Category: General

Like a slowly gathering storm, inflation has gone from dark clouds on the horizon to a noticeable downpour on both the U.S. and global economies. Is it time for business owners to panic? Not at all. As of this writing, a full-blown recession is possible but not an absolute certainty. And the impact of inflation itself will vary depending on your industry and the financial strength of your company. Here are some important points to keep in mind during this difficult time.

Government response

For starters, don’t expect any dramatic moves by the federal government. Some smaller steps, however, have been taken. For instance, the Federal Reserve has raised interest rates to “pump the brakes” on the U.S. economy. And the IRS recently announced an increase in the optional standard mileage rate tax deduction for the last six months of 2022 (July 1 through December 31). The rate for business travel is now 62.5 cents per mile — up from 58.5 cents per mile for the first half of 2022. This is notable because the IRS usually adjusts mileage rates only once annually at year-end. The tax agency explained: “in recognition of recent gasoline price increases, [we’ve] made this special adjustment for the final months of 2022.” Otherwise, major tax relief this year is highly unlikely.

Some tax breaks are inflation-adjusted — for example, the Section 179 depreciation deduction. However, these amounts were calculated at the end of 2021, so they probably won’t keep up with 2022 inflation. What’s more, many other parts of the tax code aren’t indexed for inflation.

Strategic moves

So, what can you do? First, approach price increases thoughtfully. When inflation strikes, raising your prices might seem unavoidable. After all, if suppliers are charging you more, your profit margin narrows — and the risk of a cash flow crisis goes way up. Just be sure to adjust prices carefully with a close eye on the competition. Second, take a hard look at your budget and see whether you can reduce or eliminate nonessential expenses.

Inflationary times lead many business owners to try to run their companies as leanly as possible. In fact, if you can cut enough costs, you might not need to raise prices much, if at all — a competitive advantage in today’s environment. Last, consider the bold strategy of taking a growth-oriented approach in response to inflation. That’s right; if you’re in a strong enough cash position, your business could increase its investments in marketing and production to generate more revenue and outpace price escalations. This is a “high risk, high reward” move, however.

Optimal moves

Again, the optimal moves for your company will depend on a multitude of factors related to your industry, size, mission, and market. One thing’s for sure: Inflation to some degree is inevitable. Let’s hope it doesn’t get out of control. We can help you generate, organize and analyze the financial information you need to make sound business decisions. Contact one of our experts to find out how. © 2022

 

Key Deadlines for Businesses and Other Employers

Here are some of the key tax-related deadlines affecting businesses and other employers during the third quarter of 2022. Keep in mind that this list isn’t all-inclusive, so there may be additional deadlines that apply to you. Contact us to ensure you’re meeting all applicable deadlines and to learn more about the filing requirements.

August 1

Report income tax withholding and FICA taxes for second quarter 2022 (Form 941), and pay any tax due. (See the exception below, under “August 10.”) File a 2021 calendar-year retirement plan report (Form 5500 or Form 5500-EZ) or request an extension.

August 10

Report income tax withholding and FICA taxes for second quarter 2022 (Form 941), if you deposited on time and in full all of the associated taxes due.

September 15

If a calendar-year C corporation, pay the third installment of 2022 estimated income taxes. If a calendar-year S corporation or partnership that filed an automatic six-month extension: File a 2021 income tax return (Form 1120S, Form 1065 or Form 1065-B) and pay any tax, interest and penalties due. Make contributions for 2021 to certain employer-sponsored retirement plans. © 2022

U.S. businesses have been hit by the perfect storm.

As the pandemic continues to disrupt supply chains and plague much of the global economy, the war in Europe further complicates the landscape, disrupting major supplies of energy and other commodities. In the U.S., price inflation has accelerated the Federal Reserve’s plans to raise interest rates and commence quantitative tightening, making debt more expensive. The stock market has declined sharply, and the prospect of a recession is on the rise. Further, U.S. consumer demand may be cooling despite a strong labor market and low unemployment. As a result of these and other pressures, many businesses are rethinking their supply chains and countries of operation as they also search for opportunities to free up or preserve cash in the face of uncertain headwinds.

Enter income tax accounting methods.

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

In general, accounting methods either result in the acceleration or deferral of an item or items of taxable income or deductible expense, but they don’t alter the total amount of income or expense that is recognized during the lifetime of a business. As interest rates 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.

Some of the more common accounting methods to consider center around the following:

• Advance payments. Taxpayers may be able to defer recognizing advance payments as taxable income for one year instead of paying the tax when the payments are received.
• Prepaid and accrued expenses. Some prepaid expenses can be deducted when paid instead of being capitalized. Some accrued expenses can be deducted in the year of accrual as long as they are paid within a certain period of time after year end.
• Costs incurred to acquire or build certain tangible property. Qualifying costs may be deducted in full in the current year instead of being capitalized and amortized over an extended period. Absent an extension, under current law, the 100% deduction is scheduled to decrease by 20% per year beginning in 2023.
• Inventory capitalization. Taxpayers can optimize uniform capitalization methods for direct and indirect costs of inventory, including using or changing to various simplified and non-simplified methods and making certain elections to reduce administrative burden.
• Inventory valuation. Taxpayers can optimize inventory valuation methods. For example, adopting to (or making changes within) the last-in, first-out (LIFO) method of valuing inventory generally will result in higher cost of goods sold deductions when costs are increasing.
• Structured lease arrangements. Options exist to maximize tax cash flow related to certain lease arrangements, for example, for taxpayers evaluating a sale vs. lease transaction or structuring a lease arrangement with deferred or advance rents.

Insights

Optimizing tax accounting methods can be a great option for businesses that need cash to make investments in property, people and technology as they address supply chain disruptions, tight labor markets and evolving business and consumer landscapes. Moreover, many of the investments that businesses make are ripe for accounting methods opportunities — such as full expensing of capital expenditures in new plant and property to reposition supply chains closer to operations or determining the treatment of investments in new technology enhancements. For prepared businesses looking to weather the storm, revisiting their tax accounting methods could free up cash for a period of years, which would be useful in the event of a recession that might diminish sales and squeeze profit margins before businesses are able to right-size costs.

​While an individual accounting method may or may not materially impact the cash flow of a company, the impact can be magnified as more favorable accounting methods are adopted. Taxpayers should consider engaging in accounting methods planning as part of any acquisition due diligence as well as part of their regular cash flow planning activities.

Example

The estimated impact of an accounting method is typically measured by multiplying the deferred or accelerated amount of income or expense by the marginal tax rate of the business or its investors.

For example, assume a business is subject to a marginal tax rate of 30%, considering all of the jurisdictions in which it operates. If the business qualifies and elects to defer the recognition of $10 million of advance payments, this will result in the deferral of $3 million of tax. Although that $3 million may become payable in the following taxable year, if another $10 million of advance payments are received in the following year the business would again be able to defer $3 million of tax.

Continuing this pattern of deferral from one year to the next would not only preserve cash but, due to the time value of money, potentially generate savings in the form of forgone interest expense on debt that the business either didn’t need to borrow or was able to pay down with the freed-up cash. This opportunity becomes increasingly more valuable with rising interest rates, as the ability to pay significant portions of the eventual liability from the accumulation of forgone interest expense can materialize over a relatively short period of time, i.e., the time value of money increases as interest rates rise.

Accounting Method Changes

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

• The “automatic” change procedure, which requires the taxpayer to file the Form 3115 with the IRS as well as attach the form to the federal tax return for the year of change; or
• The “nonautomatic” change procedure, which requires advance IRS consent. The Form 3115 for nonautomatic changes must be filed during the year of change.

In addition, certain planning opportunities may be implemented without a Form 3115 by analyzing the underlying facts.

What Can Businesses Do Now?

Taxpayers should keep in mind that tax accounting method changes falling under the automatic change procedure can still be made for the 2021 tax year with the 2021 federal return and can be filed currently for the 2022 tax year.

Nonautomatic procedure change requests for the 2022 tax year are recommended to be filed with the IRS as early as possible before year end to give the IRS sufficient time to review and approve the request by the time the federal income tax return is to be filed.

Engaging in discussions now is the key to successful planning for the current taxable year and beyond. Whether a Form 3115 application is necessary or whether the underlying facts can be addressed to unlock the accounting methods opportunity, the options are best addressed in advance to ensure that a quality and holistic roadmap is designed. Analyzing the opportunity to deploy accounting methods for cash savings begins with a discussion and review of a business’s existing accounting methods.

To learn more contact us to talk to an expert on how you can drive you cash savings.

4 TIPS FOR WORKING WITH A RESOURCE-CONSTRAINED INTERNAL REVENUE SERVICE

Federal tax professionals working to resolve issues with the IRS can attest to the multifaceted impacts of the agency’s resource constraints on taxpayer service. The signs are evident, for example, in the long wait times for calls to be answered, tax return processing delays, and increased instances of penalties being assessed against compliant taxpayers. Perhaps most frustratingly, IRS examinations that could have been resolved cooperatively with an adequately staffed agency have become unnecessarily prolonged and, in some cases, contentious.

The optimists among us see that the process of reform to address these issues has begun with a slow refunding of the IRS. However, it could take years of IRS hiring and training for the organization to manage the full scope of its responsibilities. What do we do while we wait?

The following are some suggested best practices for dealing with the IRS in the current environment.

1. Closely monitor your IRS accounts

The IRS’s most recent filing season was challenging. Even some taxpayers that electronically filed have since discovered that their returns were improperly recorded in the IRS’s system, resulting in incorrect taxable income or net operating loss carryforwards.

IRS input errors can have significant negative consequences for compliant taxpayers. For taxpayers that remitted the proper amount of income tax (i.e., the income tax liability reported on their return), an IRS input error that results in a higher recorded income tax liability could lead to the improper assessment of late payment penalties. Worse yet, if the IRS input error results in a lower recorded income tax liability, the IRS may refund a taxpayer’s “excess” payment. If the taxpayer inadvertently accepts the refund (by, for example, depositing the refund check), the IRS will assess underpayment interest from the day it sent the refund until the day the taxpayer pays it back.

IRS input errors can also negatively impact taxpayers that overpaid their current year tax liability and elected to have the excess amount credited to the subsequent tax year. If the input error increases the taxpayer’s current year tax liability, the IRS will credit a lower amount, potentially triggering penalties for late payment in the subsequent year.

The errors that begin with an IRS input mistake and end with penalty and interest assessments can be caught early by taxpayers that actively monitor their IRS accounts. Specifically, taxpayers that establish access to the IRS’s eServices via the IRS website are able to track most activity on their tax accounts, confirm the IRS has accurately recorded their tax filings and ensure the IRS has not sent any erroneous refund checks. Tax advisors can also easily monitor their clients’ tax accounts with a properly executed Form 2848, Power of Attorney.

2. Monitor the status of your IRS correspondence

It generally takes months for the IRS to respond to taxpayer correspondence. The IRS is similarly slow in processing amended tax returns, including amended returns that report a claim for refund. Due to the processing delays, the National Taxpayer Advocate’s office recently announced it had “made the difficult decision to suspend accepting cases where the sole issue involves the processing of amended returns until the IRS is able to work through its backlog.”[1]

The IRS is also having difficulty keeping track of or is simply unable to answer, many taxpayer communications. [2] As a general rule, if the IRS has not responded to a taxpayer within eight to ten weeks of initial contact, it is important for the taxpayer to follow up with a phone call to the IRS to determine whether the IRS is taking steps to resolve the taxpayer’s issue. IRS call center representatives can often see notes on the taxpayer’s account that clarify what (if any) action the IRS has taken.

Although taxpayers may attempt this follow-up call to the IRS themselves, their tax advisors will likely have more efficient lines of communication via the IRS’s Practitioner Priority Service hotline, which is only available to appointed taxpayer representatives.

 

3. Avoid paper communication with the IRS whenever possible

The IRS’s ongoing battle with its paper backlog has been front-page news since the onset of the pandemic. However, despite its efforts to hire and retain employees, the IRS continues to struggle — now promising in a highly optimistic announcement that the backlog will be clear “by the end of calendar year 2022.” [3]

Although no form of IRS communication may be quick or easy right now, the IRS is generally processing electronic communications, such as electronic filings and faxes, much more quickly than paper communications. Therefore, taxpayers should consider electronic methods of communicating with the IRS whenever possible. If the IRS offers electronic filing of any tax form, whether through a third-party IRS-authorized e-file provider or via a simple fax submission, taxpayers should consider taking advantage of these simple, electronic transmissions. Not only is the IRS processing electronically filed tax forms more quickly than paper filings, it is also typically making fewer mistakes when inputting electronic returns in its systems, thus mitigating the risk of erroneous civil penalties and interest.

In addition, taxpayers that retain and carefully store their IRS transmission receipts are much better prepared to show proof of filing, for example, if the IRS’s records do not show the taxpayer’s communication was received.

 

4. Document and retain every important IRS communication

The IRS processing centers are not the only area of the agency currently struggling with customer service. Unfortunately, some IRS examination teams appear not to be performing the same comprehensive reviews that used to allow cases to close without the IRS Office of Appeals or tax litigation, which may lead to unnecessary assessments. Examination teams may also be slow to make progress on taxpayers’ cases, then request months-long statute extensions so they have sufficient time to finish their work. These types of examination strategies are also tied to IRS resource constraints – namely, insufficient resources to keep the IRS examination train rolling along efficiently.

Taxpayers can mitigate these types of examination experiences by being proactive and documenting every important communication with the IRS. Every response to an IRS inquiry and communication with an IRS examiner should be clearly dated, printed to PDF, and saved in a safe file. In addition, every important conversation with an IRS examiner should be documented via email—e.g., “Dear IRS Agent, please confirm my understanding of the following discussion we had today ….” It is very important to clearly record and save all important interactions with the IRS, as the simplest of IRS examinations can turn quickly when dealing with the agency’s resource constraints. A taxpayer’s documentation of common understandings and examination delays is now critical to establishing a thorough defense if the case must go to Appeals or litigation.

[1] Collins, E. (2021, November 21). IRS Delays in Processing Amended Tax Returns Are Impacting TAS’s Ability to Assist Taxpayers. National Taxpayer Advocate Blog. https://www.taxpayeradvocate.irs.gov/news/nta-blog-irs-delays-in-processing-amended-tax-returns-are-impacting-tass-ability-to-assist-taxpayers/

[2] Velarde, A. (2022, February 7). Ex-Official Confirms IRS Ignores Some Reasonable Cause Statements. Tax Notes. Doc 2022-4055.

[3] Curry, J. (2022, March 21). Rettig Makes a Big Backlog Pledge, Defends Audit Priorities. Tax Notes. Doc 2022-8773.

Contact one of our experts for more help.

In a report to Congress, the IRS’s Whistleblower Office said that in 2021 the agency collected more than $245 million from noncompliant taxpayers as a result of whistleblowers’ tips. The IRS made 179 awards totaling more than $36 million to the whistleblowers. Since the whistleblower program began in 2007, the number and amounts of awards paid annually have varied significantly, “especially when a small number of high-dollar claims are resolved in a single year,” according to the report. Over its 15-year history, the Whistleblower Office has paid awards totaling nearly $1.1 billion and collected $6.4 billion from noncompliant taxpayers. Read the report: https://bit.ly/39Bb1Wr

CFPB expands its authority to punish banks for discrimination

In a March 16 announcement, the Consumer Financial Protection Bureau (CFPB) announced that it will expand its antidiscrimination efforts to situations in which fair lending laws may not apply. Examples include servicing, collections, consumer reporting, payments, remittances and deposits.

Fair lending laws, such as the Equal Credit Opportunity Act (ECOA), target discrimination in the extension of credit. But discrimination in other consumer finance areas also may trigger liability under the Consumer Financial Protection Act (CFPA), which prohibits unfair, deceptive, and abusive acts or practices. For example, the announcement explains, denying access to a checking account on the basis of race could be an unfair practice even if ECOA doesn’t apply. Discrimination can violate the CFPA regardless of whether it’s intentional.

The CFPB updated its exam manual to reflect its antidiscrimination stance, noting that discrimination may be deemed unfair if it “[causes] substantial harm to consumers that they cannot reasonably avoid, where that harm is not outweighed by countervailing benefits to consumers or competition.” Examiners will require banks and other supervised companies to “show their processes for assessing risks and discriminatory outcomes, including documentation of customer demographics and the impact of products and fees on different demographic groups.”

FinCEN’s Rapid Response Program for cyber-enabled financial crime

In a recent fact sheet, the Financial Crimes Enforcement Network (FinCEN) highlighted its Rapid Response Program (RRP). This program helps victims and their financial institutions recover funds stolen as the result of certain cyber-enabled financial crime schemes, including business email compromise. RRP is a partnership among FinCEN, U.S. law enforcement and foreign partner agencies. It facilitates recovery of stolen funds through rapidly sharing financial intelligence and collaborating with foreign partner agencies to block fraudulent transactions, freeze funds, and stop and recall payments.

To date, the RRP has been used in approximately 70 foreign jurisdictions to recover more than $1.1 billion. The fact sheet provides guidance on how to activate the RRP. This guidance includes a flow chart that outlines the complaint process, as well as instructions on filing suspicious activity reports in connection with activities targeted by an RRP complaint.

FDIC imposes notice requirement for banks involved in crypto activities

In a recent financial institutions letter (FIL), the FDIC required FDIC-supervised institutions to notify the FDIC if they plan to engage in or are currently engaged in any activities involving or related to crypto assets. Unlike a similar policy announced earlier by the Office of the Comptroller of the Currency (OCC), the FDIC policy doesn’t require institutions to obtain specific approval of such activities.

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© 2022

On June 9, 2022, the IRS announced that they are increasing the optional standard mileage rate for the rest of 2022. Effective July 1, 2022, the standard mileage rate for business travel will increase 4 cents from 58.5 to 62.5 cents per mile. The rate for deductible medical and moving rates will also increase 4 cents from 18 to 22 cents. The IRS also provided legal guidance for the changes in Announcement 2022 – 13.

The IRS usually updates the mileage rate once a year in the fall for the next calendar year but is making this special midyear increase in response to recent gas price increases. IRS Commissioner Chuck Rettig said, “ We are aware a number of unusual factors have come into play involving fuel costs, and we are taking this special step to help taxpayers, businesses, and others who use this rate.” According to the IRS, fuel costs are influential to the mileage figure, but other items such as depreciation, insurance, and other fixed and variable costs factor into the calculation as well.

The optional standard mileage rate is used to calculate the deductible costs of operating an automobile for business use in lieu of tracking actual costs. The rate is also used by the federal government and many businesses as the standard rate to reimburse their employees for mileage. Visit the IRS website for more information: https://www.irs.gov/newsroom/irs-increases-mileage-rate-for-remainder-of-2022

Contact one of our experts if you have any questions about the standard mileage rate.