[vc_row][vc_column][vc_column_text]2022 Year-End Tax Planning for Individuals

 

With rising interest rates, inflation, and continuing market volatility, tax planning is as essential as ever for taxpayers looking to manage cash flow while paying the least amount of taxes possible over time. As we approach year end, now is the time for individuals, business owners and family offices to review their 2022 and 2023 tax situations and identify opportunities for reducing, deferring or accelerating their tax obligations.

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

2022 Federal Income Tax Rate Brackets

Tax Rate	Joint/Surviving Spouse	Single	Head of Household	Married Filing Separately	Estates & Trusts
10%	$0 – $20,550	$0 – $10,275	$0 – $14,650	$0 – $10,275	$0 – $2,750
12%	$20,551 – $83,550	$10,276 – $41,775	$14,651 – $55,900	$10,276 – $41,775	–
22%	$83,551 – $178,150	$41,776 – $89,075	$55,901 – $89,050	$41,776 – $89,075	–
24%	$178,151 – $340,100	$89,076 – $170,050	$89,051 – $170,050	$89,076 – $170,050	$2,751 – $9,850
32%	$340,101 – $431,900	$170,051 – $215,950	$170,051 – $215,950	$170,051 – $215,950	–
35%	$431,901 – $647,850	$215,951 – $539,900	$215,951 – $539,900	$215,951 – $323,925	$9,851 – $13,450
37%	Over $647,850	Over $539,900	Over $539,900	Over $323,925	Over $13,450

2023 Federal Income Tax Rate Brackets

Tax Rate	Joint/Surviving Spouse	Single	Head of Household	Married Filing Separately	Estates & Trusts
10%	$0 – $22,000	$0 – $11,000	$0 – $15,700	$0 – $11,000	$0 – $2,900
12%	$22,001 – $89,450	$11,001 – $44,725	$15,701 – $59,850	$11,001 – $44,725	–
22%	$89,451 – $190,750	$44,726 – $95,375	$59,851 – $95,350	$44,726 – $95,375	–
24%	$190,751 – $364,200	$95,376 – $182,100	$95,351 – $182,100	$95,376 – $182,100	$2,901 – $10,550
32%	$364,201 – $462,500	$182,101 – $231,250	$182,101 – $231,250	$182,101 – $231,250	–
35%	$462,501 – $693,750	$231,251 – $578,125	$231,251 – $578,100	$231,251 – $346,875	$10,551 – $14,450
37%	Over $693,750	Over $578,125	Over $578,100	Over $346,875	Over $14,450

 

Timing of Income and Deductions

Taxpayers should consider whether they can minimize their tax bills by shifting income or deductions between 2022 and 2023. Ideally, income should be received in the year with the lower marginal tax rate, and deductible expenses should be paid in the year with the higher marginal tax rate. If the marginal tax rate is the same in both years, deferring income from 2022 to 2023 will produce a one-year tax deferral, and accelerating deductions from 2023 to 2022 will lower the 2022 income tax liability.

Actions to consider that may result in a reduction or deferral of taxes include:

• Delaying closing capital gain transactions until after year end or structuring 2022 transactions as installment sales so that gain is deferred past 2022 (also see Long Term Capital Gains, below).
• Considering whether to trigger capital losses before the end of 2022 to offset 2022 capital gains.
• Delaying interest or dividend payments from closely held corporations to individual business-owner taxpayers.
• Deferring commission income by closing sales in early 2023 instead of late 2022.
• Accelerating deductions for expenses such as mortgage interest and charitable donations (including donations of appreciated property) into 2022 (subject to AGI limitations).
• Evaluating whether non-business bad debts are worthless by the end of 2022 and should be recognized as a short-term capital loss.
• Shifting investments to municipal bonds or investments that do not pay dividends to reduce taxable income in future years.

On the other hand, taxpayers that will be in a higher tax bracket in 2023 may want to consider potential ways to move taxable income from 2023 into 2022, such that the taxable income is taxed at a lower tax rate. Current year actions to consider that could reduce 2023 taxes include:

• Accelerating capital gains into 2022 or deferring capital losses until 2023.
• Electing out of the installment sale method for 2022 installment sales.
• Deferring deductions such as large charitable contributions to 2023.

 

Long-Term Capital Gains

The long-term capital gains rates for 2022 and 2023 are shown below. The tax brackets refer to the taxpayer’s taxable income. Capital gains also may be subject to the 3.8% Net Investment Income Tax.

2022 Long-Term Capital Gains Rate Brackets

Long-Term Capital Gains Tax Rate	Joint/Surviving Spouse	Single	Head of Household	Married Filing Separately	Estates & Trusts
0%	$0 – $83,350	$0 – $41,675	$0 – $55,800	$0 – $41,675	$0 – $2,800
15%	$83,351 – $517,200	$41,676 – $459,750	$55,801 – $488,500	$41,676 – $258,600	$2,801 – $13,700
20%	Over $517,200	Over $459,750	Over $488,500	Over $258,600	Over $13,700

2023 Long-Term Capital Gains Rate Brackets

Long-Term Capital Gains Tax Rate	Joint/Surviving Spouse	Single	Head of Household	Married Filing Separately	Estates & Trusts
0%	$0 – $89,250	$0 – $44,625	$0 – $59,750	$0 – $44,625	$0 – $3,000
15%	$89,251 – $553,850	$44,626 – $492,300	$59,751 – $523,050	$44,626 – $276,900	$3,001 – $14,650
20%	Over $553,850	Over $492,300	Over $523,050	Over $276,900	Over $14,650

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

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

Net Investment Income Tax

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

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

Social Security Tax

The Old-Age, Survivors, and Disability Insurance (OASDI) program is funded by contributions from employees and employers through FICA tax. The FICA tax rate for both employees and employers is 6.2% of the employee’s gross pay, but only on wages up to $147,000 for 2022 and $160,200 for 2023. Self-employed persons pay a similar tax, called SECA (or self-employment tax), based on 12.4% of the net income of their businesses.

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

Long-Term Care Insurance and Services

Premiums an individual pays on a qualified long-term care insurance policy are deductible as a medical expense. The maximum deduction amount is determined by an individual’s age. The following table sets forth the deductible limits for 2022 and the estimated deductible limits for 2023 (the limitations are per person, not per return):

Age	Deduction Limitation 2022	Deduction Limitation 2023
40 or under	$450	$480
Over 40 but not over 50	$850	$890
Over 50 but not over 60	$1,690	$1,790
Over 60 but not over 70	$4,510	$4,770
Over 70	$5,640	$5,960

Retirement Plan Contributions

Individuals may want to maximize their annual contributions to qualified retirement plans and Individual Retirement Accounts (IRAs).

• The maximum amount of elective contributions that an employee can make in 2022 to a 401(k) or 403(b) plan is $20,500 ($27,000 if age 50 or over and the plan allows “catch up” contributions). For 2023, these limits are $22,500 and $30,000, respectively.
• The SECURE Act permits a penalty-free withdrawal of up to $5,000 from traditional IRAs and qualified retirement plans for qualifying expenses related to the birth or adoption of a child after December 31, 2019. The $5,000 distribution limit is per individual, so a married couple could each receive $5,000.
• Under the SECURE Act, individuals are now able to contribute to their traditional IRAs in or after the year in which they turn 70½.
• The SECURE Act changes the age for required minimum distributions (RMDs) from tax-qualified retirement plans and IRAs from age 70½ to age 72 for individuals born on or after July 1, 1949. Generally, the first RMD for such individuals is due by April 1 of the year after the year in which they turn 72.
• Individuals age 70½ or older can donate up to $100,000 to a qualified charity directly from a taxable IRA.
• The SECURE Act generally requires that designated beneficiaries of persons who died after December 31, 2019, take inherited plan benefits over a 10-year period. Eligible designated beneficiaries (i.e., surviving spouses, minor children of the plan participant, disabled and chronically ill beneficiaries and beneficiaries who are less than 10 years younger than the plan participant) are not limited to the 10-year payout rule. Special rules apply to certain trusts.
• Under proposed Treasury Regulations (issued February 2022) that address required minimum distributions from inherited retirement plans of persons who died after December 31, 2019 and after their required beginning date, designated and non-designated beneficiaries will be required to take annual distributions, whether subject to a ten-year period or otherwise. This interpretation is at odds with the interpretation under the SECURE Act, in which annual distributions were not required when subject to full payout under the ten-year rule. If the proposed regulations are final before the end of 2022, there is some concern that annual distributions would be required for 2022 if the ten-year rule applies. Beneficiaries can take a wait and see approach by calculating what those 2022 distributions would be, then wait to see if final Treasury Regulations are issued, before the end of 2022, that clarify the distribution requirement under the ten-year rule.
• Small businesses can contribute the lesser of (i) 25% of employees’ salaries or (ii) an annual maximum set by the IRS each year to a Simplified Employee Pension (SEP) plan by the extended due date of the employer’s federal income tax return for the year that the contribution is made. The maximum SEP contribution for 2022 is $61,000. The maximum SEP contribution for 2023 is $66,000. The calculation of the 25% limit for self-employed individuals is based on net self-employment income, which is calculated after the reduction in income from the SEP contribution (as well as for other things, such as self-employment taxes).

 

Foreign Earned Income Exclusion

The foreign earned income exclusion is $112,000 in 2022 and increases to $120,000 in 2023.

Alternative Minimum Tax

A taxpayer must pay either the regular income tax or the alternative minimum tax (AMT), whichever is higher. The established AMT exemption amounts for 2022 are $75,900 for unmarried individuals and individuals claiming head of household status, $118,100 for married individuals filing jointly and surviving spouses, $59,050 for married individuals filing separately and $26,500 for estates and trusts. The AMT exemption amounts for 2023 are $81,300 for unmarried individuals and individuals claiming head of household status, $126,500 for married individuals filing jointly and surviving spouses, $63,250 for married individuals filing separately and $28,400 for estates and trusts.

Kiddie Tax

The unearned income of a child is taxed at the parents’ tax rates if those rates are higher than the child’s tax rate.
Limitation on Deductions of State and Local Taxes (SALT Limitation)

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

Charitable Contributions

Cash contributions made to qualifying charitable organizations, including donor advised funds, in 2022 and 2023 will be subject to a 60% AGI limitation. The limitations for cash contributions continue to be 30% of AGI for contributions to non-operating private foundations. Tax planning around charitable contributions may include:

• Maximizing 2022 cash charitable contributions to qualified charities to take advantage of the 100% AGI limitation.
• Creating and funding a private foundation, donor advised fund or charitable remainder trust.
• Donating appreciated property to a qualified charity to avoid long term capital gains tax.

Estate and Gift Taxes

For gifts made in 2022, the gift tax annual exclusion is $16,000 and for 2023 is $17,000. For 2022, the unified estate and gift tax exemption and generation-skipping transfer tax exemption is $12,060,000 per person. For 2023, the unified estate and gift tax exemption and generation-skipping transfer tax exemption is $12,920,000. All outright gifts to a spouse who is a U.S. citizen are free of federal gift tax. However, for 2022 and 2023, only the first $164,000 and $175,000, respectively, of gifts to a non-U.S. citizen spouse is excluded from the total amount of taxable gifts for the year. Tax planning strategies may include:

• Making annual exclusion gifts.
• Making larger gifts to the next generation, either outright or in trust.
• Creating a Spousal Lifetime Access Trust (SLAT) or a Grantor Retained Annuity Trust (GRAT) or selling assets to an Intentionally Defective Grantor Trust (IDGT).

Net Operating Losses and Excess Business Loss Limitation

Net operating losses (NOLs) generated in 2022 are limited to 80% of taxable income and are not permitted to be carried back. Any unused NOLs are carried forward subject to the 80% of taxable income limitation in carryforward years.

A non-corporate taxpayer may deduct net business losses of up to $270,000 ($540,000 for joint filers) in 2022. The limitation is $289,000 ($578,000 for joint filers) for 2023. A disallowed excess business loss (EBL) is treated as an NOL carryforward in the subsequent year, subject to the NOL rules. With the passage of the Inflation Reduction Act, the EBL limitation has been extended through the end of 2028.

 [/vc_column_text][/vc_column][/vc_row]

2022 Year-End Tax Planning 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.

2023 Important Tax Deadlines for Individuals and Businesses

For federal tax returns the business tax deadline for sole proprietorships and C corporations is April 17, 2023, but the deadline is March 15, 2023 for partnerships, multimember LLC and S corporations. Generally, a tax extension provides six more months to file but will not extend more time to pay.

To help avoid costly IRS penalties and interest, knowing what you need to file is important. We have listed below some major business deadlines to circle on your calendar.

Business tax deadlines for federal tax returns

• Sole proprietorships: Schedule C and personal tax return (IRS Form 1040) due April 17, 2023.
• Partnerships: IRS Form 1065 due March 15, 2023.
• Multimember LLCs: IRS Form 1065 due March 15, 2023.
• S-corporations: IRS Form 1120S due March 15, 2023.
• C-corporations: IRS Form 1120 due April 17, 2023.

Business tax extension deadlines

If you need more time to file, you may be able to get a tax extension. You must request an extension on or before the regular filing deadline. If you get a tax extension, the filing deadline changes to the following:

• Sole proprietorships: October 16, 2023.
• Partnerships: September 15, 2023.
• Multimember LLCs: September 15, 2023.
• S-corporations: September 15, 2023.
• C-corporations: October 16, 2023.

Important notes about business tax extensions:

Sole proprietors and owners of certain single-member LLCs use IRS Form 4868 to get an extension. (Good tax software should be able to handle this.) Corporations, LLCs, and partnerships use IRS Form 7004 to get an extension.

An extension gives you more time to file but it does not give you more time to pay. You typically have to pay any taxes you owe by the initial deadline to avoid penalties.

If you can’t afford your tax bill, the IRS offers installment plans that may let you pay your bill over time.

Deadlines for estimated tax payments

The IRS follows a pay-as-you-go system for taxes. S-corporations or C-corporations that expect to owe more than $500 in taxes, as well as individuals who expect to owe more than $1,000 in taxes should make quarterly estimated tax payments (along with filing a tax return annually).

Federal Unemployment Taxes (FUTA)

• If your FUTA tax liability is more than $500 for the calendar year: You have to make at least one quarterly payment. The quarterly deadlines are the last day of the month after the end of the quarter.
• If your total FUTA tax liability for the year is $500 or less: You can either deposit the amount or pay the tax with your Form 940 by January 31.
• If your FUTA tax liability is $500 or less in a quarter: Carry it forward to the next quarter or until your cumulative FUTA tax liability is more than $500.

Form 941 deadlines

Form 941, “Employer’s Quarterly Federal Tax Return,” is for reporting wages you paid and tips your employees reported to you, as well as employment taxes (federal income tax, Social Security and Medicare taxes you withheld, on top of your share of those Social Security and Medicare taxes).

You file Form 941 quarterly. The deadline is the last day of the month following the end of the quarter.

• May 2, 2022.
• August 1, 2022.
• November 30, 2022.
• January 31, 2023.

Note: Some employers with small payrolls can file Form 944 once a year instead of Form 941 quarterly if their annual employment tax liability is $1,000 or less. Form 944 generally is due on January 31 of the following year. IRS Topic No. 758 has the details.

Small business owners must remit income tax withheld from employees’ paychecks, as well as the employee and employer shares of Medicare and Social Security taxes. For FICA, businesses follow either a monthly or semiweekly deposit schedule.

Generally, businesses that paid $50,000 or less in employment taxes must deposit monthly. Each payment is due by the 15th of the following month.

Businesses that paid more than $50,000 in employment taxes must deposit semiweekly. Deposit taxes for payments made on Wednesday, Thursday or Friday by the following Wednesday. Deposit taxes for payments made on Saturday, Sunday, Monday or Tuesday by the following Friday.

Businesses must use electronic funds transfer (EFTPS) to make federal tax deposits.

Deadlines for employee and contractor tax forms

Deadline to send out W-2s

The annual deadline to file W-2s is January 31.

• You can send W-2 forms by regular email or make them available digitally, though employees can request a paper copy.
• Provide these forms late, and the IRS can hit you with penalties anywhere from $50 to $580 per employee, depending on how late you were.

Deadline to send out 1099s

If you worked with independent contractors during the tax year, you may need to send them a Form 1099-NEC by January 31. The same penalties and deadlines that apply for W-2 forms apply for 1099s.

 

2022 Deadlines

 

Depreciating Residential Rental and Commercial Real Property

When you own rental property, depreciation is your best friend.

One reason depreciation is so valuable is that, unlike deductible rental property expenses such as interest and maintenance, you get to claim depreciation year after year without having to pay anything beyond your original investment in the property. Moreover, rental real property owners are entitled to depreciation even if their property goes up in value over time (as it usually does). The basic idea behind depreciation is simple, but applying it in practice can be complex. Indeed, the annual depreciation deductions for two properties that cost the same can be very different.

For example, if you own a motel with a depreciable basis of $1 million, you get to deduct $25,640 each year for depreciation (except the first and last years). If you own an apartment building with a $1 million basis, your depreciation deduction is $36,360.

Why the difference? A motel and apartment building are both rental real estate. Shouldn’t they be depreciated the same way? Not according to the tax law. An apartment building is a residential rental property, while a motel is a commercial rental property. There are different depreciation periods for commercial and residential property: it takes far longer to depreciate commercial property fully. For this reason, you should always make sure you correctly classify your property as commercial or residential. Such classification can be more challenging than you might think, especially for mixed-use properties. If you rent to residential and commercial tenants, the tax code classifies the building as residential only if 80 percent or more of the gross annual rent is from renting dwelling units.

Even properties rented only for residential use may have to be classified as commercial if a majority of the tenants or guests are transients who stay only a short time. This rule can adversely impact the depreciation deductions for property owners who rent their property to short-term guests through Airbnb and other short-term rental platforms. If you’ve been using the wrong depreciation period for your residential or commercial rental property, you should correct the error by filing an amended return or IRS Form 3115 to fix depreciation errors more than two years old.

We are here to help. Call us at 561-995-0064 or email info@lerrosarbey.com

Takeaways

If you keep the property for 40 years, the total depreciation deductions are the same for both residential and non-residential real property. The difference is you get your deductions 42% faster with property classified as residential rental property (39 divided by 27.5). Given the time value of money, this is a valuable benefit of owning residential rental property.

For depreciation, residential property is a building or other structure for which 80% or more of the gross rental income for the tax year is from dwelling units. How much space the dwelling units take up in the building is irrelevant; all that matters is how much money you earn from them. If you live in any part of the building, the gross rental income includes the fair rental value of the part you occupy.

If a building changes from a residential rental property to a non-residential rental property due to the 80% rule, you switch to the non-residential rate of depreciation on the first day of that year.

Likewise, if the non-residential real property becomes residential real property, you switch and depreciate over a 27.5 year recovery period for residential rental property instead of the 39-year period.

The definition of the dwelling unit for purposes of depreciation is more expansive than what you might find with vacation homes. For example, the vacation home rules state that the dwelling unit has basic living accommodations, such as sleeping space, a toilet, and cooking facilities. For 27.5-year residential rental property depreciation, you don’t need the kitchen. The 30-day transient rule applies not only to hotels, motels, and nursing homes but to short-term Airbnb-type rentals as well.

2021 Year-End Planning for Individuals

 

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

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

Individual Tax Planning Highlights

2021 Federal Income Tax Rate Brackets

Tax Rate	Joint/Surviving Spouse	Single	Head of Household	Married Filing Separately	Estate & Trusts
10%	$0 – $19,900	$0 – $9,950	$0 – $14,200	$0 – $9,950	$0 – $2,650
12%	$19,901 – $81,050	$9,951 – $40,525	$14,201 – $54,200	$9,951 – $40,525	–
22%	$81,051 – $172,750	$40,526 – $86,375	$54,201 – $86,350	$40,526 – $86,375	–
24%	$172,751 $329,850	$86,376 – $164,925	$86,351 – $164,900	$86,376 – $164,925	$2,651 – $9,550
32%	$329,851 – $418,850	$164,926 – $209,425	$164,901 – $209,400	$164,926 – $209,425	–
35%	$418,851 – $628,300	$209,426 – $523,600	$209,401 – $523,600	$209,426 – $314,150	$9,551 – $13,050
37%	Over $628,300	Over $523,600	Over $523,600	Over $314,150	Over $13,050

2022 Federal Income Tax Rate Brackets

Tax Rate	Joint/Surviving Spouse	Single	Head of Household	Married Filing Separately	Estates & Trusts
10%	$0 – $20,550	$0 – $10,275	$0 – $14,650	$0 – $10,275	$0 – $2,750
12%	$20,551 – $83,550	$10,276 – $41,775	$14,651 – $55,900	$10,276 – $41,775	–
22%	$83,551 – $178,150	$41,776 – $89,075	$55,901 – $89,050	$41,776 – $89,075	–
24%	$178,151 – $340,100	$89,076 – $170,050	$89,051 – $170,050	$89,076 – $170,050	$2,751 – $9,850
32%	$340,101 – $431,900	$170,051 – $215,950	$170,051 – $215,950	$170,051 – $215,950	–
35%	$431,901 – $647,850	$215,951 – $539,900	$215,951 – $539,900	$215,951 – $323,925	$9,851 – $13,450
37%	Over $647,850	Over $539,900	Over $539,900	Over $323,925	Over $13,450

Proposed Surcharge on High-Income Individuals, Estates and Trusts

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

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

Actions to consider that may result in a reduction or deferral of taxes include:

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

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

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

 

Long-Term Capital Gains

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

2021 Long-Term Capital Gains Rate Brackets

Long-Term Capital Gains Tax Rate	Joint/Surviving Spouse	Single	Head of Household	Married Filing Separately	Estates & Trusts
0%	$0 – $80,800	$0 – $40,400	$0 – $54,100	$0 – $40,400	$0 – $2,700
15%	$80,801 – $501,600	$40,401 – $445,850	$54,101 – $473,750	$40,401 – $250,800	$2,701 – $13,250
20%	Over $501,600	Over $445,850	Over $473,750	Over $250,800	Over $13,250

2022 Long-Term Capital Gains Rate Brackets

Long-Term Capital Gains Tax Rate	Joint/Surviving Spouse	Single	Head of Household	Married Filing Separately	Estates & Trusts
0%	$0 – $83,350	$0 – $41,675	$0 – $55,800	$0 – $41,675	$0 – $2,800
15%	$83,351 – $517,200	$41,676 – $459,750	$55,801 – $488,500	$41,676 – $258,600	$2,801 – $13,700
20%	Over $517,200	Over $459,750	Over $448,500	Over $258,600	Over $13,700

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

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

Net Investment Income Tax

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

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

• Deferring net investment income for the year.
• Accelerating into 2021 income from pass-through entities that would be subject to the expanded definition of net investment income under the proposed tax legislation.

Social Security Tax

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

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

Long-Term Care Insurance and Services

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

Age	Deduction Limitation 2021	Deduction Limitation 2022
40 or under	$450	$450
Over 40 but not over 50	$850	$850
Over 50 but not over 60	$1,690	$1,690
Over 60 but not over 70	$4,520	$4,510
Over 70	$5,640	$5,640

Retirement Plan Contributions

Individuals may want to maximize their annual contributions to qualified retirement plans and Individual Retirement Accounts (IRAs) while keeping in mind the current proposed tax legislation that would limit contributions and conversions and require minimum distributions beginning in 2029 for large retirement funds without regard to the taxpayer’s age.

• The maximum amount of elective contributions that an employee can make in 2021 to a 401(k) or 403(b) plan is $19,500 ($26,000 if age 50 or over and the plan allows “catch up” contributions). For 2022, these limits are $20,500 and $27,000, respectively.
• The SECURE Act permits a penalty-free withdrawal of up to $5,000 from traditional IRAs and qualified retirement plans for qualifying expenses related to the birth or adoption of a child after December 31, 2019. The $5,000 distribution limit is per individual, so a married couple could each receive $5,000.
• Under the SECURE Act, individuals are now able to contribute to their traditional IRAs in or after the year in which they turn 70½.
• The SECURE Act changes the age for required minimum distributions (RMDs) from tax-qualified retirement plans and IRAs from age 70½ to age 72 for individuals born on or after July 1, 1949. Generally, the first RMD for such individuals is due by April 1 of the year after the year in which they turn 72.
• Individuals age 70½ or older can donate up to $100,000 to a qualified charity directly from a taxable IRA.
• The SECURE Act generally requires that designated beneficiaries of persons who die after December 31, 2019, take inherited plan benefits over a 10-year period. Eligible designated beneficiaries (i.e., surviving spouses, minor children of the plan participant, disabled and chronically ill beneficiaries and beneficiaries who are less than 10 years younger than the plan participant) are not limited to the 10-year payout rule. Special rules apply to certain trusts.
• Small businesses can contribute the lesser of (i) 25% of employees’ salaries or (ii) an annual maximum set by the IRS each year to a Simplified Employee Pension (SEP) plan by the extended due date of the employer’s federal income tax return for the year that the contribution is made. The maximum SEP contribution for 2021 is $58,000. The maximum SEP contribution for 2022 is $61,000. The calculation of the 25% limit for self-employed individuals is based on net self-employment income, which is calculated after the reduction in income from the SEP contribution (as well as for other things, such as self-employment taxes).
• 2021 could be the final opportunity to convert non-Roth after-tax savings in qualified plans and IRAs to Roth accounts if legislation passes in its current form. Proposed legislation would prohibit all taxpayers from funding Roth IRAs or designated Roth accounts with after-tax contributions starting in 2022, and high-income taxpayers from converting retirement accounts attributable to pre-tax or deductible contributions to Roths starting in 2032.
• Proposed legislation would require wealthy savers of all ages to substantially draw down retirement balances that exceed $10 million after December 31, 2028, with potential income tax payments on the distributions. As account balances approach the mandatory distribution level, extra consideration should be given before making an annual contribution.

Foreign Earned Income Exclusion

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

Alternative Minimum Tax

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

Kiddie Tax

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

 

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

 

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

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

 

Charitable Contributions

The Taxpayer Certainty and Disaster Relief Act of 2020 extended the temporary suspension of the AGI limitation on certain qualifying cash contributions to publicly supported charities under the CARES Act. As a result, individual taxpayers are permitted to take a charitable contribution deduction for qualifying cash contributions made in 2021 to the extent such contributions do not exceed the taxpayer’s AGI. Any excess carries forward as a charitable contribution that is usable in the succeeding five years. Contributions to non-operating private foundations or donor-advised funds are not eligible for the 100% AGI limitation. The limitations for cash contributions continue to be 30% of AGI for non-operating private foundations and 60% of AGI for donor advised funds. The temporary suspension of the AGI limitation on qualifying cash contributions will no longer apply to contributions made in 2022. Contributions made in 2022 will be subject to a 60% AGI limitation. Tax planning around charitable contributions may include:

• Maximizing 2021 cash charitable contributions to qualified charities to take advantage of the 100% AGI limitation.
• Deferring large charitable contributions to 2022 if the taxpayer would be subject to the proposed individual surcharge tax.
• Creating and funding a private foundation, donor advised fund or charitable remainder trust.
• Donating appreciated property to a qualified charity to avoid long term capital gains tax.

Estate and Gift Taxes

The November 3 draft of the Build Back Better Act does not include any changes to the estate and gift tax rules. For gifts made in 2021, the gift tax annual exclusion is $15,000 and for 2022 is $16,000. For 2021, the unified estate and gift tax exemption and generation-skipping transfer tax exemption is $11,700,000 per person. For 2022, the exemption is $12,060,000. All outright gifts to a spouse who is a U.S. citizen are free of federal gift tax. However, for 2021 and 2022, only the first $159,000 and $164,000, respectively, of gifts to a non-U.S. citizen spouse are excluded from the total amount of taxable gifts for the year. Tax planning strategies may include:

• Making annual exclusion gifts.
• Making larger gifts to the next generation, either outright or in trust.
• Creating a Spousal Lifetime Access Trust (SLAT) or a Grantor Retained Annuity Trust (GRAT) or selling assets to an Intentionally Defective Grantor Trust (IDGT).

 

Net Operating Losses

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

Excess Business Loss Limitation

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

On November 5, 2021, the U.S. House of Representatives delayed voting on its version of the Build Back Better Act (H.R. 5376), a package of social spending measures funded by tax increases. The delay allows members more time to review the budget impact of the provisions in the bill. Some of the legislation’s major tax proposals, which mainly target large profitable corporations and high-income individuals, include:

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

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

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

 

Consider tax accounting method changes and strategic tax elections

 

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

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

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

Is “reverse” planning better for your situation?

 

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

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

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

 

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

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

Only certain changes may be implemented without a Form 3115.

 

Write-off bad debts and worthless stock

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

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

 

Maximize interest expense deductions

 

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

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

 

Maximize tax benefits of NOLs

 

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

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

 

Defer tax on capital gains

 

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

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

• Reinvesting capital gains in Qualified Opportunity Zones.
• Reinvesting proceeds from sales of real property in other “like-kind” real property.
• Selling shares of a privately held company to an Employee Stock Ownership Plan.

Businesses engaging in reverse planning strategies (see Is “reverse” planning better for your situation?  above) may instead want to move capital gain income into 2021 by accelerating transactions (if feasible) or, for installment sales, electing out of the installment method.

Claim available tax credits

 

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

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

 

Partnerships and S corporations

 

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

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

 

Planning for international operations

 

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

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

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

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

 

Review transfer pricing compliance

 

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

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

Considerations for employers

 

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

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

 

State and local taxes

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

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

State pass-through entity elections

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

Accounting for income taxes – ASC 740 considerations

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

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

Begin Planning for the Future

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

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

[av_one_full first min_height=” vertical_alignment=” space=” row_boxshadow=” row_boxshadow_color=” row_boxshadow_width=’10’ custom_margin=” margin=’0px’ mobile_breaking=” border=” border_color=” radius=’0px’ padding=’0px’ column_boxshadow=” column_boxshadow_color=” column_boxshadow_width=’10’ background=’bg_color’ background_color=” background_gradient_color1=” background_gradient_color2=” background_gradient_direction=’vertical’ src=” background_position=’top left’ background_repeat=’no-repeat’ highlight=” highlight_size=” animation=” link=” linktarget=” link_hover=” title_attr=” alt_attr=” mobile_display=” id=” custom_class=” aria_label=” av_uid=’av-6gjy1z’]

[av_textblock size=” av-medium-font-size=” av-small-font-size=” av-mini-font-size=” font_color=” color=” id=” custom_class=” av_uid=’av-kij8lemh’ admin_preview_bg=”]
HOUSE WAYS AND MEANS COMMITTEE RELEASES INITIAL TAX PROPOSALS
[/av_textblock]

[/av_one_full][av_one_half first min_height=” vertical_alignment=” space=” row_boxshadow=” row_boxshadow_color=” row_boxshadow_width=’10’ custom_margin=” margin=’0px’ mobile_breaking=” border=” border_color=” radius=’0px’ padding=’0px’ column_boxshadow=” column_boxshadow_color=” column_boxshadow_width=’10’ background=’bg_color’ background_color=” background_gradient_color1=” background_gradient_color2=” background_gradient_direction=’vertical’ src=” background_position=’top left’ background_repeat=’no-repeat’ highlight=” highlight_size=” animation=” link=” linktarget=” link_hover=” title_attr=” alt_attr=” mobile_display=” id=” custom_class=” aria_label=” av_uid=’av-6gjy1z’]

[av_textblock size=” av-medium-font-size=” av-small-font-size=” av-mini-font-size=” font_color=” color=” id=” custom_class=” av_uid=’av-kij8lemh’ admin_preview_bg=”]
On September 13, 2021, the House Ways and Means Committee released draft legislation that proposes a series of tax increases and tax cuts, which will undergo a round of markups by the committee over the next few days. Most tax proposals were anticipated; however, the House provided a few surprises.
Income Tax Provisions

Section 1202 – Qualified Small Business Stock

Taxpayers are currently eligible for 75% and 100% exclusions for sales of qualified small business stock (QSBS). In an unexpected move, the proposed legislation would eliminate the 75% and 100% exclusions for sales of QSBS acquired after February 17, 2009, and sold after September 13, 2021, unless the sale was made pursuant to a written binding contract already in place and not materially modified thereafter. The proposed provision would apply to taxpayers whose adjusted gross income equals or exceeds $400,000 and to trusts and estates.
[/av_textblock]

[/av_one_half][av_one_half min_height=” vertical_alignment=” space=” row_boxshadow=” row_boxshadow_color=” row_boxshadow_width=’10’ custom_margin=” margin=’0px’ mobile_breaking=” border=” border_color=” radius=’0px’ padding=’0px’ column_boxshadow=” column_boxshadow_color=” column_boxshadow_width=’10’ background=’bg_color’ background_color=” background_gradient_color1=” background_gradient_color2=” background_gradient_direction=’vertical’ src=” background_position=’top left’ background_repeat=’no-repeat’ highlight=” highlight_size=” animation=” link=” linktarget=” link_hover=” title_attr=” alt_attr=” mobile_display=” id=” custom_class=” aria_label=” av_uid=’av-4pizyf’]

[av_image src=’https://vcpa.com/wp-content/uploads/2021/09/https-_specials-images.forbesimg.com_imageserve_614358353d5d5c2cf7a2a14f_0x0-1030×687.jpg’ attachment=’1762′ attachment_size=’large’ copyright=” caption=” styling=” align=’center’ font_size=” overlay_opacity=’0.4′ overlay_color=’#000000′ overlay_text_color=’#ffffff’ animation=’no-animation’ hover=” appearance=” link=” target=” id=” custom_class=” av_element_hidden_in_editor=’0′ av_uid=’av-kij8njkq’ admin_preview_bg=”][/av_image]

[/av_one_half][av_one_full first min_height=” vertical_alignment=” space=” row_boxshadow=” row_boxshadow_color=” row_boxshadow_width=’10’ custom_margin=” margin=’0px’ mobile_breaking=” border=” border_color=” radius=’0px’ padding=’0px’ column_boxshadow=” column_boxshadow_color=” column_boxshadow_width=’10’ background=’bg_color’ background_color=” background_gradient_color1=” background_gradient_color2=” background_gradient_direction=’vertical’ src=” background_position=’top left’ background_repeat=’no-repeat’ highlight=” highlight_size=” animation=” link=” linktarget=” link_hover=” title_attr=” alt_attr=” mobile_display=” id=” custom_class=” aria_label=” av_uid=’av-351lsn’]

[av_textblock size=” av-medium-font-size=” av-small-font-size=” av-mini-font-size=” font_color=” color=” id=” custom_class=” av_uid=’av-kij8l07s’ admin_preview_bg=”]
Under the current 50% exclusion rules, the remaining 50% QSBS gain is taxed at 28%. The excluded QSBS gain is considered an alternative minimum tax (AMT) preference item, which, when considered along with the net investment income tax on the taxable half of the gain, results in an effective rate of 16.88% for QSBS acquired after September 27, 2010, and sold after September 13, 2021.
Capital Gains

The current maximum tax rate on capital gains is 20%. The proposed legislation would increase the capital gains rate to 25% for taxable years ending after September 13, 2021. Transitional rules are proposed for taxable years that include September 13, 2021, taxing net gains realized before September 13, 2021, at 20%. Gains arising from a transaction pursuant to a binding written contract in effect before September 13, 2021, (and not materially modified thereafter) would remain eligible for the 20% rate.

Planning opportunity: Consider deferring realization of some capital losses until 2022 to offset capital gains that would otherwise be taxed at 25%.
Top Marginal Individual Income Tax Rate

The top marginal individual income tax rate now is 37%. The draft legislation would raise the top marginal tax rate to 39.6% for taxable income over $450,000 for married individuals filing jointly and surviving spouses, $425,000 for head of households, $400,000 for single individuals, $225,000 for married individuals filing separately, and $12,500 for estates and trusts. The proposal would be effective for taxable years beginning after December 31, 2021.

Planning opportunity: Consider accelerating ordinary income to 2021.
Net Investment Income Tax

Under the current rules, net investment income does not include income derived in the ordinary course of a trade or business or income attributable to the disposition of property earned outside of a passive activity. The proposed legislation would eliminate those carveouts and others, while broadening the type of income subject to net investment income tax (NIIT). NIIT applies to the greater of “specified net income” or net investment income for high income individuals, estates, and trusts. “Specified net income” includes net investment income even if derived in the ordinary course of a trade or business and other gross income and net gains attributable to the disposition of property, even if earned outside of a passive activity or the trade or business of trading financial instruments or commodities. Certain foreign income is includible in the definition of net investment income.

The proposed provision would apply to taxpayers whose modified adjusted gross income exceeds $500,000 for married individuals filing jointly and surviving spouses, $250,000 for married individuals filing separately, $12,500 for estates and trusts, and $400,000 for all other tax filers. The proposal would be effective for taxable years beginning after December 31, 2021.
Carried Interests

The holding period to obtain long-term capital gains treatment for gain allocated to carried interest partners is three years. The proposal would extend the holding period from three to five years. The three-year holding period would remain in effect with respect to any income attributable to real property trades or businesses and for taxpayers (other than an estate or trust) with adjusted gross income of less than $400,000. The proposal also contains provisions to include all items that are treated as capital gain (for example, Section 1231 gain) and prevent avoidance of the holding period rules. The proposal would be effective for taxable years beginning after December 31, 2021.
Qualified Business Income

The qualified business income deduction currently is not limited by a maximum allowable deduction. The proposal would introduce such a cap, limiting the maximum allowable qualified business income deduction to $500,000 for married individuals filing jointly and surviving spouses, $250,000 for married individuals filing separately, $10,000 for estates and trusts, and $400,000 for all other taxpayers. The proposal would be effective for taxable years beginning after December 31, 2021.
Excess Business Loss Limitation

Under a temporary provision, excess business losses of non-corporate taxpayers in excess of $500,000 for joint filers ($250,000 for all other taxpayers) are disallowed and treated as net operating losses in the following year; however, the provision is set to expire on December 31, 2025. The proposal would make the temporary provision permanent and modify how a disallowed excess business loss (EBL) is treated. Instead of treating the disallowed loss as a net operating loss in the following year, the EBL would be treated as a deduction attributable to a taxpayer’s trades or businesses when computing the EBL in the subsequent year. The proposal would be effective for taxable years beginning after December 31, 2020.
Surcharge on High-Income Individuals

There is currently no surcharge imposed on high-income individuals. The proposal would impose a 3% surcharge on modified adjusted gross income in excess of $2,500,000 for married individuals filing separately, $100,000 for estates and trusts, and $5,000,000 for all other individuals. The proposal would be effective for taxable years beginning after December 31, 2021.
Transfers Between Deemed Owner and Irrevocable Grantor Trust

Transfers between a deemed owner and his or her irrevocable grantor trust are nontaxable events. The proposal would disregard grantor trust status when determining whether a transfer between a deemed owner and his or her grantor trust is a sale or an exchange, possibly resulting in a taxable event. Additionally, the proposal would expand the definition of related party under Internal Revenue Code Section 267(b) to include grantor trusts and their deemed owners. The proposal would apply to trusts created on or after the date of the enactment of this provision and to any portion of a trust established before the date of enactment that is attributable to a contribution made on or after such date.

Planning opportunity: Consider sales to intentionally defective grantor trusts.
Estate and Gift Tax Provisions

Estate Tax Basic Exclusion Amount

The estate tax basic exclusion amount is $11,700,000 for 2021. The proposal would terminate the temporary increase in the basic exclusion amount, returning that amount to $5,000,000, indexed for inflation. Under this proposal, the basic exclusion amount in 2022 is anticipated to be $6,030,000. The proposal would apply to estates of decedents dying and gifts made after December 31, 2021.

Planning opportunity: Consider making gifts up to the 2021 estate tax basic exclusion amount, $11,700,000.
Grantor Trusts

When a deemed owner of a grantor trust dies, the assets of that grantor trust (other than a fully revocable trust) are generally not included in the deemed owner’s estate. The proposal would require that assets in a grantor trust be included in the gross estate of the deceased deemed owner. Additionally, the proposal would treat distributions (other than to the deemed owner or spouse) during the life of the deemed owner and the termination of grantor trust status during the life of the deemed owner as completed gifts.

The proposal would apply to trusts created on or after the date of the enactment of this provision and to any portion of a trust established before the date of enactment that is attributable to a contribution made on or after such date.

Planning opportunity: Consider terminating grantor trust status or making a gift to a grantor retained annuity trust (GRAT) or spousal lifetime access trust (SLAT).
Valuation Discounts

Valuation discounts, such as marketability discounts and minority interest discounts, are allowed for transfers of nonbusiness assets for estate and gift tax purposes. The proposal would eliminate valuation discounts for certain transfers of nonbusiness assets for estate and gift tax purposes. Nonbusiness assets are defined as passive assets that are held for the production or collection of income and are not used in the active conduct of a trade or business. The proposal would apply to transfers after the date of the enactment of this Act.

Planning opportunity: Consider making gifts that will be eligible for valuation discounts.
Retirement Plans

Annual Contributions to Plans

Annual contributions to retirement plans are not currently limited by the value of the retirement plans owned by a taxpayer. The proposal would prohibit annual contributions by “applicable taxpayers” to “applicable retirement plans” (which includes tax-qualified defined contribution plans, IRC Section 403(b) and 457(b) plans, and traditional and Roth IRAs) if the total value of all the taxpayer’s applicable retirement accounts exceeds $10 million as of the end of the prior year. Applicable taxpayers are head of household filers with adjusted taxable income in excess of $425,000, married individuals filing joint and surviving spouses with adjusted taxable income in excess of $450,000, and all other taxpayers with adjusted taxable income in excess of $400,000. Both the $10 million cap and income limitations are indexed for inflation beginning after 2022. The proposal would be effective for taxable years beginning after December 31, 2021.
Minimum Required Distributions from Plans

Taxpayers are not currently required to take additional distributions if the total value of their retirement plan accounts exceeds $10 million. The proposal would require applicable taxpayers (as defined above) of any age to take a minimum required distribution equal to 50% of the aggregate vested balances in applicable retirement plans in excess of $10 million. In other words, if an applicable taxpayer’s combined retirement plan account balances exceed $10 million at the end of the taxable year, the taxpayer must take a minimum required distribution in the following year equal to 50% of the amount in excess of $10 million.

Further, if the taxpayer’s combined retirement plan account balances exceed $20 million, the taxpayer would be required to take distributions equal to the lesser of (i) the aggregate plan balances in excess of $20 million or (ii) the aggregate balances in Roth IRAs and designated Roth accounts in defined contribution plans. Once the taxpayer distributes the amount of any excess required under this distribution rule, the taxpayer then would be allowed to determine the retirement accounts from which to make distributions in satisfaction of the 50% distribution rule.

The proposal would be effective for tax years beginning after December 31, 2021.
Roth Rollovers and Conversions

The current definition of a qualified rollover or conversion does not exclude any portion of the rollover or contribution that is not includible in gross income. The proposed legislation would amend the definition of qualified rollovers and conversions to Roth IRAs to include only amounts that would be includible in gross income and subject to tax. The proposal would be effective for rollovers and conversions made after December 31, 2021.
“Back Door” Roth IRAs

“Back door” Roth IRA strategies currently allow taxpayers who exceed existing Roth income limits to make nondeductible contributions to a traditional IRA, and shortly thereafter, convert the nondeductible contribution from the traditional IRA to a Roth IRA. Current law also allows taxpayers to contribute to a Roth 401(k) plan regardless of income limits (including making non-Roth after-tax contributions) and convert such contributions to a Roth IRA. The proposal would prohibit applicable taxpayers from engaging in these “back door” Roth IRA strategies.

To eliminate these strategies, the proposal would prohibit Roth conversions, for both IRAs and employer-sponsored plans, for applicable taxpayers, as defined above. The proposal would be effective for distributions, transfers and contributions made in taxable years beginning after December 31, 2031 (10 years from now). However, for taxable years beginning after December 31, 2021, the proposal would prohibit all employee after-tax contributions in tax-qualified retirement plans and would prohibit after-tax IRA contributions from being converted to Roth IRAs regardless of income level.
IRAs and Accredited Investor

The proposed legislation would prohibit IRAs from holding any security that requires the IRA owner to be an accredited investor. This proposal would be effective for taxable years beginning after December 31, 2021, but with a two-year transition period for investments already held in an IRA as of the date of enactment.
IRAs and Self-Dealing

To prevent self-dealing, the proposal would expand the definition of “prohibited investments” in an IRA to include investments in which the IRA owner has a substantial interest. A substantial interest is defined as (a) a direct or indirect interest in investments not tradeable on an established securities market in which the IRA owner has at least 10% of the (i) combined voting power or value of all classes of stock, (ii) capital or profits interest of a partnership, or (iii) beneficial interest of a trust or estate; or (b) a corporation, partnership, or other unincorporated enterprise in which the IRA owner is an officer or director (or holds a similar position). The proposal makes this provision a requirement to be a valid IRA.

The proposal would be effective for investments made in taxable years beginning after December 31, 2021, but with a two-year transition period for investments already held in an IRA as of the date of enactment.
Other Highlights

The proposal also includes the following noteworthy provisions:

• Repeal of the temporary limitation on personal casualty losses.
• Expansion of the wash sale rules to include foreign currency, commodities, and digital assets. The rules also would apply to acquisitions by certain related parties including the taxpayer’s spouse, dependents, taxpayers to whom the taxpayer is a dependent, entities controlled by the taxpayer or related party, 529 plans and Coverdell education savings accounts where a related party is the beneficiary, and certain 401(a), 403(a), 403(b), and 457(b) plans where the taxpayer or related party can make investment decisions.

Comment

The proposed legislation does not include a repeal of the $10,000 limit on the state and local tax deduction for individual taxpayers, nor does it include provisions to eliminate the step-up in basis upon death. It is unclear whether those provisions will be added to this proposed legislation or included in other legislation. Recent news reports suggest that these two provisions do not have solid support among Democratic leaders.
[/av_textblock]

[/av_one_full][av_one_full first min_height=” vertical_alignment=” space=” row_boxshadow=” row_boxshadow_color=” row_boxshadow_width=’10’ custom_margin=” margin=’0px’ mobile_breaking=” border=” border_color=” radius=’0px’ padding=’0px’ column_boxshadow=” column_boxshadow_color=” column_boxshadow_width=’10’ background=’bg_color’ background_color=” background_gradient_color1=” background_gradient_color2=” background_gradient_direction=’vertical’ src=” background_position=’top left’ background_repeat=’no-repeat’ highlight=” highlight_size=” animation=” link=” linktarget=” link_hover=” title_attr=” alt_attr=” mobile_display=” id=” custom_class=” aria_label=” av_uid=’av-3z7fav’]
[av_comments_list av-desktop-hide=” av-medium-hide=” av-small-hide=” av-mini-hide=” alb_description=” id=” custom_class=” av_uid=’av-25giyv’]
[/av_one_full]

[av_one_full first min_height=” vertical_alignment=” space=” row_boxshadow=” row_boxshadow_color=” row_boxshadow_width=’10’ custom_margin=” margin=’0px’ mobile_breaking=” border=” border_color=” radius=’0px’ padding=’0px’ column_boxshadow=” column_boxshadow_color=” column_boxshadow_width=’10’ background=’bg_color’ background_color=” background_gradient_color1=” background_gradient_color2=” background_gradient_direction=’vertical’ src=” background_position=’top left’ background_repeat=’no-repeat’ highlight=” highlight_size=” animation=” link=” linktarget=” link_hover=” title_attr=” alt_attr=” mobile_display=” id=” custom_class=” aria_label=” av_uid=’av-6gjy1z’]
[av_textblock size=” av-medium-font-size=” av-small-font-size=” av-mini-font-size=” font_color=” color=” id=” custom_class=” av_uid=’av-kij8lemh’ admin_preview_bg=”]

ESTATE TAX PLANNING IN 2021: UNCERTAINTY ABOUNDS BUT OPTIONS STILL EXIST

[/av_textblock]
[/av_one_full]

[av_three_fifth first min_height=” vertical_alignment=” space=” row_boxshadow=” row_boxshadow_color=” row_boxshadow_width=’10’ custom_margin=” margin=’0px’ mobile_breaking=” border=” border_color=” radius=’0px’ padding=’0px’ column_boxshadow=” column_boxshadow_color=” column_boxshadow_width=’10’ background=’bg_color’ background_color=” background_gradient_color1=” background_gradient_color2=” background_gradient_direction=’vertical’ src=” background_position=’top left’ background_repeat=’no-repeat’ highlight=” highlight_size=” animation=” link=” linktarget=” link_hover=” title_attr=” alt_attr=” mobile_display=” id=” custom_class=” aria_label=” av_uid=’av-6gjy1z’]

[av_textblock size=” av-medium-font-size=” av-small-font-size=” av-mini-font-size=” font_color=” color=” id=” custom_class=” av_uid=’av-kij8lemh’ admin_preview_bg=”]
Currently, U.S. citizens and non-U.S. citizens domiciled in the U.S. are entitled to an $11.7 million gift and estate tax exemption and are subject to a maximum marginal gift and estate tax rate of 40%. And while the gift and estate tax exemption is scheduled to drop to approximately one-half the current amount on January 1, 2026, there also are tax proposals in play that could change the estate and gift tax laws much sooner.

What are the proposals?

On the campaign trail, then-candidate Biden expressed a desire to reduce the gift and estate tax exemption from $11.7 million to $3.5 million and increase the gift and estate tax rate from 40% to 45%. The Green Book, recently released by Treasury, reveals that the Biden Administration also would like to substantially increase the types of transfers that would trigger capital gains for income tax purposes (potentially at proposed higher capital gains rates). The expanded category of transfers would include:

• Gifts;
• Death;
• Transfers to or distributions from trusts;
• Contributions to or distributions from partnerships; and
• Deemed dispositions from holding assets for 90 years within a partnership or trust.

Given that these types of transfers are largely used in current estate planning practices, the Biden proposals along with additional bills that have been introduced in Congress would substantially change today’s estate planning environment. Some of the proposed bills recommend enacting tax law changes retroactively. While not normally done, Congress does have the authority to make retroactive changes to the tax law.
[/av_textblock]

[/av_three_fifth][av_two_fifth min_height=” vertical_alignment=” space=” row_boxshadow=” row_boxshadow_color=” row_boxshadow_width=’10’ custom_margin=” margin=’0px’ mobile_breaking=” border=” border_color=” radius=’0px’ padding=’0px’ column_boxshadow=” column_boxshadow_color=” column_boxshadow_width=’10’ background=’bg_color’ background_color=” background_gradient_color1=” background_gradient_color2=” background_gradient_direction=’vertical’ src=” background_position=’top left’ background_repeat=’no-repeat’ highlight=” highlight_size=” animation=” link=” linktarget=” link_hover=” title_attr=” alt_attr=” mobile_display=” id=” custom_class=” aria_label=” av_uid=’av-4pizyf’]
[av_image src=’https://vcpa.com/wp-content/uploads/2021/09/estate-tax-landscape-2021.jpg’ attachment=’1752′ attachment_size=’full’ copyright=” caption=” styling=” align=’center’ font_size=” overlay_opacity=’0.4′ overlay_color=’#000000′ overlay_text_color=’#ffffff’ animation=’no-animation’ hover=” appearance=” link=” target=” id=” custom_class=” av_element_hidden_in_editor=’0′ av_uid=’av-kij8njkq’ admin_preview_bg=”][/av_image]
[/av_two_fifth]

[av_one_full first min_height=” vertical_alignment=” space=” row_boxshadow=” row_boxshadow_color=” row_boxshadow_width=’10’ custom_margin=” margin=’0px’ mobile_breaking=” border=” border_color=” radius=’0px’ padding=’0px’ column_boxshadow=” column_boxshadow_color=” column_boxshadow_width=’10’ background=’bg_color’ background_color=” background_gradient_color1=” background_gradient_color2=” background_gradient_direction=’vertical’ src=” background_position=’top left’ background_repeat=’no-repeat’ highlight=” highlight_size=” animation=” link=” linktarget=” link_hover=” title_attr=” alt_attr=” mobile_display=” id=” custom_class=” aria_label=” av_uid=’av-351lsn’]

[av_textblock size=” av-medium-font-size=” av-small-font-size=” av-mini-font-size=” font_color=” color=” id=” custom_class=” av_uid=’av-kij8l07s’ admin_preview_bg=”]
What Can You Do Now?

In 2020, many wealthy taxpayers implemented planning to take advantage of current gift and estate tax laws, anticipating the possibility that substantial changes were coming as early as January 1, 2021 and that the changes would impact their ability to do meaningful planning going forward. Now the potential risk facing taxpayers who have not yet acted on such planning is whether new tax laws will be enacted retroactively, causing what would have been a tax-free gift to be a taxable gift.

For example, suppose a taxpayer made an $11.7 million gift on August 1, 2021. Then, the gift and estate tax exemption is lowered from $11.7 million to $3.5 million with the gift and estate tax rate increased from 40% to 45%, all retroactively effective January 1, 2021. What was considered a tax-free gift on August 1, 2021 now becomes a taxable gift and incurs gift tax of $3,690,000. If both spouses made equal gifts of $11.7 million on August 1, 2021, the total gift tax would be $7,380,000.  Taxpayers who are considering substantial gifts or similar planning today need to carefully consider the possibility of retroactive changes in the tax laws.
Gifts to Next Generation – in Trust or Outright

For those taxpayers willing to engage in estate planning, one planning technique is making gifts to trust(s) for the benefit of children and grandchildren. Under current rules, a married couple that has made no prior taxable gifts can transfer up to $23.4 million without incurring gift tax. The gift often consists of cash, marketable securities or closely held business interests. A gift of closely held business interests generally attracts valuation discounts for lack of control and lack of marketability, as determined by an appraisal.

Alternatively, individuals can make an outright gift to their child who has reached the age of majority. Legal counsel, however, often recommends gifting to a trust because a trust may offer creditor protection, divorce protection and protection from future gift, estate and generation skipping taxes.
Spousal Lifetime Access Trust

Some taxpayers are uncomfortable transferring large amounts to trusts for their children, or they are concerned about the complete loss of control of the assets. In response to these concerns, a “spousal lifetime access trust” (SLAT) may be appropriate. A SLAT is created when one spouse (the donor spouse) funds an irrevocable trust for the benefit of the other spouse (the donee spouse). Normally, the donee spouse, children and grandchildren are named as discretionary beneficiaries of the SLAT, with the trustee making distributions to the donee spouse, as deemed appropriate.

A SLAT typically will be a grantor trust for income tax purposes, causing the donor spouse to pay the income tax on the income earned by the trust. Assets owned jointly by both spouses cannot be used to fund a SLAT. Careful trust drafting is required to minimize issues that can arise if the donee spouse dies or the spouses divorce. When a husband sets up a SLAT for his wife and children and the wife sets up a SLAT for her husband and children, the terms of the two SLATs should not be identical to avoid the “reciprocal trust doctrine.” If the trusts run afoul of this doctrine, the trusts essentially are unraveled, negating the intended planning.
Grantor Retained Annuity Trust

Another common estate planning technique used by wealthy individuals is the “grantor retained annuity trust” (GRAT). Gifts to a GRAT are designed to use little or none of the individual’s lifetime estate and gift tax exemption. Instead, the objective of a GRAT is to shift future income and appreciation on the trust assets to the next generation. The GRAT works best if the individual has assets that are expected to grow in value above what is known as the Section 7520 rate, which is set each month by the IRS. The rate for July 2021 was 1.2%.

For example, suppose a GRAT was established with $10 million of assets in July 2021 for a term of five years and was expected to earn 8% over the five-year term. Under this fact pattern, approximately $2.5 million would pass tax-free to the next generation outright or to a trust for the next generation, using little to none of the individual’s gift and estate tax exemption. Taxpayers should consider having a GRAT in place—especially under current tax law—if their goal is to transfer assets to the next generation.

Given the uncertainty of whether tax changes will be enacted and as of when, individuals who have not recently updated their estate plans should consult with their estate and tax advisor, sooner rather than later. Your advisor can assist you in assessing and evaluating your family goals and objectives as to wealth succession and create an estate plan that considers current and future risks, whether legislative, financial or otherwise.
[/av_textblock]

[/av_one_full][av_one_full first min_height=” vertical_alignment=” space=” row_boxshadow=” row_boxshadow_color=” row_boxshadow_width=’10’ custom_margin=” margin=’0px’ mobile_breaking=” border=” border_color=” radius=’0px’ padding=’0px’ column_boxshadow=” column_boxshadow_color=” column_boxshadow_width=’10’ background=’bg_color’ background_color=” background_gradient_color1=” background_gradient_color2=” background_gradient_direction=’vertical’ src=” background_position=’top left’ background_repeat=’no-repeat’ highlight=” highlight_size=” animation=” link=” linktarget=” link_hover=” title_attr=” alt_attr=” mobile_display=” id=” custom_class=” aria_label=” av_uid=’av-3z7fav’]
[av_comments_list av-desktop-hide=” av-medium-hide=” av-small-hide=” av-mini-hide=” alb_description=” id=” custom_class=” av_uid=’av-25giyv’]
[/av_one_full]

[av_one_full first min_height=” vertical_alignment=” space=” row_boxshadow=” row_boxshadow_color=” row_boxshadow_width=’10’ custom_margin=” margin=’0px’ mobile_breaking=” border=” border_color=” radius=’0px’ padding=’0px’ column_boxshadow=” column_boxshadow_color=” column_boxshadow_width=’10’ background=’bg_color’ background_color=” background_gradient_color1=” background_gradient_color2=” background_gradient_direction=’vertical’ src=” background_position=’top left’ background_repeat=’no-repeat’ highlight=” highlight_size=” animation=” link=” linktarget=” link_hover=” title_attr=” alt_attr=” mobile_display=” id=” custom_class=” aria_label=” av_uid=”]

[av_textblock size=” av-medium-font-size=” av-small-font-size=” av-mini-font-size=” font_color=” color=” id=” custom_class=” av_uid=’av-ktftxny5′ admin_preview_bg=”]

U.S. HOUSE PASSES BUDGET RESOLUTION

[/av_textblock]

[/av_one_full][av_one_full first min_height=” vertical_alignment=” space=” row_boxshadow=” row_boxshadow_color=” row_boxshadow_width=’10’ custom_margin=” margin=’0px’ mobile_breaking=” border=” border_color=” radius=’0px’ padding=’0px’ column_boxshadow=” column_boxshadow_color=” column_boxshadow_width=’10’ background=’bg_color’ background_color=” background_gradient_color1=” background_gradient_color2=” background_gradient_direction=’vertical’ src=” background_position=’top left’ background_repeat=’no-repeat’ highlight=” highlight_size=” animation=” link=” linktarget=” link_hover=” title_attr=” alt_attr=” mobile_display=” id=” custom_class=” aria_label=” av_uid=’av-21u7ru’]
[av_textblock size=” av-medium-font-size=” av-small-font-size=” av-mini-font-size=” font_color=” color=” id=” custom_class=” av_uid=’av-ktebua7j’ admin_preview_bg=”]
The U.S. House of Representatives on August 24 voted 220-212 in favor of a $3.5 trillion budget resolution that allows congressional committees to draft legislation that would expand Medicare, invest in education, and allocate funds to combating climate change, as well as enact other spending priorities of the Biden administration. The legislation is also likely to include tax increases to pay for the spending package.

The Senate has already passed the budget resolution, which was adopted on a 50-49 party-line vote on August 11. The resolution does not require President Biden’s signature; rather, it unlocks the reconciliation process so that Democrats can write tax-and-spending legislation that can be passed without Republican cooperation.

The legislative process now turns to the congressional committees that will transform the budget blueprint into a detailed package of measures to enact President Biden’s agenda. For example, Senate Finance Committee Chair Ron Wyden (D-Ore.) and fellow Democrats Sherrod Brown (D-Ohio) and Mark Warner (D-Va) released today a draft of a proposed overhaul of the U.S. international tax regime that they would like to see included in the budget reconciliation bill.

The draft legislation is expected to follow along the lines of the proposals outlined in the “Green Book,” the 114-page document the Treasury Department issued on May 28 to provide details regarding the administration’s tax proposals. Among those proposals are an increase in the corporate tax rate from 21% to 28% and an increase in the top marginal individual income tax rate from 37% to 39.6% for taxable income over $509,300 for married individuals filing jointly ($254,650 for married individuals filing separately), $481,000 for head of household filers, and $452,700 for single filers. Another proposed change would tax long-term capital gains and qualified dividend income of taxpayers with adjusted gross income of more than $1 million at ordinary income tax rates.

On the international tax side, the draft legislation is expected to include proposals to reform the global intangible low-taxed income (GILTI) regime and increase the rate, repeal the foreign derived intangible income (FDII) provisions and replace the base erosion and anti-abuse tax (BEAT) with the more stringent SHIELD (Stopping Harmful Inversions and Ending Low-Taxed Developments) regime.

In keeping with the administration’s two-track approach to enacting its “Build Back Better” agenda, House Speaker Nancy Pelosi (D-Ca) issued a statement committing to pass the budget resolution’s sister legislation–a $1 trillion infrastructure package the Senate approved on August 10—by September 27.

The timing of legislative action on the two packages may pose a challenge to the Democrats’ plans, and congressional leaders will have to perform a delicate dance to ensure the support of their members—all 50 Democratic Senators, and virtually all House Democrats need to vote in favor of the legislative package to pass (assuming little to no Republican support). Progressive House Democrats favored passing the broader budget resolution before the bipartisan infrastructure package, whereas moderate Democrats insisted that the infrastructure deal be taken up first. This impasse threatened to derail the administration’s plans; the final vote dodged what would have been a setback for the administration.

Republicans oppose the budget resolution on the grounds that such large spending would trigger significant inflation and a surge in the federal deficit.

Written by Todd Simmens. Copyright © 2021 BDO USA, LLP. All rights reserved. www.bdo.com
[/av_textblock]
[/av_one_full]

[av_one_full first min_height=” vertical_alignment=” space=” row_boxshadow=” row_boxshadow_color=” row_boxshadow_width=’10’ custom_margin=” margin=’0px’ mobile_breaking=” border=” border_color=” radius=’0px’ padding=’0px’ column_boxshadow=” column_boxshadow_color=” column_boxshadow_width=’10’ background=’bg_color’ background_color=” background_gradient_color1=” background_gradient_color2=” background_gradient_direction=’vertical’ src=” background_position=’top left’ background_repeat=’no-repeat’ highlight=” highlight_size=” animation=” link=” linktarget=” link_hover=” title_attr=” alt_attr=” mobile_display=” id=” custom_class=” aria_label=” av_uid=’av-3z7fav’]
[av_comments_list av-desktop-hide=” av-medium-hide=” av-small-hide=” av-mini-hide=” alb_description=” id=” custom_class=” av_uid=’av-25giyv’]
[/av_one_full]