spouse has a valid Social Security number (SSN), that spouse is eligible to receive the $1,400 rebate if he or she meets all other requirements of joint filers (i.e., AGI limitations). However, for military service members, both spouses are eligible for the economic income payment if at least one spouse was a member of the U.S. armed forces at any time during the tax year and at least one spouse’s SSN in included on the joint return. If a dependent is considered when calculating the credit, the dependent must have a valid SSN. Individuals who did not file a tax return in 2019 or 2020 may still receive an automatic advance based on the individual’s status as a beneficiary of social security, railroad retirement benefits or VA (Veteran’s Administration) benefits. Individuals who otherwise are not required to file and are not receiving social security benefits are still eligible for the rebate but will be required to file a tax return to claim the benefit. Unemployment Income For tax year 2020, if a taxpayer’s adjusted gross income is less than $150,000, the taxpayer may exclude up to $10,200 of unemployment compensation from gross income. There is no phaseout, and the $150,000 limit applies to single filers, joint filers and head of household filers. In the case of joint filers, the $10,200 exclusion amount applies separately to each filer. If the taxpayer has filed his or her 2020 tax return, the he or she will need to file an amended return to receive the tax benefit. The act also extends the federal unemployment compensation benefits in the amount of $300 per week through September 6, 2021. Child Tax Credit The ARPA expands the child tax credit amounts and eligibility requirements for tax year 2021. The credit is increased from $2,000 to $3,000 per qualifying child ($3,600 for children under age 6). The definition of a qualifying child is expanded to include a child who has not turned 18 by the end of 2021. The credit is fully refundable for a taxpayer with a principal place of abode in the U.S. for more than one-half the tax year, or for a taxpayer who is a bona fide resident of Puerto Rico for the tax year. The additional $1,000 credit amount per qualifying child ($1,600 per qualifying child under age 6) begins to phase out at a rate of $50 for each $1,000 when a single filer’s modified adjusted gross income (MAGI) exceeds $75,000 ($150,000 for joint filers and $112,500 for head of household filers). A single filer with one qualifying child over age 6 will phase out of the increased credit amount if the taxpayer’s MAGI exceeds $95,000. Similarly situated joint filers will phase out of the increased credit amount if their MAGI exceeds $170,000. After application of the phase-out rules for the temporarily increased credit amount, the remaining $2,000 of credit is subject to the phaseout rules under existing law ($400,000 for joint filers and $200,000 for all other filers). A single filer with one qualifying child will phase out of the remaining credit if his or her MAGI exceeds $240,000, while joint filers with one qualifying child will phase out of the remaining credit if their MAGI exceeds $440,000. The ARPA directs the IRS to establish a program in which monthly advance payments equal to 1/12th of the estimated 2021 Child Tax Credit amount will be paid to the taxpayer during the period July 2021 through December 2021. The remaining 50% of the annual estimated amount will be claimed on the 2021 tax return. Initially, the advanced amount will be determined based on a taxpayer’s 2019 or 2020 tax filing. However, upon receipt of a more recent tax filing or other taxpayer-provided eligibility information, the IRS may modify the advance amount. The IRS announced on March 12, 2021 that it is reviewing implementation plans for the ARPA and that it will be issuing guidance on relevant provisions. Child and Dependent Care Credit The child and dependent care credit also is expanded for tax year 2021. The limitation for employment-related expenses considered in determining the credit is increased from $3,000 to $8,000 for one qualifying individual and from $6,000 to $16,000 for two or more qualifying individuals. Further, the applicable percentage of employment-related expenses that are allowed as a credit against tax is increased from 35% to 50%. As a result, for taxpayers with one qualifying individual, the maximum credit is increased from $1,050 to $4,000. For taxpayers with two or more qualifying individuals, the maximum credit is increased from $2,100 to $8,000. The credit begins to phase out when the taxpayer’s AGI exceeds $125,000. The applicable percentage is reduced by 1 percentage point for each $2,000 (or fraction thereof) by which the taxpayer’s AGI exceeds $125,000. However, the applicable percentage is not reduced below 20% except for taxpayers with AGI in excess of $400,000. Consequently, the applicable percentage is 50% for taxpayers with AGI of $125,000 or less, 20% for taxpayers with AGI greater than $185,000 but not greater than $400,000, and phases out completely for taxpayers with AGI greater than $440,000. The credit is refundable for taxpayers that have a principal place of abode in the U.S. for more than one-half of the tax year. Student Loan Discharges For tax years 2021 through 2025, partial or full discharge of an eligible student loan may be excluded from gross income. The types of eligible student loans include (1) loans for post-secondary educational if made, insured or guaranteed by a federal, state or local government; (2) certain private education loans; and (3) original or refinanced loans made by an educational institution, charitable contributions to which would be limited to 50% of an individual taxpayer’s AGI if the loan is made with federal, state or local government or with certain private education lenders pursuant to a program designed to encourage students to serve in occupations, or areas, with unmet needs under the supervision of a tax-exempt governmental unit or organization described in Internal Revenue Code section 501(c)(3). If the discharge of a loan made by an educational organization or a private education lender is in exchange for services performed for that organization or private lender, these rules do not exclude the discharge of the loan from gross income. [...] Read more...

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