Tags: Tax

There’s still time to evaluate your 2022 tax situation

There is still time to evaluate your 2022 tax situation and make some year-end planning decisions.

Timing of Income and Deductions

If you have the ability to control the timing of your income, you can accelerate or defer income and deductions to manage your income tax brackets. It is imperative to not only look at 2022, but also what lies ahead in 2023 and the future to time income, deductions, retirement plan contributions, charitable gifts, etc.

Consider Year-End Investment Decisions

Work with your investment advisors to develop a plan for tax efficient investing. Consider waiting until January to sell so that you realize your capital gain or loss next year if you are in a higher marginal tax bracket in the current year and expect to be in a lower one in the following year. If you expect to recognize a capital gain this year, you should review your portfolio for possible capital losses that can be used to offset the gains. If you have any capital loss carryforwards, you should review your portfolio for capital gain opportunities to make use of such carryforwards.

Maximize Charitable Contribution Deduction

Taxpayers, especially those that are close to the standard deduction, may want to consider bundling their charitable contributions into 2022 to take advantage of this deduction. Contributing to a donor advised funds (DAFs) is a strategy to consider as well. DAFs allow you to make a substantial charitable contribution in a high-income year while directing the payment of the actual grants in future years.

If AGIs limits are not a factor, consider donating appreciated securities. When stock is donated to qualified charitable organizations, you receive a tax deduction for the full fair market value and avoid paying capital gains tax on the appreciation.

An additional option is making a qualified charitable distribution from your IRA required minimum distribution.  If you already took your RMD for 2022 this is a strategy to consider for 2023.

Health Savings Accounts

Consider setting up a health savings account (HSA). HSAs allow you to deduct contributions to the account, the investment earnings are tax-deferred until withdrawn, and any amounts you withdraw are tax-free when used to pay qualified medical expenses. Once you reach age 65 you can withdraw funds for any reason and the withdrawal is treated much like an IRA. HSAs for 2022 may be established and contributions made by April 15, 2023.

Maximize Contributions to Retirement Plans

Contributing to retirement plans may lower AGI and allow tax deferred savings. If allowed by your retirement plan, consider Roth contributions.

Required Minimum Distributions (RMD)

RMDs must be taken by December 31. Taxpayers that turned age 72 during the year may defer the start date to April 1. In this circumstance, consideration should be given to the timing of your initial RMD based on your other income sources and your income tax bracket.

Roth IRA Conversions

Consider converting traditional-IRA money into a Roth IRA in 2022.

Reasons to consider a conversion include 1) There is no RMD requirement for Roth IRAs, 2) With the impending reduction to the estate tax exemption, taxpayers may benefit by paying the income tax now and reducing their taxable estate, 3) Taxpayers that want to leave IRA assets to their families will provide tax-free post death distributions, and 4) Tax rates are historically low.

Keep in mind that the conversion will increase your income and tax for 2022.

529 Education Plans

Maximize contributions to your state sponsored 529 plans to take advantage of state tax deductions. 529 plans can now be used for elementary and secondary school tuition as well as college or vocational school.

Avoid penalties and interest

In order to avoid penalty and interest for underpayment of taxes, you must pay in 90% of your current year tax or 110% of your prior year tax through withholding or timely estimated tax payments. If your withholding has decreased and/or income has increased substantially you should consider increasing your remaining withholding or estimated payment.

Maximize Wealth Transfer Strategies

Under current law taxpayers may exclude gifts of up to $16,000 per individual per year. Consider outright gifts to children, LLC and partnerships, and non-grantor trusts.

You may also make direct payments to medical providers for medical bills or qualifying educational institutions for grade school through higher education without gift tax consequences.

The current estate exemption is $12.06 million increasing to $12.92 million in 2023. Even without any legislative changes, under current law, this exemption will sunset on December 31, 2025 and revert to approximately $6.2 million. If you have not already done so you should review your estate plan to develop a strategy which may include gifting assets now to take advantage of the higher exemption.


Please contact us if you would like to discuss year end planning. We will provide updates if any legislation is passed that affects 2022 tax plans.

    Tags: Tax

    2022 Year-End Tax Planning Checklist for Businesses 

    U.S. businesses are facing pressure to drive revenue, manage costs and increase shareholder value, all while surrounded by economic and political uncertainties. Disruptions to supply chains brought about by the pandemic have continued into 2022. Inflation and rising interest rates have made the cost of debt, goods and services more expensive and cooled consumer spending. The stock market has declined sharply, and the prospect of a recession is on the rise. What’s more, the outcomes of the upcoming November U.S. congressional elections — which as of the publication of this article are as yet unknown — will shape future tax policies. How do businesses thrive in uncertain times? By turning toward opportunity, which includes proactive tax planning. Tax planning is essential for U.S. businesses looking for ways to optimize cash flow while minimizing their total tax liability over the long term.  

    This article provides a checklist of areas where, with proper planning, businesses may be able to reduce or defer taxes over time.  Unless otherwise noted, the information contained in this article is based on enacted tax laws and policies as of the publication date and is subject to change based on future legislative or tax policy changes. 

    Recent legislative changes – the Inflation Reduction Act and the CHIPS Act 

    As the U.S. entered 2022, major proposed federal legislation that sought to raise taxes on large profitable corporations and high-income individuals (the Build Back Better Act) had died in the Senate. Although not nearly as broad in terms of tax increases, the Inflation Reduction Act (IRA) was enacted on August 16, 2022.

    Tax-related provisions in the IRA include: 

    • A 15% alternative minimum tax (AMT) on the adjusted financial statement income of certain large corporations (also referred to as the “book minimum tax” or “business minimum tax”), effective for tax years beginning after December 31, 2022.  
    • A 1% excise tax on corporate stock buybacks, which applies to repurchases made by public companies after December 31, 2022.  
    • Modification of many of the current energy-related tax credits and the introduction of significant new credits, including new monetization options. 
    • A two-year extension of the section 461(l) excess business loss limitation rules for noncorporate taxpayers, which are now set to expire for tax years beginning after 2028. 

    Corporate AMT 

    The AMT is 15% of the adjusted financial statement income (AFSI) of an applicable corporation less the corporation’s AMT foreign tax credit. An applicable corporation is a corporation (other than an S corporation, a regulated investment company or a real estate investment trust) whose average annual AFSI exceeds $1 billion for the prior consecutive three years. The AMT can also apply to a foreign-parented multinational group that meets the $1 billion AFSI test and whose net income in the U.S. equals or exceeds $100 million on average over the same three-year period. 

    • Large corporations that may be subject to the AMT for 2023 will need to estimate their AFSI for tax years 2020, 2021 and 2022. Once a corporation is an applicable corporation, it remains an applicable corporation for all subsequent tax years.  
    • The rules for determining applicable corporations and calculating AFSI are complex and require Treasury to issue regulations and/or other guidance. When calculating AFSI, special aggregation rules apply to controlled groups and trades or businesses (including partnerships or a share of partnership income) under common control. 
    • Corporations that are subject to the AMT should be sure to consider the tax when making tax planning decisions.    

    Excise tax on stock buybacks 

    The 1% excise tax is imposed on U.S. public companies. The tax is 1% of the fair market value of any stock repurchased by a corporation during any taxable year ending after 2022, net of the fair market value of any new stock issued by the corporation during the taxable year. The IRA provides exceptions for certain repurchases (i.e., where the repurchased amount does not exceed $1 million or where the repurchased amount is treated as a dividend for income tax purposes). The tax extends to certain affiliates of U.S. corporations, as well as specified affiliates of foreign corporations performing buybacks on behalf of their parent organization. 

    • Corporations planning taxable stock buybacks should consider executing repurchases by December 31, 2022 to avoid the 1% excise tax.  

    Tax credits 

    The IRA includes the largest-ever U.S. investment committed to combat climate change, providing energy security and clean energy programs over the next 10 years. Overall, the IRA modifies many of the current green energy credits and introduces significant new credits. Notably, the IRA also introduces new options for monetizing the credits, including the ability for taxable entities to elect a one-time transfer of all or a portion of certain tax credits to other taxpayers for cash.  

    The CHIPS Act, enacted on August 9, 2022, provides for a new 25% advanced manufacturing investment credit for investments in semiconductor manufacturing and for the manufacture of certain equipment required in the semiconductor manufacturing process.  

    For more information on the green energy credits and the advanced manufacturing investment credit,  see Claim Available Tax Credits, below. 

    Generate cash savings through tax accounting method changes and strategic tax elections 

    Adopting or changing income tax accounting methods can provide taxpayers with valuable opportunities for timing the recognition of items of taxable income and expense, which determines when cash is needed to pay federal tax liabilities.  

    In general, accounting methods can either result in the acceleration or deferral of an item or items of taxable income or deductible expense, but they do not alter the total amount of income or expense that is recognized during the lifetime of a business. As interest rates continue to rise and debt becomes more expensive, many businesses want to preserve their cash, and one way to do this is to defer their tax liabilities through their choice of accounting methods.  

    Companies that want to reduce their 2022 tax liability should consider traditional tax accounting method changes, tax elections and other actions for 2022 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 (i.e., where accounts receivable exceed accounts payable and accrued expenses). 
    • 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 fixed and determinable by the end of the year and paid within 2.5 months of year end. 
    • Accelerating deductions of liabilities such as warranty costs, rebates, allowances and product returns, state income and franchise taxes, and real and personal property taxes under the “recurring item exception.” 
    • Purchasing qualifying property and equipment before the end of 2022 to take advantage of the 100% bonus depreciation provisions (before bonus depreciation begins to gradually phase out starting in 2023) and the Section 179 expensing rules. 
    • Deducting “catch-up” depreciation (including bonus depreciation, if previously missed) of personal property by changing to shorter recovery periods or changing from non-depreciable to depreciable.  
    • Optimizing inventory valuation methods. For example, adopting, or making changes within, the last-in, first-out (LIFO) method of valuing inventory generally will result in higher cost of goods sold deductions as costs are increasing.   
    • Changing from amortizing commissions paid to employees to deducting in the year paid or incurred under the simplifying conventions.  
    • Electing to deduct 70% of success-based fees paid or incurred in 2022 in connection with certain acquisitive transactions under Rev. Proc. 2011-29. Other transaction costs that are not inherently facilitative may also be deductible. Taxpayers that incur transaction costs should consider undertaking a transaction cost study to maximize their tax deductions. 
    • 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 2022 if, for example, they believe tax rates will increase in the near future or they want to optimize use of NOLs.

    These businesses may want to consider “reverse” planning strategies, such as: 

    • Implementing a variety of “reverse” tax accounting method changes, such as changing to recognize advance payments in the year of receipt or changing to deduct certain tax liabilities (state income, state franchise, real and personal property taxes, payroll taxes) when paid. 
    • Selling and leasing back appreciated property before the end of 2022, 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 2022.   
    • Electing out of the installment sale method for installment sales closing in 2022. 
    • Delaying payments of liabilities whose deduction is based on when the amount is paid, so that the payment is deductible in 2023 (e.g., paying year-end bonuses after the 2.5-month rule). 

    Treatment of R&E Expenses 

    Under the 2017 Tax Cuts and Jobs Act (TCJA), research and experimental (R&E) expenditures incurred or paid for tax years beginning after December 31, 2021 will no longer be immediately deductible for tax purposes. Instead, businesses are required to capitalize and amortize R&E expenditures over a period of five or 15 years beginning in 2022. The mandatory capitalization rules also apply to software development costs, including software developed for internal use. The new rules present additional considerations for businesses that invest in R&E. 

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

    Some of the opportunities listed above for changing the timing of income recognition and deductions require taxpayers to submit a request to change their method of tax accounting for the particular item of income or expense.

    Generally, tax accounting method change requests require taxpayers to file a Form 3115, Application for Change in Accounting Method, with the IRS under one of the following two procedures: 

    • The “automatic” change procedure, which requires the taxpayer to attach the Form 3115 to the timely filed (including extensions) federal tax return for the year of change and to file a separate copy of the Form 3115 with the IRS no later than the filing date of that return; or 
    • The “nonautomatic” change procedure, which applies when a change is not listed as automatic and requires the Form 3115 (including a more robust discussion of the legal authorities than an automatic Form 3115 would include) to be filed with the IRS National Office during the year of change along with an IRS user fee. Calendar year taxpayers that want to make a nonautomatic change for the 2022 taxable year should be cognizant of the accelerated December 31, 2022 due date for filing Form 3115. 

    Tax accounting method changes generally allow for the recognition of unfavorable changes over four years while allowing the full amount of any favorable changes in the year of the change. 

    Write-off bad debts and worthless stock 

    While the economy attempts to recover from the challenges brought on by the COVID-19 pandemic, inflation and rising interest rates,  businesses should evaluate whether losses may be claimed on their 2022 returns related to worthless assets such as receivables, property, 80% owned subsidiaries or other investments.  

    • Business 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 sometimes 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).  

    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 $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). 

    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. 

    • For tax years beginning after 2020, NOL carryovers from tax years beginning after 2017 are limited to 80% of the excess of the corporation’s taxable income over the corporation’s NOL carryovers from tax years beginning before 2018 (which are not subject to this 80% limitation, but may be carried forward only 20 years). If the corporation does not have pre-2018 NOL carryovers, but does have post-2017 NOLs, the corporation’s NOL deduction can only negate up to 80% of the 2022 taxable income with the remaining subject to the 21% federal corporate income tax rate. Corporations should monitor their taxable income and submit appropriate quarterly estimated tax payments to avoid underpayment penalties. 
    • Corporations should monitor their equity movements to avoid a Section 382 ownership change that could limit annual NOL deductions. 
    • Losses from pass-throughs entities must meet certain requirements to be deductible at the partner or S corporation owner level (also 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.

    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 2022 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.  

    • The Employee Retention Credit (ERC) is a refundable payroll tax credit for qualifying employers that were significantly impacted by COVID-19 in 2020 or 2021.  For most employers, the compensation eligible for the credit had to be paid prior to October 1, 2021.  However, the deadline for claiming the credit does not expire until the statute of limitations closes on Form 941. Therefore, employers generally have three years to claim the ERC for eligible quarters during 2020 and 2021 by filing an amended Form 941-X for the relevant quarter. Employers that received a Paycheck Protection Program (PPP) loan can claim the ERC but the same wages cannot be used for both programs. 
    • Businesses that incur expenses related to qualified research and development (R&D) activities are eligible for the federal R&D credit.  
    • Small business start-ups are permitted to use up to $250,000 of their qualified R&D credits to offset the 6.2% employer portion of social security payroll tax. The IRA doubles this payroll tax offset limit to $500,000, providing an additional $250,000 that can be used to offset the 1.45% employer portion of Medicare payroll tax.  
    • Taxpayers that reinvest capital gains in Qualified Opportunity Zones may be able to temporarily defer the federal tax due on the capital gains. The investment must be made within a certain period after the disposition giving rise to the gain. Post-reinvestment appreciation is exempt from tax if the investment is held for at least 10 years but sold by December 31, 2047.  
    • 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. The IRA extends and enhances certain green energy credits as well as introduces a variety of new incentives.  Projects that have historically been eligible for tax credits and that have been placed in service in 2022 may be eligible for credits at higher amounts. Additionally, projects that begin construction under the tax rules prior to 60 days after the Department of the Treasury releases guidance on these requirements are eligible for the credits at the higher rates.  Certain other projects may be eligible for tax credits beginning in 2023. The IRA also introduces prevailing wage and apprenticeship requirements in the determination of certain credit amounts, as well as direct pay or transferability tax credit monetization options beginning with projects placed in service in 2023.  
    • Under the CHIPS Act, taxpayers that invest in semiconductor manufacturing or the manufacture of certain equipment required in the semiconductor manufacturing process may be entitled to a 25% advanced manufacturing investment credit beginning in 2023. The credit generally applies to qualified property placed in service after December 31, 2022 and for which construction begins before January 1, 2027. Where construction began prior to January 1, 2023, the credit applies only to the extent of the basis attributable to construction occurring after August 9, 2022. 

    Partnerships and S corporations 

    Partnerships, S corporations and their owners may want to consider the following tax planning opportunities: 

    • 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 2022. 
    • 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 tax basis, at-risk and active participation 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 2022 to maximize their loss deductions. The Inflation Reduction Act extends the excess business loss limitation by two years (the limitation was scheduled to expire for taxable years beginning on or after January 1, 2027). 
    • 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. If business conditions are such that the interest does not have value or the partner is considering abandonment, important issues need to be considered.  
    • 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.  
    • 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. 
    • The transition rules in the 2019 final regulations that put an end to the use of bottom-dollar guarantees by partners to create recourse tax basis in a partnership will expire on October 4, 2023. Taxpayers that currently rely on the transition rules should review their partnership liability allocations.  

    International operations 

    Treasury issued final foreign tax credit (FTC) regulations on December 28, 2021 finalizing, with significant modifications, previously proposed regulations addressing the creditability standards for various foreign taxation amounts under the U.S. FTC system. The regulations modify long standing rules related primarily to withholding taxes on items such as royalties and services and add a standard related to a jurisdiction’s transfer pricing rules needing to employ arm’s length principles for in-country income taxes to be creditable. 

    The new standards primarily impact withholding and income taxes from certain Asian and Latin American countries.  If your organization benefits from FTCs, now is the time to undertake a critical look at the jurisdictions you operate in and perform an assessment of whether taxes paid to such jurisdiction(s) are still available as FTCs. 

    In addition, the current economic environment has renewed the interest of many organizations to consider repatriating cash from overseas operations. Besides gaining access to cash, there could be significant U.S. tax advantages to repatriating those profits currently. If your organization has controlled foreign corporations (CFCs) and those CFCs have undistributed previously taxed earnings and profits (PTEP) from the Section 965 transition tax, Subpart F and/or global intangible low taxed income (GILTI) from principally Euro or pound sterling functional currency entities, repatriating the PTEP could unlock deductions related to foreign exchange currency fluctuations. For instance, if the Euro or pound sterling exchange rate has strengthened in favor of the U.S. dollar compared to when undistributed PTEP was generated, repatriating such PTEP now under current exchange rates will likely generate an ordinary deduction for the difference in the amount of U.S. dollars received now versus the amount that was previously included in income. Additionally, planning to mitigate foreign withholding taxes on distributions should be considered, and there may be strategies that can help achieve both objectives.    

    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 inflation) 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 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 2022 and enter 2023: 

    • Employers have until the extended due date of their 2022 federal income tax return to retroactively establish a qualified retirement plan and to fund the new or an existing plan for 2022. However, employers cannot retroactively eliminate existing retirement plans (such as simplified employee pensions (SEPs) or SIMPLE plans) to make room for a retroactively adopted plan (such as an employee stock ownership plan (ESOP) or cash balance plan). 
    • Contributions made to a qualified retirement plan by the extended due date of the 2022 federal income tax return may be deductible for 2022; contributions made after this date are deductible for 2023. 
    • Employers can reimburse employees tax-free for up to $5,250 per year in student loan debt, through Dec. 31, 2025, if the employer sets up a broad-based IRC Section 127 educational assistance plan. 
    • Employers seeking to attract and retain employees may offer tuition assistance to future employees by providing forgivable loan agreements. When the loans are forgiven (typically after the student has become an employee for a specified period of time), the amount forgiven is taxable wages, subject to income and employment taxes (including the employer share of employment taxes). 
    • 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 the remaining balance of the deferred amount 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 and LLC members (including owners of capital interests and profits interests) 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, 2023) for the bonus to be deductible in 2022. However, the bonus compensation must be paid before the end of 2022 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; additional taxable compensation for remote workers’ travel to a work location that is determined to be personal commuting expense; and payroll tax, benefits, and transfer pricing issues. 

    State and local taxes 

    Businesses should monitor the tax laws and policies in the states in which they do business to understand their tax 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 2022 and 2023: 

    Nexus rules  

    • Has the business reviewed the nexus rules in every state in which it has property, employees or sales to determine whether it has a tax obligation? State nexus rules are complex and vary by state. Even minimal or temporary physical presence within a state can create nexus, e.g., temporary visits by employees for business purposes; presence of independent contractors making sales or performing services, especially warranty repair services; presence of mobile or moveable property; or presence of inventory at a third-party warehouse. In addition, many states have adopted a bright-line factor-presence nexus threshold for income tax purposes (e.g., $500,000 in sales). Also keep in mind that foreign entities that claim federal treaty protection are likely not protected from state income taxes, and those foreign entities that have nexus with a state may still be liable for state taxes.  
    • Has the business considered the state income tax nexus consequences of its mobile or remote workforce, including the impacts on payroll factor and sales factor sourcing? 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.) 
    • Does the business qualify for P.L. 86-272 protection with respect to its activities in a state? For businesses selling remotely and that have claimed P.L. 86-272  protection 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? 

    Filing methods and elections 

    • Is the business using the most advantageous filing method allowed by a state based on its facts and circumstances? States may require or allow a taxpayer to report on a separate company or unitary combined reporting basis, or may provide filing option elections. A state’s mandatory unitary combined filing may allow a “water’s edge” election or a worldwide combined group election. States have different rules for how and when to file water’s edge and other reporting method elections; therefore, care should be taken that the election is filed on a timely basis. 
    • Where the taxpayer or a U.S. affiliate has foreign activities, or where the taxpayer has foreign affiliates, have the overseas business operations been evaluated as to whether they should be included in any water’s edge unitary combined group?   
    • If the business’s affiliated group has both loss entities and profitable entities, has the business considered making nexus consolidated return elections in states where such elections are allowed? 
    • Did the business make an S corporation election for federal income tax purposes, and is it required to make a separate state election (or file nonresident shareholder consents with the tax jurisdiction)?   
    • Does the business operate using single member LLCs or other federal disregarded entity structures, and has the tax treatment of those structures been reviewed for state-specific rules and filing requirements?  

    Taxable income and tax calculation 

    • Does the state conform to federal tax rules or decouple from them? Not all states follow federal tax rules. For example, many states have their own systems of depreciation, and may or may not allow federal bonus depreciation. 
    • Where the business receives deductible dividends, GILTI, subpart F income, or other nontaxable income, have state expense disallowance attribution rules been applied? 
    • Does the business have intercompany royalty or other intangible expense, interest expense, or management fees paid to a related entity that may be required to be added back in computing state taxable income?  
    • 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.  
    • Is the business claiming all available state and local tax credits? States offer various incentive credits including, e.g., for research activities, expanding or relocating operations, making capital investments or increasing headcount.  

    Allocation and apportionment 

    • Is the business correctly sourcing its sales of tangible personal property, services, and intangibles to the proper states? The majority of states impose single-sales factor apportionment formulas and require market-based sourcing for sales of services and licenses/sales of intangibles using disparate market-based sourcing methodologies.  
    • Has the business considered whether a nonbusiness or allocable income position may be appropriate and whether taking such a position would be advantageous? 
    • If the business holds an interest in a partnership, have the consequences with respect to factor flow-through and other potential special partnership apportionment provisions been considered? 
    • If the taxpayer sold assets or a business segment, including where an IRC Section 336, 338(g), or 338(h)(10) election was made, has the multistate treatment of the sale gain receipts been addressed, including with respect to goodwill? 
    • If the business is a manufacturer, retailer, transportation company, financial corporation, or other special industry, have state special apportionment elections or required special apportionment formulas been considered? 

    Other issues 

    • Has the business considered the state and local tax treatment of merger, acquisition and disposition transactions? Keep in mind that internal reorganizations of existing structures also have state tax impacts. There are many state-specific considerations when analyzing the tax effects of transactions.  
    • Has the business considered state and local transfer pricing requirements with respect to its intercompany financing and other intercompany arrangements? With rising interest rates and inflation, intercompany arrangements should be re-addressed, and intercompany transfer pricing studies may need to be updated. Also see Transfer Pricing, above. 
    • Has the business amended any federal returns or settled an IRS audit? 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 when there is no change to state taxable income or deductions. 

    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). Nearly 30 states have enacted 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 complex 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.  

    Other state and local taxes 

    State and local property taxes, sales and use taxes and other indirect state and local taxes can be the largest piece of an organization’s state tax expenditures, even exceeding state and local income and franchise taxes. Just like state income taxes, businesses should understand and plan for their other state and local tax obligations.

    Some areas of consideration include: 

    • Has the business reviewed its sales and use tax nexus footprint, the taxability of its products and services, and whether it is charging the appropriate sales and use tax rates? A comprehensive review of the sales and use tax function along with improving or automating processes may help businesses report and pay the appropriate amount of tax to the correct states and localities.  
    • 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. Businesses should consider challenging their property tax assessments within the applicable appeal window.  
    • Businesses should ensure they are properly reporting and remitting unclaimed property to state governments. All 50 states and the District of Columbia require holders to file unclaimed property returns. 

    Accounting for income taxes – ASC 740 considerations 

    The financial year-end close can present unique and challenging issues for tax departments.

    To avoid surprises, tax professionals can begin now to: 

    • Evaluate the effectiveness of year-end tax accounting close processes and consider modifications to processes that are not effective. 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. 
    • Consider the tax accounting impacts of enacted legislation in 2022. The accounting for tax credits enacted as part of the CHIPS Act and the IRA can be challenging. 
    • Stay abreast of pending tax legislation and be prepared to account for the tax effects of legislation that is enacted into law 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 non-recurring 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 transactions, income tax expense/(benefit) could be recorded in continuing operations, discontinued operations or equity.  
    • Evaluate existing and new uncertain tax positions and update supporting documentation. 
    • Ensure tax account reconciliations are performed and provide sufficient detail to validate the year-over-year change in tax account balances. 
    • Understand required tax footnote disclosures and build the preparation of supporting documentation into the year-end close process. 

    Begin Planning for the Future  

    Businesses should consider actions that will put them on the best path forward for 2022 and beyond. Business can begin now to: 

    • Establish or build upon a framework for total tax transparency to bring visibility to the company’s approach to tax and total tax contribution. 
    • 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 legal entity rationalization, which can reduce administrative costs and provide other benefits and efficiencies.  
    • 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, claim qualifying bonus depreciation and identify other discretionary incentives to reduce or defer various taxes.  
    • Evaluate possible co-sourcing or outsourcing arrangements to assist with priority projects as part of an overall tax function transformation. 

    Have questions? We are here to help. Contact us today!

      Tags: Tax

      Year-End Tax Savings for Businesses

      The following summary includes areas where businesses may be able to reduce or defer taxes for 2022 as well as begin overall tax planning as we near year end.  

      Pass-Through Entity Tax 

      Several states have enacted legislation that allows a workaround of the $10,000 limit on state and local income taxes. These work arounds allow pass-through entities (PTEs) to pay and deduct state income taxes at the entity level instead of the individual level. Maryland and Virginia are among the nearly 30 states that have enacted workarounds to this deduction limitation for owners of pass-through entities. The tax must be paid in 2022 to take advantage of this deduction.  

      Bonus Depreciation 

      The 100% bonus depreciation stays in effect until January 1, 2023. At that point, the first-year bonus depreciation decreases by 20% per year through December 31, 2026. Taxpayers can still qualify for Section 179 deduction for eligible property and should consider the upcoming changes before yearend to maximize depreciation deductions. 

      Net Operating Loss Carryforward 

      Federal net operating losses (NOLs) generated can only be carried forward and may only offset 80% of current year taxable income. A business that anticipates a NOL may consider accelerating income or deferring expenses to create a small amount of income for 2022.  Corporations should monitor their taxable income and submit appropriate estimated tax payments to avoid underpayment penalties as necessary. 

      Retirement Savings Plans 

      If you have not already established a retirement plan you may want to consider taking advantage of this benefit. Some plans must be established and funded by December 31, 2022, whereas others may be established and funded through the extended due date of the business tax return. Depending on your tax bracket this can provide significant tax savings by reducing taxable income. 

      Research & Development Tax Credit (R&D) 

      The R&D credit remains in place for 2022 (taxpayers should review the substantiation requirements for this credit); however, there are significant changes in the treatment of R&D expenses for 2022. Domestic research and experimentation expenses incurred after December 31, 2021, are no longer immediately deductible for tax purposes and must be amortized over 5 years and foreign research expenses must be amortized over 15 years. 

      Nexus caused by Telecommuting Workers 

      Many companies have changed their work from home policies and are allowing employees to telecommute. Employees working from home may create nexus in other states and require new reporting and payment obligations for both income and employment taxes. Companies should review the location of their employees and review the rules of each state. 

      Energy Tax Credits 

      The Inflation Reduction Act signed into law in August 2022 included modifications of many of the current energy-related tax credits and the introduction of new credits and monetization options. Companies should review the eligibility qualifications and consider if an investment in energy efficient property and sustainability initiatives fit their needs. 

      Click here for a more detailed year-end planning checklist.


      Please contact us if you would like to discuss year-end planning:

        Tags: Tax

        Tax Exempt Organizations: Navigating the Executive Compensation Excise Tax 

        Section 4960 of the Internal Revenue Code imposes a 21% excise tax on remuneration in excess of $1 million as well as excess “parachute payments” paid by applicable tax-exempt organizations (ATEOs) or their related entities to any “covered employee.” Tax-exempt employers that compensate their executives over $1 million per year or that pay separation-related compensation should monitor the amounts and timing of such remuneration. With advance planning, ATEOs may be able to better manage any excise tax they may owe. Additionally, final regulations under Section 4960 issued in early 2021 may provide opportunities for ATEO groups to claim refunds of excise taxes paid in prior years. 


        Insight 

        While the 2021 final regulations generally follow proposed regulations issued in 2019, the final regulations include key changes that may provide relief for taxpayers. Among other provisions, the final regulations: 

        • Clarify that the 21% excise tax applies to remuneration paid or vested during taxable years beginning after December 31, 2017. Therefore, the tax does not apply to amounts that vested before 2018 but does apply to earnings on those vested amounts that accrue or vest in 2018 or later; 
        • Expand the exceptions where employees of a for-profit entity related to an ATEO will not be treated as covered employees; and 
        • Exclude certain foreign organizations from the Section 4960 rules. 

        Although the final regulations are effective for taxable years beginning after December 31, 2021, taxpayers may apply them as early as 2018 (when Section 4960 first became effective). As a result, some employers may be able to request refunds of overpaid taxes for prior years using the relief provided in the final regulations. 


        Excise Tax Doesn’t Just Apply to Remuneration in Excess of $1 Million 

        Section 4960 excise tax does not apply only to ATEO employers that pay remuneration over $1 million. ATEOs of all sizes (and their related entities) may also owe excise tax if: 

        • They have one or more “highly compensated” employees (HCEs) in any year after 2017, i.e., they paid any employee $125,000 or more for 2018 or 2019; $130,000 or more for 2020 or 2021; or $135,000 or more for 2022; and 
        • The employee is paid an amount equal to or exceeding three times their five-year average annual compensation from the ATEO, any predecessor or related organization due to the involuntary termination of the individual’s employment (i.e., an excess parachute payment). 

        Therefore, even if an ATEO never pays an employee more than $1 million, it could still owe the Section 4960 excise tax if it pays excess parachute payments. Note that the tax only applies in the event of involuntary terminations. Death, disability, retirement and qualifying voluntary resignations do not trigger Section 4960 excise tax. 

        Who is a Covered Employee?  

        For purposes of Section 4960, a covered employee means an employee (including a former employee) of an ATEO if the employee is one of the five highest HCEs for the taxable year or was a covered employee of the organization (or a predecessor) for any preceding taxable year beginning after December 31, 2016. Therefore, even though Section 4960 first became effective for taxable years beginning on or after January 1, 2018, ATEOs and related entities must look back to the 2017 taxable year to determine who is a covered employee. Once an employee is covered, the individual retains that status indefinitely, even after termination of employment or death. 

        What is an Excess Parachute Payment? 

        Parachute payments are payments in the nature of compensation that are contingent on an involuntary termination of employment and that equal or exceed three times the employee’s base amount (i.e., their five-year annual average compensation, including pay for services performed for a predecessor or related organization). Section 4960 imposes excise tax on the amount of the parachute payments that exceed the base amount. 

        Parachute payments do not include amounts paid from tax-qualified retirement plans, payments for medical services, and “substantially certain” amounts that would have been paid even without the involuntary termination of employment. Parachute payments include payments for a release of claims, damages for employment agreement breaches, window program payments, payments for non-compete or similar agreements and the value of accelerated vesting of benefits. 


        Insight 

        Organizations should carefully identify and track their covered employee group and any separation-related payments for which a covered employee may be eligible. The final regulations confirm that the ATEO and each related entity must maintain a separate list of covered employees, instead of maintaining one aggregated list of covered employees for the entire related group. The final regulations also confirm that an employee could be a covered employee of more than one ATEO in a related group of organizations for a tax year. 

        Note that although the tax applies to covered employees of an ATEO, the ATEO’s related entities (including for-profit related entities) could owe their share of the tax to the extent they compensate the same covered employee. 


        Planning Ahead 

        With thoughtful planning, organizations may be able to reduce the amount of excise tax due on executive remuneration and separation-related compensation. 

        • Where executive compensation is projected to exceed $1 million in a taxable year, organizations may consider capping executive remuneration by instituting policies that will prevent remuneration from exceeding the $1 million threshold or spreading compensation over $1 million to lower-compensation tax years via other compensation arrangements, for example: 
        • Using a Section 457(f) plan to potentially defer amounts to a later year 
        • Entering into a split-dollar life insurance policy between the employer and the executive. Organizations should note that these are complex arrangements and involve extensive administrative and reporting requirements. Experienced advisors must be consulted to properly structure these policies. 
        • Some organizations may choose to make the entire payment and pay the excise tax on the excess remuneration over $1 million, based on contractual commitments and/or competitive necessity. In these cases, the additional 21% cost of the employee’s compensation should be considered when determining if the executive’s overall compensation package still qualifies as “reasonable compensation” under the intermediate sanction rules, which allow the IRS to impose penalties when it determines that executives have received excessive compensation from a tax-exempt organization. 
        • By planning ahead, organizations may be able to reduce separation-related payments and increase the five-year average base amount by paying the employee additional reasonable compensation during years prior to the separation event, for example, additional qualified plan contributions (especially when the individual is nearing retirement age) or W-2 compensation. 

        Have questions? We are here to help. Contact us today!

          Tags: Tax

          State Income Tax Apportionment: How Much of Your Business’s Income is Subject to State Tax?

          Businesses operating across state lines must determine the amount of their income that is subject to tax in each state. Generally, this is done using what is known as “formulary apportionment.” Given that states regulate the apportionment methods they allow and are not required to use a uniform approach, the varying methods — especially the different ways states source and weight a taxpayer’s sales activities — may result in excessive taxation overall. Multistate businesses should review the apportionment options and rules in the states and localities where they are taxable for potential opportunities to reduce their tax bill and to ensure they are reporting and paying the correct amount of tax. 

          Formulary Apportionment in General 

          In general, taxpayers with multi-state activities apportion their business income or loss among the states where their activities occur. Formulary apportionment is usually accomplished by means of a fraction, with the numerator accounting for the business’s in-state activities and the denominator accounting for the business’s activities everywhere. The fraction is then converted to an apportionment percentage, which is applied to the taxpayer’s apportionable income. The result is the amount of the taxpayer’s income that is subject to net income tax in that state. Accordingly, the computation of the apportionment percentage may have the largest impact on the taxpayer’s state income tax return. 

          Apportionment Rules Vary by State 

          Generally, state apportionment formulas account for the taxpayer’s property, payroll and sales (or receipts) activities. Historically, states used an equally weighted three-factor formula. Over time, many states have gradually given more weight to the taxpayer’s sales, for example, by double-weighting or even a triple-weighting the sales factor. The current trend is to apportion income based on sales alone using a single sales factor formula. States may also apply special apportionment formulas to certain industries, including financial services, transportation, broadcasting and publishing. Elective formulas, such as for manufacturers, may present planning opportunities. 

          The exact composition of each factor (property, payroll and sales) varies by state and industry. Some common areas of differences among the states include: 

          • Determining when property is used in the business and should be included in the property factor. 
          • Treatment of executive compensation in the payroll factor. 
          • Whether occasional or isolated sales are included in the sales factor. 

          Sales Sourcing Methods 

          The sales factor can present interesting and challenging issues. Sales of tangible personal property are generally sourced to the state where the property is delivered — but there are several notable exceptions that could result in sales being sourced to a different state. For example, sales to the federal government or sales that are shipped to a state in which the seller is not subject to income tax may be sourced (or “thrown back”) to the state from where the shipment originated. 

          With respect to sourcing receipts from sales of services and intangibles, there are two primary methods: 

          1. Market-based sourcing, which requires the taxpayer to source sales based on where the customer receives the benefit of the service or where the service is delivered. 
          1. Cost of performance sourcing, which generally requires the taxpayer to source sales to the state where the service was performed based on its costs of performance. 

          Businesses should note that some states apply different sourcing rules (and even different apportionment formulas) depending on whether the taxpayer is a C corporation, an S corporation or a partnership. 

          Because of the lack of uniformity among state apportionment rules, it is common for more or less than 100% of a business’s apportionable income to be apportioned among the states in which the business operates. Multistate businesses should be cognizant of how much of their total taxable income is subject to state tax while working within each state’s rules and regulations to ensure accurate reporting and the lowest possible tax liability. In some cases, a state may have more than one method businesses can use. In addition, where a state’s usual apportionment methodology does not fairly reflect the amount of business done in the state, the state may allow the taxpayer to apply to use an alternative method of apportionment. Accordingly, the application of state income apportionment formulas, including sourcing of receipts, requires a detailed understanding of a taxpayer’s business, transactions and states of operation, among other facts and circumstances. 

          Insight 

          Because of the lack of uniformity among state apportionment rules, it is common for more or less than 100% of a business’s apportionable income to be apportioned among the states in which the business operates. Multistate businesses should be cognizant of how much of their total taxable income is subject to state tax while working within each state’s rules and regulations to ensure accurate reporting and the lowest possible tax liability. In some cases, a state may have more than one method businesses can use. In addition, where a state’s usual apportionment methodology does not fairly reflect the amount of business done in the state, the state may allow the taxpayer to apply to use an alternative method of apportionment. Accordingly, the application of state income apportionment formulas, including sourcing of receipts, requires a detailed understanding of a taxpayer’s business, transactions and states of operation, among other facts and circumstances. 

          Additional State Apportionment Considerations 

          There are many additional factors to consider when reviewing state apportionment methods and calculations. Some of these include: 

          • Does the state distinguish between apportionable “business” income and allocable “non-business” income? Depending on the state’s rules, non-business income may be excluded from apportionable income and allocated to a different state. 
          • Does P.L. 86-272 impact the sourcing of receipts? P.L. 86-272 is a federal law that prohibits a state from imposing a net income tax on an out-of-state person soliciting the sales of tangible personal property and whose contacts with the state are limited to certain “protected” activities. 
          • Don’t forget local jurisdictions. Localities that impose net income taxes may have apportionment formulas and sourcing provisions that differ from state rules. 

          Have questions? We are here to help. Contact us today!

            Tags: Tax

            Inflation Reduction Act of 2022 Includes Numerous Clean Energy Tax Incentives

            On July 27, 2022, Sens. Joe Manchin (D-WV) and Chuck Schumer (D-NY) released legislative text for budget reconciliation legislation, also known as the Inflation Reduction Act of 2022. Twelve days later, the U.S. Senate on August 7 approved the bill on a party-line vote, with all 50 Democratic Senators voting for the legislation and all Republicans voting against it. Vice President Kamala Harris cast the decisive 51st vote in favor of the legislation. The House of Representatives then approved the bill on August 12, with all 220 Democrats voting for, and 207 Republicans voting against (with four Republicans not voting) the bill. The House made no changes to the Senate-passed bill, which President Biden signed into law on August 16. 
             
            The act includes the largest-ever U.S. investment committed to combat climate change, allocating $369 billion to energy security and clean energy programs over the next 10 years, including provisions incentivizing manufacturing of clean energy equipment and electric vehicles domestically. 
               
            Overall, the act modifies many of the current energy-related tax credits and introduces significant new credits and structures intended to facilitate long-term investment in the renewables industry. 
              

            Base and Bonus Credit Rate Structure 

            The act introduces a new credit structure whereby the tax incentives are subject to a base rate and a “bonus rate.” To qualify for the bonus rate, projects must satisfy certain wage and apprenticeship requirements implemented to ensure both the payment of prevailing wages and that a certain percentage of total labor hours are performed by qualified apprentices. 
             
            Projects under 1MW or that begin construction within 60 days of the date when Treasury publishes guidance regarding the wage and apprenticeship requirements are automatically eligible for the bonus credit.  
             
            Additional bonus credits may also be available for certain projects that are placed in service after December 31, 2022, and that meet domestic content requirements. For a project to qualify for this 10% bonus credit, taxpayers must ensure that a certain percentage of any steel, iron or manufactured product that is part of the project at the time of completion was produced in the United States.   
             
            Facilities located in energy communities are also eligible for up to a 10% additional credit. Energy communities are defined as a brownfield site, an area with significant fossil fuel employment, or a census tract or any immediately adjacent census tract in which, after December 31, 1999, a coal mine has closed, or, after December 31, 2009, a coal-fired electric generating unit has been retired.   
              

            Credit Monetization Changes 

            The act includes two new options for the monetization of the tax credits in the form of direct pay and transferability.  Direct pay allows certain tax-exempt entities including state or local governments and Indian tribal governments to receive tax refunds in the amount of the credits as an overpayment of tax.   Taxpayers not eligible for direct pay can elect a one-time transfer of all or a portion of certain tax credits for cash to unrelated taxpayers. The cash received for the transfer of the credits is not included in the income, nor is the cash paid for the transferred credits deducted from income. The IRS may release registration requirements or other procedures to govern these tax credit transfers. 
             
            The act also increases the carryback period for certain credits to three years for credits eligible to be transferred from the current one-year carryback and extends the carryforward period two additional years, from 20 to 22 years. 
               

            Clean Energy Provisions 

            A number of additional changes to the energy related tax credits are summarized below: 
              

            Production Tax Credit (PTC) and Investment Tax Credit (ITC) 

            The PTC and ITC are extended and enhanced with the restoration to full rates for projects that begin construction prior to January 1, 2025, subject to prevailing wage and apprenticeship requirements. Wind and solar projects are also eligible for bonus credits for projects placed in service in low-income communities. Solar projects have the option to claim the PTC and the ITC is expanded to include energy storage as well as biogas and microgrid property.  
              

            Clean energy PTC and ITC 

            New technology-neutral credits will be available for qualified zero-emission facilities that begin construction after December 31, 2024. The credits begin to phase out the earlier of the calendar year when the annual greenhouse gas emissions from the production of electricity are equal to or less than 25% of the annual greenhouse gas emissions from the production of electricity in the U.S. for calendar year 2022 or 2032. 
              

            Carbon Capture Sequestration Credit 

            The act extends the “begin construction” date to December 31, 2032 and changes the credit rate and carbon capture requirements for both direct air capture and electricity-generating facilities. Qualification for the bonus rate requires satisfaction of prevailing wage and apprenticeship requirements and there is an option for all taxpayers to elect a direct payment of the credit for the first five years of operation. 
              

            Clean Hydrogen 

            A new tax credit is established for facilities that produce clean hydrogen at a qualified facility after December 31, 2022, and that begin construction prior to January 1, 2033. Taxpayers can claim the PTC or ITC with bonus rates subject to their fulfilling prevailing wage and apprenticeship requirements. All taxpayers can elect a direct payment of the credit for the first five years of operation. 
              

            Advanced Manufacturing Production Credit 

            A new production tax credit is available beginning in 2023 for each eligible renewable energy component produced by the taxpayer in the U.S. and sold to an unrelated person. Eligible components include any solar or wind component, qualifying inverters and qualifying battery components and any applicable critical mineral. The credit is fully transferable and there is also an option for direct payment during the first five years of production. 
              

            Sustainable Aviation Fuel and Clean Fuel 

            The act includes new credits for sustainable aviation fuel used or sold as part of a qualified mixture between January 1, 2023, and December 31, 2024, and clean transportation fuel produced and sold after December 31, 2024, and before January 1, 2028. 
                

            Electric Vehicles 

            The existing $7,500 credit is modified by removing the current provision that begins phasing out the credit once a manufacturer sells 200,000 qualifying vehicles per manufacturer. The act also introduces limitations regarding domestic assembly requirements and for taxpayers with income over certain thresholds. Beginning in 2024, the act provides an option to transfer the credit to qualifying dealers and there is no credit available for purchases after December 31, 2032. 
               
            The act also establishes a new credit for previously owned clean vehicles on the initial transfer. The credit is allowed for vehicles with a sales price of $25,000 or less that have a model year at least two years old.  Similar to the credit for a new EV, this credit is limited for taxpayers with income over certain thresholds. 
              
            Immediately following President Biden’s signing of the bill,  the U.S. Department of the Treasury and the Internal Revenue Service published initial information – guidance and FAQs –  on changes to the tax credit for electric vehicles strengthened by the new legislation. 
              

            Alternative Refueling Property 

            The credit that expired on December 31, 2021, is extended and modified for property placed in service through December 31, 2032. The eligible expenses are increased and the per location limit is removed. However, beginning in 2023, only property placed in service in low-income or rural census tracts will be eligible for the credit. Prevailing wage and apprenticeship requirements must be satisfied to qualify for the full credit.  
              

            Commercial Clean Vehicles 

            Qualified commercial vehicles acquired after December 31, 2022, and before January 1, 2033, are eligible for a credit equal to the lesser of 30% of the cost of the vehicle not powered by a gasoline or diesel internal combustion engine or the incremental cost of the vehicle. The credit cannot exceed $7,500 for vehicles weighing less than 14,000 pounds or $40,000 for all other vehicles, and is available only for depreciable property acquired from qualified manufacturers.

             
            Additional clean energy and efficiency incentives for individuals included in the act include: 
            • Extension, increase and modification of nonbusiness energy property credit. 
            • Residential clean energy credit. 
            • Energy efficient commercial buildings deduction. 
            • Extension, increase and modifications of new energy efficient home credit. 

            Insights 

            • Projects placed in service in 2022, including before the act’s date of enactment, may be eligible for the PTC and the ITC at full rates. Additional guidance around the prevailing wage and apprenticeship requirements is forthcoming and is expected to include required administrative procedures and documentation to meet the certification requirement to qualify for the bonus rates.     
            • Direct pay, albeit limited in scope, in addition to the ability to transfer credits for cash, provides new flexibility in how certain tax credits may be monetized. Combined with the continuation of traditional tax equity structures, this option will impact capital and financing structures going forward. 


            Have questions? We are here to help. Contact us today!

              Tags: Tax

              IRS Provides Broad Penalty Relief for Some 2019, 2020 Returns

              The IRS on August 23, 2022, announced it will grant automatic penalty relief for late-file penalties imposed with respect to certain returns required to be filed for the 2019 and 2020 tax years. 
               
              Notice 2022-36 provides systemic penalty relief to taxpayers for certain civil penalties related to 2019 and 2020 returns. Penalty relief is automatic, so that eligible taxpayers need not apply for it. If penalties have already been paid, the taxpayer will receive a credit or refund. However, the IRS has not yet announced if or when it will notify eligible taxpayers that it has waived their preexisting penalties pursuant to this announcement. 
               
              However, it is critical to note that some of these automatic penalty waivers are available only if a taxpayer files its delinquent returns on or before September 30, 2022.
              As such, there is a very short window for taxpayers with outstanding reporting obligations to file their delinquent 2019 and 2020 returns and receive this automatic penalty relief. Any penalty relief under these procedures will be credited or refunded as appropriate. 
               
              This automatic relief does not apply to penalties for fraudulent failure to file or when a taxpayer has already settled its late-file penalties via an offer in compromise, a closing agreement or a judicial proceeding. 
               
              This chart summarizes the list of returns for which automatic penalty relief is now available. 


              Have questions? We are here to help. Contact us today!

                Tags: Tax

                Inflation Reduction Act Becomes Law

                President Biden signed the Inflation Reduction Act into law at a White House ceremony on August 16, finalizing a legislation intended to address inflation by paying down the national debt, lower consumer energy costs, provide incentives for the production of clean energy, and reduce healthcare costs. 

                The bill moved through the legislative process in near-record time, having been first introduced by Sens. Chuck Schumer (D-NY) and Joe Manchin (D-WV) on July 27.  With the 50-50 Senate, summer recess, and approaching mid-term elections, the path to passage by both houses of Congress was not a certainty.

                The act is expected to raise roughly $450 billion through new tax provisions, including a 15% minimum book tax on certain large corporations, a 1% excise tax on corporate stock buybacks, and a two-year extension of the section 461(l) loss limitation rules for noncorporate taxpayers, which is now set to expire for tax years beginning after 2028. The act also boosts funding for the IRS, intended to result in increased tax collections over the next 10 years.

                The act includes the largest-ever U.S. investment committed to combat climate change, allocating $369 billion to energy security and clean energy programs over the next 10 years, including provisions incentivizing manufacturing of clean energy equipment and electric vehicles domestically. 
                 
                Overall, the act modifies many of the current energy-related tax credits and introduces significant new credits and structures intended to facilitate long-term investment in the renewables industry. 

                For a more detailed discussion of the tax provisions in the act, see Senate Approves Inflation Reduction Act with Changes to Tax Provisions.   


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                  Tags: Tax

                  Is Your Company Effectively Managing Tax Risk?

                  The concept of “tax risk” is an increasingly important and regular topic of discussion across organizations and in boardrooms, and for good reason.

                  Businesses that operate across state lines or internationally can in certain cases trigger tax liabilities in jurisdictions where they do not have a physical presence.

                  In addition, many countries are adopting policies requiring greater transparency in tax and financial reporting, providing tax administrations more information with which to raise investigations and issue assessments. As companies place additional focus on social responsibility and fiscal transparency, the benefits of having a tax risk policy in place can be substantial.

                  Given the rapidly changing global tax environment combined with the continued demand for tax departments to add value to the organization, an effective tax risk policy is a necessity for any business needing to better manage tax risk.

                  Is tax risk currently top of mind for business leaders?

                  According to the 2022 BDO Tax Outlook Survey, 51% of tax executives surveyed said they have a tax risk policy “complete and ready,” and 46% said their tax risk policy is a “work in progress.” Additionally, 94% of respondents reported that tax risk is “highly” or “moderately” included as part of their board of director’s oversight function. Whether they have fully implemented policies or are still in the drafting stage, all businesses should take the appropriate steps to be certain their tax risk policy contains what it needs to effectively manage tax risk.



                  Insight

                  Every business decision has a tax implication, and with each decision comes the potential for tax risk. An important part of managing tax risk rests with the ability of the tax department to proactively analyze and plan for the tax effects of business transactions as well as correctly report the associated tax consequences. A sound tax risk policy should involve the tax department having a seat at the table as business decisions are being planned and executed so that the associated tax implications may be effectively assessed in real time. Effective processes and controls that include regular, transparent communication with non-tax leaders and decision makers are essential.
                   
                  A comprehensive tax risk policy will help tax departments mitigate financial reporting risk and potentially adverse operational consequences including negative cash flow impacts. In addition, a tax risk policy can provide shareholders and other stakeholders, tax authorities and regulators greater assurance that an organization has a thoughtful and robust approach to tax strategy and tax risk.   


                  What is tax risk?

                  Tax risk is a company’s risk of incurring additional tax, interest or penalty costs due to incorrectly underreporting its tax obligations in its financial statements or in tax or other regulatory filings. It also includes the risk a company will unnecessarily pay more taxes than it might otherwise legally owe due to missed planning opportunities and lack of clear tax strategy. Tax risk generally is heightened when a company has, for example, multi-jurisdictional or cross-border transactions or complex supply chains, remote employees or agency arrangements, valuable intellectual property or digital operations. Further, businesses that do not effectively manage tax risk also run the risk of reputational damage, for example, with investors or other stakeholders, or with tax or other governmental administrations. In addition, where errors are significant, companies may be required to restate their financial statements.

                  Some examples of potential areas of tax risk include:

                  • Failing to properly consider the tax impacts of a transaction or other business development due to a lack of communication between tax and the business organization.
                  • Incorrectly underreporting taxes due to computational errors or misapplication of tax rules and regulations. Underreporting errors can expose a company not only to additional tax cost but also underpayment interest and civil or even criminal penalties.
                  • Unnecessarily overreporting taxes due to insufficient or erroneous tax analysis or lack of tax planning. Overreporting errors can result in needless cash flow drains, as well as potential examinations and delayed refunds.
                  • Failing to identify changes in tax law or other new developments affecting the company’s tax positions due to a lack of tax department resources.

                  The benefits of a tax risk policy


                  As part of an overall tax policy, every business should have a documented policy that addresses tax risk. According to the BDO 2022 Tax Outlook Survey, there is a correlation between tax department involvement in strategic planning decisions and having a tax risk policy. Of the survey respondents who said that leadership “always” includes tax in strategic planning decisions, 72% also indicated they had completed a tax risk policy. By comparison, only 38% of respondents who said they are “sometimes” included have a tax risk policy in place.
                   
                  A comprehensive and properly implemented tax risk policy helps ensure a company’s tax behavior is in alignment with the company’s overall risk profile. An effective tax risk policy also strengthens tax risk awareness across the wider organization through better communication, processes and controls that include executive oversight of tax strategy.

                  A well-developed tax risk policy will include:

                  • A clearly articulated tax strategy, approved by management and the board of directors, that is aligned with the risk appetite of the broader organization.
                  • Robust internal control policies, processes and review and oversight procedures around tax reporting and planning that can be shared with tax authorities and stakeholders or published as part of ESG reporting.
                  • Sufficient tax department resources, technology and training along with clearly defined roles and responsibilities for tax department personnel.
                  • A documented policy setting out the company’s approach to interaction with tax authorities and regulators.
                  • A regular cadence of communication with organization leaders and board members regarding tax strategy, as well as procedures to help ensure that tax risk is considered when engaging in business planning.

                  Is your company’s tax risk policy effectively managing tax risk?


                  Every business should have a tax risk policy in place that not only articulates their tax strategy and vision but also reflects the way the company operates. In other words, to be effective, a tax risk policy must be consistent with the policies of the broader business organization.
                   
                  In an ever-changing business and tax environment, an effective tax risk policy will include procedures that require the policy to be regularly assessed and modified as needed.

                  Indications that your tax risk policy should be reviewed include:

                  • Increased tax examination activities or unexpected tax examination findings.
                  • Recent control deficiencies related to the tax function. 
                  • Legislative changes.
                  • Tax department turnover or a department reorganization that could lead to loss of institutional tax knowledge.
                  • Upcoming M&A or other significant business transactions.
                  • Changes to business operating models or supply chains, organizational transformation or similar business factors.
                  • Increased board or stakeholder inquiries related to tax, including around ESG concerns. 

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                    Tags: Tax

                    Senate Approves Inflation Reduction Act with Changes to Tax Provisions

                    Twelve days after Sens. Joe Manchin (D-WV) and Charles Schumer (D-NY) announced that they had reached agreement on a healthcare, climate and tax bill, the U.S. Senate on August 7 approved the Inflation Reduction Act on a party-line vote, with all 50 Democratic Senators voting for the legislation and all Republicans voting against it, and Vice President Kamala Harris casting the decisive 51st vote in favor.

                    The Senate’s final version of the bill – H.R. 5376 – includes a 15% corporate minimum tax on certain large corporations, a substantial increase in IRS funding, a 1% excise tax on corporate stock buybacks that was added during negotiations with Sen. Krysten Sinema, and a two-year extension of the section 461(l) loss limitation rules for noncorporate taxpayers, which is now set to expire for tax years beginning after 2028.

                    The House of Representatives is expected to return from its summer recess to vote on the Senate bill on Friday, August 12, 2022.  If the House approves the version of the bill passed in the Senate with no modifications, the bill would be ready for President Biden’s signature. Conversely, if the House makes any changes to the Senate bill, any differences would have to be resolved before sending the bill to the president for his signature.    
                     

                    Changes

                    The tax provisions included in the final bill generally adhere to the proposals first revealed by Sens. Manchin and Schumer on July 27, albeit with some significant modifications.

                    Perhaps the salient difference between the two versions of the bill is the removal, at the behest of Sen. Krysten Sinema (D-Az), of a provision that would have introduced an extended five-year holding period for partnership interests held in connection with the performance of services (“carried interest”) to qualify for long-term capital gain treatment.

                    To replace the estimated $14 billion that would have been raised through the changes to the carried interest rules, Democrats introduced a new 1% excise tax on stock buybacks that is expected to bring in an estimated $73 billion in revenue.
                     

                    Corporate Minimum Tax

                    Effective for tax years beginning after December 31, 2022, the act introduces a book minimum tax (AMT) that would impose a 15% minimum tax on “adjusted financial statement income” (AFSI) of applicable corporations over the corporate AMT foreign tax credit for the taxable year. An applicable corporation’s minimum tax would be equal to the amount by which the tentative minimum tax exceeds the corporation’s regular tax for the year.  The book minimum tax would increase a taxpayer’s tax only to the extent the minimum tax calculation exceeds the regular tax, as well as the base erosion and anti-abuse tax (BEAT).

                    An “applicable corporation” is defined as any corporation (other than an S corporation, regulated investment company or a real estate investment trust) with three-year average annual AFSI that exceeds $1 billion. For these purposes, a corporation must calculate its three-year average AFSI without regard to financial statement net operating losses (NOLs) but with regard to certain specified adjustments to book income, to determine if the average in any year exceeds $1 billion. The specified adjustments include items related to related entities, foreign income, disregarded entities, federal income taxes, non-reasonable compensation, covered benefit plan amounts and tax depreciation.

                    In a last-minute addition that took some by surprise, the Senate added an amendment introduced by Sen. John Thune (R-SD) during the vote-a-rama process—during which senators may offer an unlimited number of amendments if they relate to the underlying reconciliation bill—that eliminated an expanded aggregation rule under Section 52 that would have applied with respect to the book minimum tax when there is partnership or investment fund ownership.  The bill authorizes Treasury to issue regulations or other guidance that create a simplified set of rules for determining whether a corporation satisfies the $1 billion test ($100 million in the case of certain foreign-parented multinational groups).

                    Arguing that the originally proposed rules would have snared many small businesses that accepted investment partnerships with private equity firms during the pandemic, Thune’s amendment precludes the application of the minimum tax to companies that reach the threshold because their income is combined with unrelated businesses under the shared ownership of an investment fund or partnership.

                    The Senate also extended the excess business loss rules under IRC Section 461(l) for two more years through taxable years beginning after 2028. This CARES Act provision was originally expected to sunset for years after 2025 until it was extended by one year by the American Rescue Plan Act. This latest extension is expected to raise an estimated $55 billion over 10 years.

                    The corporate minimum tax had also been modified before the vote – again at Sen Sinema’s request — to reduce the effect of some depreciation rules on companies that would be subject to the minimum tax. The bill now provides that adjusted financial statement income will be reduced by tax depreciation deductions while book depreciation adjustments will be added back to AFSI.
                     

                    Excise Tax

                    The 1% non-deductible excise tax would be imposed on the fair market value of any stock repurchased by a domestic corporation with stock traded on an established securities market. A “repurchase” is defined as a redemption under the U.S. Tax Code or other economically similar transaction, as opposed to a dividend payment to shareholders. The tax would apply to repurchases after December 31, 2022. The tax extends to certain affiliates of U.S. corporations, as well as specified affiliates of foreign corporations performing buybacks on behalf of their parent organization.

                    Some stock repurchases would be exempt from the excise tax, including tax-free reorganizations, repurchased stock contributed to a pension plan or ESOP, or when the total annual amount of repurchases equals $1 million or less.
                     

                    Provisions Not in the Bill

                    The Senate bill does not include the modifications to the international tax rules changes, including amendments to the global intangible low-taxed income (GILTI) rules that would be necessary to bring the GILTI regime into conformity with the OECD’s Pillar Two and the 15% global minimum tax. It is not clear what the implications are for U.S. participation in the OECD’s global tax reform proposal.

                    Moreover, the bill does not include a provision to remove the itemized deduction cap for an individual’s state and local taxes and it does not provide for the reinstatement of the popular research expensing provision under Section 174 for research and experimental (R&E) expenditures.

                    Section 174 was amended by the 2017 Tax Cuts and Jobs Act to require mandatory amortization of R&E expenditures incurred in taxable years beginning on or after January 1, 2022. The capitalized Section 174 costs, including salaries of researchers, overhead expenses such as rent, depreciation, utilities related to facilities used for R&D, supplies used during the research process and certain software development costs are now required to be capitalized and amortized using a straight-line methodology over five years for costs incurred in the U.S. or 15 years for costs occurring outside the U.S.


                    Insights

                    The Senate added a two-year extension of the excess business loss rules under Section 461(l) as an amendment to fill the revenue gap caused by the elimination of the carried interest proposal. It is interesting to note that Section 461(l) may end up as a timing difference, because any disallowed amounts convert to an NOL in a subsequent year. Current NOLs carry forward indefinitely and can offset up to 80% of taxable income going forward. 

                    Moreover, if enacted, the House-passed Build Back Better Act would have made further substantive changes to Section 461(l) that were not included in the Senate bill, including the proposal to convert disallowed losses to Section 461(l) carryovers (not NOL carryovers) and the proposal to make Section 461(l) permanent. Finally, there is apparently no ability to accelerate the deduction of an excess business loss upon a taxable disposition of the business, giving rise to the loss unless converted to an NOL.

                    Private equity funds and their portfolio companies will benefit from key changes to the bill. Specifically, the elimination of proposed changes to the existing carried interest rules is welcome news to fund managers, while changes to the rules relating to application of the corporate AMT will ensure that small, private equity-backed corporations are not subjected to this tax.

                    The inclusion of depreciation deductions for purposes of calculating the AMT is another welcome change in the Senate-passed bill. However, the bill does not include a provision for the deduction of amortization (except for certain amortization relating to qualified wireless spectrum). As a result of the lack of amortization deductions, partners in umbrella partnership C corporation (Up-C) initial public offerings could see the value of their tax receivable benefits decrease if the public company becomes subject to the AMT.


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