Author: Alexis Long

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Financial News General

Student Loan Forgiveness Plan

On Aug. 24, President Biden announced a plan for student loan debt relief. The three-part plan may affect nearly 8 million borrowers.

Part one will allow $20,000 of debt forgiveness for taxpayers who went to college on a Pell Grant or $10,000 without a Pell Grant. This applies only to taxpayers earning below $125,000 a year ($250,000 for married couples). The plan doesn’t specify how earnings are calculated or to which tax year they apply.

Part two is an extension of the pause on student loan repayment until Dec. 31, 2022.

Part three modifies the income-based repayment plan rules. Pell Grant recipients with undergraduate degrees will have their repayments capped at 5% of monthly income.

Contact one of our experts if you have any questions.

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Tax

Home sweet home: Do you qualify for office deductions?

If you’re a business owner working from home or an entrepreneur with a home-based side gig, you may qualify for valuable home office deductions. But not everyone who works from home gets the tax break. Employees who work remotely can’t deduct home office expenses under current federal tax law. To qualify for a deduction, you must use at least part of your home regularly and exclusively as either: Your principal place of business, or A place to meet with customers, clients, or patients in the normal course of business. In addition, you may be able to claim deductions for maintaining a separate structure — such as a garage — where you store products or tools used solely for business purposes. Notably, “regular and exclusive” use means you must consistently use a specific identifiable area in your home for business. However, incidental or occasional personal use won’t necessarily disqualify you.

Rules for employees: What if you work remotely from home as an employee for an organization? Previously, people who itemized deductions could claim home office deductions as a miscellaneous expense, if the arrangement was for their employer’s convenience. But the Tax Cuts and Jobs Act suspended miscellaneous expense deductions for 2018 through 2025. So, employees currently get no tax benefit if they work from home. On the other hand, self-employed individuals still may qualify if they meet the tax law requirements. Direct and indirect expenses If you qualify, you can write off the full amount of your direct expenses and a proportionate amount of your indirect expenses based on the percentage of business use of your home. Indirect expenses include Mortgage interest, Property taxes, Utilities (electric, gas, and water), Insurance, Exterior repairs, maintenance, and Depreciation or rent under IRS tables. Important: If you itemize deductions, mortgage interest and property taxes may already be deductible. If you claim a portion of these expenses as home office expenses, the remainder is deductible on your personal return. But you can’t deduct the same amount twice as a personal deduction and again as a home office expense.

Calculating your deduction: Typically, the percentage of business use is determined by the square footage of your home office. For instance, if you have a 3,000 square-foot home and use a room with 300 square feet as your office, the applicable percentage is 10%. Alternatively, you may use any other reasonable method for determining this percentage, such as a percentage based on the number of comparably sized rooms in the home. The simplified method of keeping track of indirect expenses is time-consuming. Some taxpayers prefer to take advantage of a simplified method of deducting home office expenses. Instead of deducting actual expenses, you can claim a deduction equal to $5 per square foot for the area used as an office, up to a maximum of $1,500 for the year. Although this method takes less time than tracking actual expenses, it generally results in a significantly lower deduction. When you sell keep in mind that if you claim home office deductions, you may be in for a tax surprise when you sell your home. If you eventually sell your principal residence, you may qualify for a tax exclusion of up to $250,000 of gain for single filers ($500,000 for married couples who file jointly). But you must recapture the depreciation attributable to a home office for the period after May 6, 1997.

Contact one of our experts if you have any questions related to writing off home office expenses, the best way to compute deductions, and the tax implications when you sell your home. © 2022

Categories
Financial News

INFLATION REDUCTION ACT BECOMES LAW

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

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

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

The act includes the largest-ever U.S. investment committed to combat climate change, allocating $369 billion to energy security and clean energy programs over the next 10 years, including provisions incentivizing manufacturing of clean energy equipment and electric vehicles domestically.

Overall, the act modifies many of the current energy-related tax credits and introduces significant new credits and structures intended to facilitate long-term investment in the renewables industry.

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General

Update on the Inflation Reduction Act

The proposed Inflation Reduction Act imposes a new 15% corporate alternative minimum tax on the adjustable financial statement income of certain corporations. The tax will apply if it exceeds the taxpayer’s regular tax, including its base erosion and anti-abuse tax for the tax year. An applicable corporation for a tax year is one that meets an average annual adjusted financial statement income test for one or more tax years that “are prior to such taxable year and end after Dec. 31, 2021.” A corporation meets the income test if its average annual adjusted financial statement income for the three-tax-year period (without regard to loss carryovers) ending with the tax year exceeds $1 billion.

Contact one of our experts with any questions about the Inflation Reduction Act.

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Tax

Kentucky storm victims are now eligible for tax filing relief.

Storm victims in federally declared disaster areas of Kentucky are now eligible for tax filing relief. The IRS has announced that for filing deadlines after July 26, 2022, affected individuals and businesses have until Nov. 15, 2022, to file and pay any tax due. The Nov. 15 deadline also applies to quarterly estimated tax payments that are due on Sept. 15 and quarterly payroll and excise tax returns due on Aug. 1 and Oct. 31. Taxpayers who suffered uninsured or unreimbursed disaster-related losses can choose to claim them on either the current year’s return (2022) or the previous year’s return (2021). For more information: https://bit.ly/3OZusql

Contact one of our experts for more information.

Categories
General Tax

Estates now have an additional three years to file for a portability election.

Portability allows a surviving spouse to apply a deceased spouse’s unused federal gift and estate tax exemption amount toward his or her own transfers during life or at death.

To secure these benefits, however, the deceased spouse’s executor must have made a portability election on a timely filed estate tax return (Form 706). The return is due nine months after death, with a six-month extension option.

Unfortunately, estates that aren’t otherwise required to file a return (typically because they don’t meet the filing threshold) often miss this deadline. The IRS recently revised its rules for obtaining an extension to elect portability beyond the original nine-months after death (plus six-month extension) timeframe.

What’s new? In 2017, the IRS issued Revenue Procedure 2017-34, making it easier (and cheaper) for estates to obtain an extension of time to file a portability election. The procedure grants an automatic extension, provided: The deceased was a U.S. citizen or resident, The executor wasn’t otherwise required to file an estate tax return and didn’t file one by the deadline, and The executor files a complete and properly prepared estate tax return within two years of the date of death.

Since the 2017 ruling, the IRS has had to issue numerous private letter rulings granting an extension of time to elect portability in situations where the deceased’s estate wasn’t required to file an estate tax return and the time for obtaining relief under the simplified method (two years of the date of death) had expired.

According to the IRS, these requests placed a significant burden on the agency’s resources. The IRS has now issued Revenue Procedure 2022-32. Under the new procedure, an extension request must be made on or before the fifth anniversary of the deceased’s death (an increase of three years). This method, which doesn’t require a user fee, should be used in place of the private letter ruling process. (The fee for requesting a private letter ruling from the IRS can cost hundreds or thousands of dollars.)

Don’t miss the revised deadline If your spouse predeceases you and you’d benefit from portability, be sure that his or her estate files a portability election by the fifth anniversary of the date of death.

Contact us with any questions you have regarding portability. © 2022

Categories
General Tax

The Kiddie Tax: Does It Affect your Family?

Many people wonder how they can save taxes by transferring assets into their children’s names. This tax strategy is called income shifting. It seeks to take income out of your higher tax bracket and place it in the lower tax brackets of your children. While some tax savings are available through this approach, the “kiddie tax” rules impose substantial limitations if: The child hasn’t reached age 18 before the close of the tax year, or The child’s earned income doesn’t exceed half of his or her support and the child is age 18 or is a full-time student age 19 to 23. The kiddie tax rules apply to your children who are under the cutoff age(s) described above, and who have more than a certain amount of unearned (investment) income for the tax year — $2,300 for 2022.

While some tax savings up to this amount can still be achieved by shifting income to children under the cutoff age, the savings aren’t substantial. If the kiddie tax rules apply to your children and they have over the prescribed amount of unearned income for the tax year ($2,300 for 2022), they’ll be taxed on that excess amount at your (the parents’) tax rates if your rates are higher than the children’s tax rates. This kiddie tax is calculated by computing the “allocable parental tax” and special allocation rules apply if the parents have more than one child subject to the kiddie tax. Note: Different rules applied for the 2018 and 2019 tax years, when the kiddie tax was computed based on the estates’ and trusts’ ordinary and capital gain rates, instead of the parents’ tax rates. Be aware that, to transfer income to a child, you must transfer ownership of the asset producing the income. You can’t merely transfer the income itself.

Property can be transferred to minor children using custodial accounts under state law. Possible saving vehicles The portion of investment income of a child that’s taxed under the kiddie tax rules may be reduced or eliminated if the child invests in vehicles that produce little or no current taxable income. These include: Securities and mutual funds oriented toward capital growth; Vacant land expected to appreciate in value; Stock in a closely held family business, expected to become more valuable as the business expands, but pays little or no cash dividends; Tax-exempt municipal bonds and bond funds; U.S. Series EE bonds, for which recognition of income can be deferred until the bonds mature, the bonds are cashed in or an election to recognize income annually is made.

Investments that produce no taxable income — and which therefore aren’t subject to the kiddie tax — also include tax-advantaged savings vehicles such as: Traditional and Roth IRAs, which can be established or contributed to if the child has earned income; Qualified tuition programs (also known as “529 plans”); and Coverdell education savings accounts. A child’s earned income (as opposed to investment income) is taxed at the child’s regular tax rates, regardless of the amount.

Therefore, to save taxes within the family, consider employing the child at your own business and paying reasonable compensation. If the kiddie tax applies, it’s computed and reported on Form 8615, which is attached to the child’s tax return. Two reporting options Parents can elect to include the child’s income on their own return if certain requirements are satisfied. This is done on Form 8814 and avoids the need for a separate return for the child. Contact us if you have questions about the kiddie tax. © 2022

Categories
General Tax

Interested in an Electric Vehicle? How to qualify for a powerful tax credit.

Sales and registrations of electric vehicles (EVs) have increased dramatically in the U.S. in 2022, according to several sources. However, while they’re still a small percentage of the cars on the road today, they’re increasing in popularity all the time. If you buy one, you may be eligible for a federal tax break. The tax code provides credit to purchasers of qualifying plug-in electric drive motor vehicles including passenger vehicles and light trucks. The credit is equal to $2,500 plus an additional amount, based on battery capacity, that can’t exceed $5,000. Therefore, the maximum credit allowed for a qualifying EV is $7,500. Be aware that not all EVs are eligible for the tax break, as we’ll describe below. The EV definition for purposes of the tax credit, a qualifying vehicle is defined as one with four wheels that’s propelled to a significant extent by an electric motor, which draws electricity from a battery. The battery must have a capacity of not less than four-kilowatt hours and be capable of being recharged from an external source of electricity. The credit may not be available because of a per-manufacturer cumulative sales limitation. Specifically, it phases out over six quarters beginning when a manufacturer has sold at least 200,000 qualifying vehicles for use in the United States (determined on a cumulative basis for sales after December 31, 2009). For example, Tesla and General Motors vehicles are no longer eligible for the tax credit. And Toyota is the latest auto manufacturer to sell enough plug-in EVs to trigger a gradual phase-out of federal tax incentives for certain models sold in the U.S. Several automakers are telling Congress to eliminate the limit. In a letter, GM, Ford, Chrysler, and Toyota asked Congressional leaders to give all-electric car and light truck buyers a tax credit of up to $7,500. The group says that lifting the limit would give buyers more choices, encourage greater EV adoption and provide stability to auto workers. The IRS provides a list of qualifying vehicles on its website, and it recently added some eligible models. You can access the list here: https://www.irs.gov/businesses/irc-30d-new-qualified-plug-in-electric-drive-motor-vehicle-credit . Here are some additional points about the plug-in electric vehicle tax credit: It’s allowed in the year you place the vehicle in service. The vehicle must be new. An eligible vehicle must be used predominantly in the U.S. and have a gross weight of fewer than 14,000 pounds. These are only the basic rules. There may be additional incentives provided by your state. If you want more information about the federal plug-in electric vehicle tax break, contact us. © 2022

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Helpful Articles

Optimizing and Embracing Best Practices for Finance and Accounting

As market fluctuations and rising interest rates put added stress on internal finance departments, it is wise for organizations to step back and reassess their finance and accounting (F&A) processes and systems. These assessments can help determine whether F&A workflows are enabling timely outputs for reporting, budget forecasting, internal processes like payroll, and other important tasks. Among the many benefits of analyzing and improving internal F&A processes, cost effectiveness and efficiency are paramount.

Balancing Cost and Efficiency

Cost reduction strategies that initially seem intuitive could yield unexpected and counterproductive outcomes. For example, some F&A departments might put policies in place to discourage unnecessary spending. Despite the benefit of cost savings, implementing cumbersome spending parameters can complicate and delay F&A reconciliation and expense processes, which could impact productivity, damage employee morale and increase the risk of employee burnout at a time when attracting and retaining talent is increasingly difficult.

When processes are not running efficiently, your gut reaction may be to hire more employees in an attempt to fill gaps. However, a more cost-effective and employee-centric option is to examine your F&A department’s overall posture and effectiveness, with a particular focus on systems and technology that may no longer be working. Try asking questions such as:

  • Which manual processes can be automated?

Automation can reduce the time your employees have to spend on tedious tasks. This not only helps to balance their workloads, but also allows employees to better invest their time in other high-value services.

  • How can financial reporting be improved?

Organizations are better equipped to make decisions when they are armed with more insightful reporting. This includes setting benchmarks based on industry-specific metrics and reassessing them regularly for accuracy. Assessing internal processes for diligence and efficiency can also help an organization more successfully meet reporting deadlines.

 

Finding the Right Solution

With new F&A tools and technology entering the market every day, the issue is not whether a solution exists to match your organization’s needs, but how to sift through the available options and implement the right choice.

While this may appear to be a daunting process, it is not one that any organization has to go through alone. Rather than jumping to invest in more internal resources, organizations should first examine existing operations to determine which changes can be handled internally and which may benefit from external assistance.

Third-party finance and accounting professionals can help organizations set up robust controls, align spending, optimize financial reporting and find new opportunities to adopt automated technologies and processes.

Click here to find a location closest to you.

Categories
Tax

Is Your Company Effectively Managing Tax Risk?

The concept of “tax risk” is an increasingly important and regular topic of discussion across organizations and in boardrooms, and for good reason. Businesses that operate across state lines or internationally can in certain cases trigger tax liabilities in jurisdictions where they do not have a physical presence. In addition, many countries are adopting policies requiring greater transparency in tax and financial reporting, providing tax administrations more information with which to raise investigations and issue assessments. As companies place additional focus on social responsibility and fiscal transparency, the benefits of having a tax risk policy in place can be substantial. Given the rapidly changing global tax environment combined with the continued demand for tax departments to add value to the organization, an effective tax risk policy is a necessity for any business needing to better manage tax risk.

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

Insight

Every business decision has a tax implication, and with each decision comes the potential for tax risk. An important part of managing tax risk rests with the ability of the tax department to proactively analyze and plan for the tax effects of business transactions as well as correctly report the associated tax consequences. A sound tax risk policy should involve the tax department having a seat at the table as business decisions are being planned and executed so that the associated tax implications may be effectively assessed in real time. Effective processes and controls that include regular, transparent communication with non-tax leaders and decision makers are essential.

A comprehensive tax risk policy will help tax departments mitigate financial reporting risk and potentially adverse operational consequences including negative cash flow impacts. In addition, a tax risk policy can provide shareholders and other stakeholders, tax authorities and regulators greater assurance that an organization has a thoughtful and robust approach to tax strategy and tax risk.

 

What is tax risk?

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

Some examples of potential areas of tax risk include:

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

 

The benefits of a tax risk policy

As part of an overall tax policy, every business should have a documented policy that addresses tax risk. According to the BDO 2022 Tax Outlook Survey, there is a correlation between tax department involvement in strategic planning decisions and having a tax risk policy. Of the survey respondents who said that leadership “always” includes tax in strategic planning decisions, 72% also indicated they had completed a tax risk policy. By comparison, only 38% of respondents who said they are “sometimes” included have a tax risk policy in place.

A comprehensive and properly implemented tax risk policy helps ensure a company’s tax behavior is in alignment with the company’s overall risk profile. An effective tax risk policy also strengthens tax risk awareness across the wider organization through better communication, processes and controls that include executive oversight of tax strategy. A well-developed tax risk policy will include:

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

 

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

Every business should have a tax risk policy in place that not only articulates their tax strategy and vision but also reflects the way the company operates. In other words, to be effective, a tax risk policy must be consistent with the policies of the broader business organization.

In an ever-changing business and tax environment, an effective tax risk policy will include procedures that require the policy to be regularly assessed and modified as needed. Indications that your tax risk policy should be reviewed include:

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

Contact one of our experts to discuss tax risk policies for your business.