Complying with SECURE Act Changes to Long-Term Part-Time Employee Eligibility and IRS Form 5500


Two significant regulatory changes to retirement plans require immediate attention from plan sponsors, both to ensure current operational compliance and to comply with upcoming deadlines. Many long-term, part-time (LTPT) employees are now eligible for 401(k) retirement plans; there is also a new method of counting defined contribution retirement plan participants on Form 5500 Annual Return/Report. It’s important to note that a retirement plan’s audit status could be affected as these changes take effect.

In addition to understanding the far-reaching implications that could help avoid missteps with LTPT employee eligibility and revised participant headcounts, we will explore how to correct any missteps that have already occurred.

New Eligibility Opportunities for Long-Term, Part-Time Employees

Prior to the SECURE Act of 2019 and SECURE 2.0 Act of 2022 (collectively SECURE), employers could exclude employees from their tax-qualified defined contribution plans based on the number of hours they worked per year. Typically, this meant that part-time employees were ineligible to contribute to their employer’s retirement plan — no matter how many years they had worked for their employer. An IRS Employee Plans Newsletter issued on January 26, 2024, defined LTPT employees as workers who have worked at least 500 hours per year in three consecutive years, although the consecutive year condition will be reduced to two years in 2025.

SECURE expanded LTPT employee access to employer retirement plans by requiring 401(k) plans to allow employees that meet the LTPT requirements to make elective deferrals starting with the first plan year beginning on or after January 1, 2024. Employers are not required to make employer contributions for LTPT employees.

However, the burden of identifying, notifying, and enrolling these newly eligible LTPT employees falls on the employers. Failing to inform LTPT employees of their eligibility as of January 1, 2024, may have resulted in non-compliance. To rectify any compliance issues, employers can consider using the IRS amnesty program known as the Employee Plans Compliance Resolution System (EPCRS).

It is essential to understand this new requirement because LTPT employee eligibility may affect two other administrative functions for plan sponsors: Form 5500 filing and the annual employee benefit plan audit requirement.

A Key Change When Counting Participants for Form 5500

Prior to 2023, IRS Form 5500 — an essential part of ERISA’s reporting and disclosure framework — required defined contribution retirement plan sponsors to include employees who were eligible to make elective deferrals on the first day of the plan year. In most organizations, LTPT employees would be excluded from this headcount unless the employer’s plan allowed them to make contributions to the retirement plan.

Now, employers need only include participants with an account balance in the defined contribution retirement plan as of the first day of the plan year (but, for new plans, the participant account balance count is determined as of the last day of the first plan year). This may sound like a simple change, but the potential increase in participants who are LTPT employees complicates the matter.

The Impact on a Plan’s Audit Requirement

An organization’s obligation to have an annual audit of its retirement plan is dependent on the number of plan participants as of the first day of the plan year.

Beginning with the 2023 plan year, defined contribution plans that have more than 100 participant accounts as of the first day of the 2023 plan year generally must have an annual independent audit. Before 2023, all plan participants who were eligible to make salary deferrals were included in headcounts as participants even if they had not made any plan contributions. The DOL changed the rules starting in 2023 to include only those with account balances as participants. Keep in mind that the number of participants can be decreased by taking advantage of rules that allow distributions of small account balances (accounts valued at less than $7,000 starting in 2024) to former participants, if the defined contribution plan adopted these provisions.

The audit requirement of plans with 100 or more employees may change since employees without account balances are no longer counted. An organization may find that the defined contribution plan no longer requires an audit if eligible employees have not contributed to the 401(k) plan, but the audit requirement may be triggered when previously excluded LTPT employees begin to make elective deferrals.

Navigating the New Normal For Certain Retirement Plans

The LTPT employee rules take effect for plan years beginning on or after January 1, 2024 (for calendar-year end plans). If your organization missed the deadline to allow LTPT employees to participate in your plan, the good news is that there is a path to compliance. However, implementing these complicated changes in the law requires in-depth knowledge of the complex issues surrounding tax-qualified retirement plans. Experienced consultants can provide guidance and support throughout the process in the following ways:

  • Analyze plan documents and employee data to identify any compliance gaps or issues that need to be addressed
  • Engage in detailed discussions with plan sponsors to explain the intricacies of the changes and helping them understand the necessary steps to ensure compliance
  • Facilitate communication with service providers to aid in a smooth transition and implementation of any required changes
  • Calculate corrective actions required to rectify any non-compliance issues and confirm future compliance
  • Guide the employer in enrolling in the IRS’s amnesty program (EPCRS), if necessary, to self-report non-compliance issues
  • Help plan sponsors track the path taken to incorporate the necessary changes into the plan documents, to ensure ongoing compliance and avoid future issues
  • Discuss Form 5500 preparation considerations, including participant head count

 


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Before 2023, all plan participants who were eligible to make salary deferrals were included in headcounts as participants even if they had not made any plan contributions. The DOL changed the rules starting in 2023 to include only those with account balances as participants. Keep in mind that the number of participants can be decreased by taking advantage of rules that allow distributions of small account balances (accounts valued at less than $7,000 starting in 2024) to former participants, if the defined contribution plan adopted these provisions. The audit requirement of plans with 100 or more employees may change since employees without account balances are no longer counted. An organization may find that the defined contribution plan no longer requires an audit if eligible employees have not contributed to the 401(k) plan, but the audit requirement may be triggered when previously excluded LTPT employees begin to make elective deferrals. Navigating the New Normal For Certain Retirement Plans The LTPT employee rules take effect for plan years beginning on or after January 1, 2024 (for calendar-year end plans). If your organization missed the deadline to allow LTPT employees to participate in your plan, the good news is that there is a path to compliance. However, implementing these complicated changes in the law requires in-depth knowledge of the complex issues surrounding tax-qualified retirement plans. Experienced consultants can provide guidance and support throughout the process in the following ways: Analyze plan documents and employee data to identify any compliance gaps or issues that need to be addressed Engage in detailed discussions with plan sponsors to explain the intricacies of the changes and helping them understand the necessary steps to ensure compliance Facilitate communication with service providers to aid in a smooth transition and implementation of any required changes Calculate corrective actions required to rectify any non-compliance issues and confirm future compliance Guide the employer in enrolling in the IRS’s amnesty program (EPCRS), if necessary, to self-report non-compliance issues Help plan sponsors track the path taken to incorporate the necessary changes into the plan documents, to ensure ongoing compliance and avoid future issues Discuss Form 5500 preparation considerations, including participant head count     [...] Read more...
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April 10, 2024Your business should generally maximize current year depreciation write-offs for newly acquired assets. Two federal tax breaks can be a big help in achieving this goal: first-year Section 179 depreciation deductions and first-year bonus depreciation deductions. These two deductions can potentially allow businesses to write off some or all of their qualifying asset expenses in Year 1. However, they’re moving targets due to annual inflation adjustments and tax law changes that phase out bonus depreciation. With that in mind, here’s how to coordinate these write-offs for optimal tax-saving results. Sec. 179 Deduction Basics Most tangible depreciable business assets — including equipment, computer hardware, vehicles (subject to limits), furniture, most software and fixtures — qualify for the first-year Sec. 179 deduction. Depreciable real property generally doesn’t qualify unless it’s qualified improvement property (QIP). QIP means any improvement to an interior portion of a nonresidential building that’s placed in service after the date the building is placed in service — except for any expenditures attributable to the enlargement of the building, any elevator or escalator, or the internal structural framework. Sec. 179 deductions are also allowed for nonresidential building roofs, HVAC equipment, fire protection systems and security systems. The inflation-adjusted maximum Sec. 179 deduction for tax years beginning in 2024 is $1.22 million. It begins to be phased out if 2024 qualified asset additions exceed $3.05 million. (These are up from $1.16 million and $2.89 million, respectively, in 2023.) Bonus Depreciation Basics Most tangible depreciable business assets also qualify for first-year bonus depreciation. In addition, software and QIP generally qualify. To be eligible, a used asset must be new to the taxpayer. For qualifying assets placed in service in 2024, the first-year bonus depreciation percentage is 60%. This is down from 80% in 2023. Sec. 179 vs. Bonus Depreciation The current Sec. 179 deduction rules are generous, but there are several limitations: The phase-out rule mentioned above, A business taxable income limitation that disallows deductions that would result in an overall business taxable loss, A limited deduction for SUVs with a gross vehicle weight rating of more than 6,000 pounds, and Tricky limitation rules when assets are owned by pass-through entities such as LLCs, partnerships, and S corporations. First-year bonus depreciation deductions aren’t subject to any complicated limitations. But, as mentioned earlier, the bonus depreciation percentages for 2024 and 2023 are only 60% and 80%, respectively. So, the current tax-saving strategy is to write off as much of the cost of qualifying asset additions as you can with Sec. 179 deductions. Then claim as much first-year bonus depreciation as you can. Example: In 2024, your calendar-tax-year C corporation places in service $500,000 of assets that qualify for both a Sec. 179 deduction and first-year bonus depreciation. However, due to the taxable income limitation, the company’s Sec. 179 deduction is limited to only $300,000. You can deduct the $300,000 on your corporation’s 2024 federal income tax return. You can then deduct 60% of the remaining $200,000 ($500,000 − $300,000), thanks to first-year bonus depreciation. So, your corporation can write off $420,000 in 2024 . That’s 84% of the cost! Note that the $200,000 bonus depreciation deduction will contribute to a corporate net operating loss that’s carried forward to your 2025 tax year. Managing Tax Breaks As you can see, coordinating Sec. 179 deductions with bonus depreciation deductions is a tax-wise idea. We can provide details on how the rules work or answer any questions you have. © 2024       [...] Read more...
April 10, 2024If your small business is strapped for cash (or likes to save money), you may find it beneficial to barter or trade for goods and services. Bartering isn’t new — it’s the oldest form of trade — but the internet has made it easier to engage in with other businesses. However, if your business begins bartering, be aware that the fair market value of goods that you receive in these types of transactions is taxable income. And if you exchange services with another business, the transaction results in taxable income for both parties. Fair Market Value Here are some examples of an exchange of services: A computer consultant agrees to offer tech support to an advertising agency in exchange for free advertising. An electrical contractor does repair work for a dentist in exchange for dental services. In these cases, both parties are taxed on the fair market value of the services received. This is the amount they would normally charge for the same services. If the parties agree to the value of the services in advance, that will be considered the fair market value unless there’s contrary evidence. In addition, if services are exchanged for property, income is realized. For example: If a construction firm does work for a retail business in exchange for unsold inventory, it will have income equal to the fair market value of the inventory. If an architectural firm does work for a corporation in exchange for shares of the corporation’s stock, it will have income equal to the fair market value of the stock. Joining a Club Many businesses join barter clubs that facilitate barter exchanges. These clubs generally use a system of “credit units,” which are awarded to members who provide goods and services. The credits can be redeemed for goods and services from other members. In general, bartering is taxable in the year it occurs. But if you participate in a barter club, you may be taxed on the value of credit units at the time they’re added to your account, even if you don’t redeem them for actual goods and services until a later year. For example, let’s say that you earn 2,500 credit units one year, and that each unit is redeemable for $2 in goods and services. In that year, you’ll have $5,000 of income. You won’t pay additional tax if you redeem the units the next year, since you’ve already been taxed on that income. If you join a barter club, you’ll be asked to provide your Social Security number or Employer Identification Number. You’ll also be asked to certify that you aren’t subject to backup withholding. Unless you make this certification, the club is required to withhold tax from your bartering income at a 24% rate. Tax Reporting By January 31 of each year, a barter club will send participants a Form 1099-B, “Proceeds from Broker and Barter Exchange Transactions,” which shows the value of cash, property, services and credits that you received from exchanges during the previous year. This information will also be reported to the IRS. Exchanging Without Exchanging Money By bartering, you can trade away excess inventory or provide services during slow times, all while hanging on to your cash. You may also find yourself bartering when a customer doesn’t have the money on hand to complete a transaction. As long as you’re aware of the federal and state tax consequences, these transactions can benefit all parties involved. Contact us if you need assistance or would like more information. © 2024       [...] Read more...
April 10, 2024Here are some of the key tax-related deadlines that apply to businesses and other employers during the second quarter of 2024. Keep in mind that this list isn’t all-inclusive, so there may be additional deadlines that apply to you. Contact us to ensure you’re meeting all applicable deadlines and to learn more about the filing requirements. April 15th If you’re a calendar-year corporation, file a 2023 income tax return (Form 1120) or file for an automatic six-month extension (Form 7004) and pay any tax due. For corporations, pay the first installment of 2024 estimated income taxes. Complete and retain Form 1120-W (worksheet) for your records. For individuals, file a 2023 income tax return (Form 1040 or Form 1040-SR) or file for an automatic six-month extension (Form 4868) and pay any tax due. For individuals, pay the first installment of 2024 estimated taxes, if you don’t pay income tax through withholding (Form 1040-ES). April 30th Employers report income tax withholding and FICA taxes for the first quarter of 2024 (Form 941) and pay any tax due. May 10th Employers report income tax withholding and FICA taxes for the first quarter of 2024 (Form 941), if they deposited on time, and fully paid, all of the associated taxes due. May 15th Employers deposit Social Security, Medicare and withheld income taxes for April if the monthly deposit rule applies. June 17th Corporations pay the second installment of 2024 estimated income taxes. © 2024       [...] Read more...
April 8, 2024At Financial Executives International’s Corporate Financial Reporting Insights Conference last November, staff from the Securities and Exchange Commission (SEC) expressed concerns related to the use of financial metrics that don’t conform to U.S. Generally Accepted Accounting Principles (GAAP). Companies continue to have trouble complying with the SEC’s guidelines on non-GAAP reporting, said Lindsay McCord, chief accountant of the SEC’s Division of Corporation Finance. Here’s some guidance that may help as you prepare your company’s financial statements for the first quarter of 2024. Ongoing Concerns GAAP is a set of rules and procedures that accountants typically follow to record and summarize business transactions. These guidelines provide the foundation for consistent, fair, honest and accurate financial reporting. Private companies generally aren’t required to follow GAAP, but many do. Public companies don’t have a choice; they’re required by the SEC to follow GAAP. Over the years, the use of non-GAAP measures has grown. These unaudited figures can provide added insight when they’re used to supplement GAAP performance measures. But they can also be used to mislead investors and artificially inflate a public company’s stock price. Specifically, companies may include unaudited performance figures — such as earnings before interest, taxes, depreciation and amortization (EBITDA) — to cast the company in a more favorable light. Non-GAAP metrics may appear in the management, discussion and analysis section of their financial statements, earnings releases and investor presentations. For example, a company’s EBITDA is typically higher than its GAAP earnings. That’s because EBITDA is commonly adjusted for such items as stock-based compensation, nonrecurring items, intangibles and other company-specific items. In addition, non-GAAP metrics or adjustments may be cherry-picked to present a stronger financial picture than what appears in audited financial statements. Some companies also may erroneously present non-GAAP metrics more prominently than GAAP numbers — or fail to clearly label and describe non-GAAP measures. 10 Key Questions The Center for Audit Quality (CAQ) recommends considering the following 10 questions to help ensure transparent non-GAAP metric disclosures: What’s the purpose of the non-GAAP measure, and would a reasonable investor be misled by the information? Has the non-GAAP measure been given more prominence than the most comparable GAAP measure? How many non-GAAP measures have been presented, and are they all necessary and appropriate for investors to understand performance? Why has management selected a particular non-GAAP measure to supplement GAAP measures that are already established and consistently applied within its industry or across industries Does the company’s disclosure provide substantive detail on its purpose and usefulness for investors? How is the non-GAAP measure calculated, and does the disclosure clearly and adequately describe the calculation, as well as the reconciling items between the GAAP and non-GAAP measures? How does management use the measure and has that use been disclosed? Is the non-GAAP measure sufficiently defined and clearly labeled as non-GAAP or could it be confused with a GAAP measure? What are the tax implications of the non-GAAP measure, and does the calculation align with the tax consequences and the nature of the measure? Does the company have material agreements, such as a debt covenant, that require compliance with a non-GAAP measure? If so, are they disclosed? The CAQ provides additional questions that address the consistency and comparability of non-GAAP metrics. We Can Help Non-GAAP metrics can provide greater insight into the information that management considers important in running the business. However, care should be taken not to mislead investors and lenders. Contact us to discuss your company’s non-GAAP metrics and disclosures. © 2024       [...] Read more...
January 25, 2024  Beginning in 2024, small businesses will need to comply with the Corporate Transparency Act. Harris CPAs is excited to work with our clients that are impacted and we are close to selecting a third party provider to assist our clients with these filings. We will have that information available soon! In the meantime we wanted to provide a brief overview of the Act and its requirements. Corporate Transparency Act – What is it and what does it mean for me? In 2021, Congress enacted the Corporate Transparency Act. This now requires some businesses to file a Beneficial Ownership Information (BOI) report with FinCEN (Financial Crimes and Enforcement Network) of the United States Treasury. In preparing the filing, there are several steps to go through to be in compliance with the new reporting requirement. We hope to walk you through these important steps to make the process a bit more understandable. Here is an overview and checklist of the Corporate Transparency Act guidelines to follow: Determine if you are a “reporting company.” Define who the beneficial owners are – spoiler alert, it’s not just members of the LLC or shareholders. Identify up to two company applicants. Understand the timeline and file electronically on the Treasury Department’s website (which went live on January 1, 2024). How do I determine if I have a “reporting company”? A “reporting company” is a corporation, Limited Liability Company (LLC), or other entity created by filing a document. This must be filed with a Secretary of State, a similar office under the law of state or Indian tribe, or a foreign company registered to do business in the U.S. at any Secretary of State or Indian Tribe filing. There are twenty-three types of entities that are exempt from filing. Many of the exemptions are publicly traded companies, nonprofits (organized under 501(c) of the Internal Revenue Code) and certain large operating companies. Large operating companies are defined as having average gross receipts over the past three taxable years in excess of $5 million AND employing more than 20 full-time staff members. I have determined that I have a “reporting company”; who are my beneficial owners? Once you determine that you have a filing requirement, you must determine who has to be reported as a beneficial owner. A beneficial owner is defined as any individual who directly or indirectly exercises substantial control over a reporting OR owns at least 25% of the ownership interest in the company. Ownership interests include any items that may be converted to ownership in the future (i.e., stock options, restricted stock units or debt that may be converted to equity). There are 5 exceptions to the definition of a beneficial owner. This includes: (1) a minor child; (2) a nominee/intermediary/custodian/agent; (3) employees who are not senior officers, do not exercise substantial control over the business, or do not have an economic benefit of the business other than wages earned; (4) ownership through future inheritance; and (5) a creditor holding non-convertible debt instrument. Who are the company applicants? The company is able to report up to two applicants on the filing of the BOI. The company applicant would be the person(s) who filed the original organizational documents with the Secretary of State when the entity was created. If a third party was used, the individual within the company who authorized the third party to create the entity would be the applicant. Company applicants are only required to be disclosed if the entity was created on or after January 1, 2024. For entities created before this date, company applicants are not required to be disclosed. What information do I need to collect and report for the beneficial owners of my business? For a “reporting company”, you will need to report: (1) the full legal name of the business along with any trade names used; (2) the complete current U.S. address; (3) the state of registration; and (4) the taxpayer ID number used by the business for tax filings. For each beneficial owner, you will need their full legal name, date of birth, complete current address and a copy of one of the following non-expired documents: U.S. Passport, State Driver’s license or identification document issued by a state, local government or tribe. These documents will need to be uploaded to the Treasury Department portal. When is my report due? New entities filed with a Secretary of State after 12/31/2023 and before 12/31/2024 must file within 90 days of creation of the entity. Entities filed with a Secretary of State after 12/31/2024 will have to prepare the initial filing 30 days after the initial Secretary of State filing. However, existing companies created with a Secretary of State have to file their initial report by December 31, 2024. Once the initial report is filed, there is no additional filing needed until you experience a change in the BOI report. All companies who have a change in their BOI after initial filing are required to file an updated report within 30 days of the change. Examples of changes include changes to name, address, obtaining a new driver’s license or passport, changes to officer positions, and registering a DBA. If a beneficial owner becomes deceased, the report needs to be filed within 30 days of settling the owner’s estate. What happens if companies do not file? Penalties accrue at $591 per day, up to 2 years in prison, and/or up to $10,000 in fines. Hopefully the information provided below leaves you feeling a bit more informed on the steps needed to properly file with the new reporting requirement. Obviously working with your accountant can greatly help in navigating any questions or challenges that arise for your business, as it relates to the Corporate Transparency Act.   Harris will be providing more information to assist you in the filing requirement. Look for this communication to come soon.   [...] Read more...
January 23, 2024American workers are facing a savings crisis made more acute by soaring interest rates, persistent inflation, and other economic stressors. In its 2023 Workplace Wellness Survey, the Employee Benefit Research Institute (EBRI) found that 30% of workers could not pay for an unexpected $500 expense, while half of EBRI’s respondents considered their retirement savings to be their only “significant emergency savings.” This dependence on retirement savings is also rising according to Vanguard research that reveals hardship withdrawals from workplace retirement plans increased from 2021 to 2022. About 80% of those withdrawals were taken by lower-income participants (defined as the participants with an annual income of between $30,000 and $75,000) to avoid losing their home or to pay for unexpected medical bills. Further, one-third of the participants who took a hardship withdrawal in 2022 had previously taken a withdrawal in 2021. This data underscores an important challenge facing employees and employers alike: near-term financial needs may sabotage the long-term financial security and retirement outcomes of many Americans. And while today only 20% of workers have access to an emergency savings account at work, EBRI’s survey found that more than 80% of those without such a benefit want one and would prioritize it above other benefits, such as health savings accounts and additional paid time off. How Employers Can Help: The In-Plan Options To help address this issue, the Secure 2.0 Act of 2022 offers plan sponsors a way to include an emergency-savings benefit, also known as pension-linked emergency savings accounts or PLESAs, as an add-on to an existing retirement plan program. The Act permits PLESAs to be added as of January 1, 2024. Here are a few things to know about PLESAs: PLESAs are intended for non-highly-compensated employees (as defined by the IRS). Employees can contribute up to $2,500 (or a lesser amount determined by the plan sponsor) on an after-tax (Roth) basis. Employees may take withdrawals as frequently as monthly. Employers have the option of auto-enrolling employees in a PLESA up to a rate of 3% of compensation. Employers may match contributions to a PLESA, but must: Match at the same rate that applies to any retirement plan match. Make matching contributions to the participant’s retirement account, not the PLESA. Employees are not required to document a hardship or immediate financial need to take a withdrawal. PLESA contributions must be held as cash in interest-bearing deposit accounts or in regulated principal preservation investment products. While the intended goal of PLESAs is positive — to promote healthy saving habits while helping to preserve the retirement savings of employees — there remain many open questions about key aspects of the legislation including eligibility, employee and employer contributions, and distributions. The DOL and IRS have been directed to study emergency savings in defined-contribution plans and to report their findings to Congress, but the deadline for doing so isn’t until December 29, 2029. For plan sponsors concerned about the complexity and lack of regulatory clarity around setting up and administering PLESAs, a standalone emergency savings product is an alternative. Out-of-Plan Alternatives A growing number of retirement plan recordkeepers are partnering with plan sponsors to add out-of-plan (sometimes referred to as à la carte) emergency savings products to their menu of benefits. Financial wellness nonprofit Commonwealth interviewed plan recordkeepers and noted that eight out of nine recordkeepers offered or are planning to offer an emergency savings product. One such program recently initiated by some plan sponsors allows employees to contribute a portion of their net pay to an account maintained by the company’s 401(k) recordkeeper. Financial education modules and one-on-one financial coaching sessions are also being offered in conjunction with the program. Insight: Weigh the Pros and Cons When considering either approach, plan sponsors need to think through what they are trying to achieve. If it is a behavioral shift they are seeking, the in-plan option may make sense because once participants reach the $2,500 contribution limit, any overflow of funds automatically goes into the participant’s Roth retirement savings along with any employer matching contributions. In this way, plan sponsors are encouraging better short- and long-term saving habits, while also helping to reduce hardship withdrawals and loans from retirement plans along with the associated penalties and fees. For other employers, particularly smaller companies, the out-of-plan option may be a more easily implemented choice because employers are not required to already have a retirement plan in place. Also, because standalone savings plans are not subject to ERISA, there are no regulatory hurdles, auto-enrollment, auto-escalation, or fiduciary obligations for sponsors. The relative simplicity of implementing these out-of-plan savings vehicles could offer an attractive option for smaller employers. However, while out-of-plan products are attractive for their ease of use, they do not include an employer matching contribution feature. From a behavioral perspective, the out-of-plan product lacks the employee behavioral trigger that some employers want to achieve. Employers who are looking to modify employee savings habits could consider other options. We recommend sponsors clarify the goals for your employees and your benefits program and consider whether adding some type of emergency savings option (in or out-of-plan) may complement your overall objectives.   [...] Read more...
December 11, 2023  While, the IRS’ announcement last month provides significant compliance relief for processing catch-up contributions as after-tax “Roth” contributions, the focus now for plan sponsors should be on proper implementation of the guidance. IRS Notice 2023-62 established a two-year administrative extension window for plan sponsors to delay their implementation of mandated changes required by the SECURE 2.0 Act of 2022 until January 1, 2026. It also clarified that the IRS will allow catch-up contributions to continue to be made under pre-SECURE 2.0 law for plan years starting in 2024. The IRS took this action to address a drafting mistake in Section 603 of SECURE 2.0 that technically eliminated all catch-up contributions by accidentally deleting IRC Section 402(g)(1)(C). Legislators have indicated Congress intends to resolve this error with a future technical correction. This extension was welcomed by the defined contribution retirement plan community, which had previously voiced concerns about having insufficient time to update their systems to implement the provision. Section 603 of SECURE 2.0 had originally required catch-up contributions made to a qualified retirement plan — such as 401(k), 403(b), or 457(b) plans — by higher income employees (who earned $145,000 or more in the prior year) to be made on a Roth basis beginning January 1, 2024. Despite the recent extension, additional clarification is needed for plan administrators, sponsors, and other key stakeholders to fully understand their regulatory burden. Execution Challenges The new so-called “Rothification” rules had generated numerous questions from key retirement plan industry stakeholders, including large employers. There were also requests for additional implementation time as well as for more detailed and clarifying regulatory guidance. For instance, the ERISA Industry Committee (ERIC) published an open letter in July 2023 that cited a number of administrative hurdles for implementation and the need for transition relief. One concern cited was the new $145,000 income limit imposed on Roth catch-up contributions. Because it is a brand-new threshold (and not part of any existing qualified plan rule or requirement), implementation would require plan sponsors to coordinate closely with their payroll administrators, recordkeepers, and other service providers to make the necessary system updates. The new income limit is also anticipated to have a significant trickle-down impact on both sponsor and provider systems and processes. Plan sponsors also need to develop and roll out communication of the changes to employees, which requires IRS guidance that had not yet been provided. As ERIC’s open letter indicated, the industry had concerns that starting implementation before the issuance of IRS guidance could result in costly re-work. Additionally, employers whose plans do not currently allow for Roth plan contributions faced a dilemma as to whether to eliminate catch-up contributions entirely (at least, until they were able to implement a Roth program) or attempt to quickly implement a Roth option. Welcome Relief The IRS notice provides a two-year administrative transition period during which qualified retirement plans offering catch-up contributions will be treated as satisfying the new rules in Section 414(v)(7)(A) even if the contributions are not designated as Roth contributions throughout the transition period (or until December 31, 2025). Additionally, a plan that does not currently provide for any designated Roth contributions will still be treated as satisfying the new requirements. The notice also identifies some topics for expected future regulatory guidance, including the following proposed IRS positions on important open questions: Higher-income employees with no FICA income in the preceding year would not be subject to the requirements of the new catch-up rules. Plan sponsors may treat higher-income earners’ pre-tax, catch-up contributions elections as default Roth catch-up elections when they become subject to the mandatory Roth catch-up treatment. For plans maintained by more than one employer, the preceding calendar year wages for an eligible participant would not be aggregated with wages from another participating employer for purposes of determining whether the participant’s income meets the $145,000 threshold.   [...] Read more...
July 13, 2023The Department of Labor (DOL) released the final changes to Form 5500 relating to the September 2021 notice of proposed form revisions (NPFR) to amend the Form 5500. The changes fall into seven major categories. These changes are effective for plan years beginning on or after January 1, 2023 and will be incorporated into the 2023 Form 5500. As a reminder, the Form 5500 provides the DOL, Internal Revenue Service and the Pension Benefit Guaranty Corporation with information about a retirement plan’s operations, qualifications, financial condition, and compliance with government regulations. Below, we review some of the key changes to Form 5500 and what the adjustments are. Are You a Large Plan or a Small Plan? The Rules Have Changed Historically, determining whether your plan was “large” versus “small” was based on the number of eligible participants in your plan. If your plan had at least 100 eligible participants on the first day of the plan year, you were considered a large plan—regardless of how many participants had accounts or elected to participate in the plan. As a result, the DOL’s recent changes to Form 5500 redefine large plans by the number of participants with account balances on the first day of the plan year. If your plan has at least 100 participants with active accounts, then you are a large plan, and an annual audit is required. (Note that this provision only applies to defined contribution plans and is in effect for plan years that begin on or after January 1, 2023.)This provision will significantly change the threshold for the status of large versus small plans. The DOL estimates 19,500 large plans will no longer be subject to the annual audit requirement relating to this participant-count methodology change. While this change is likely good news for many plan sponsors, there are some potential issues. For example, a failed compliance test or the allocation of forfeitures could push plans over the 100-participant threshold. If a plan fails the Actual Deferral Percentage or the Actual Contribution Percentage test, participants who closed out their accounts may need to be reinstated for reimbursement purposes. To avoid this issue, plan sponsors should carefully review their plan documents to determine whether they are able to “push out” participants with account balances under $5,000. More Updates Coming Down the Pike The DOL’s final changes includes several other changes. Mock-ups of the new forms and instructions for the following items will be available later this year at Reginfo.gov: Consolidated Form 5500 for Defined Contribution Groups Streamlined reporting on the 5500 for pooled employer plans and multiple-employer plans New breakout categories for administrative expenses (Schedule H) Revisions to the financial and funding reporting requirements for defined benefit plans New Internal Revenue Code (IRC) compliance questions to improve tax oversight Certain revisions from the NPFR have been delayed including proposed revisions to the content requirements for the schedules of assets filed by large plans. The DOL wants to modernize data reported in a plan’s individual investments to improve consistency, transparency, and usability of plan investment information, but feedback revealed that service providers need more time. Insight: Partner With Service Providers to Build Your Strategy Most plan sponsors process distributions with the help of service providers, so it is important to partner with such service providers to keep an eye on your number of participants—especially if you are close to the threshold of 100 active plan participants. Plan sponsors should clarify if it is their goal to remain a small plan, familiarize themselves with the options presented in the plan document to move participants out of the plan, and determine the procedure for a potential distribution. Learn how Harris CPAs can help you here! Employee Benefit Plan Page   [...] Read more...
February 21, 2023SECURE 2.0 was signed into law on December 29, 2022, makes sweeping changes to retirement savings plans. Before plan sponsors can take advantage of the many provisions in SECURE 2.0, the DOL will need to provide additional regulations and guidance on some of the provisions. In other words, there is more to come on SECURE 2.0. In the meantime, the DOL is focused on 17 items recently released in its biannual regulatory agenda. Plan sponsors and other industry experts should pay attention to this agenda to be sure they understand how these changes may affect them—particularly in areas such as changes to the fiduciary rule, updates on pooled employer plans, and final rules on lifetime income illustrations. In total, the Employee Benefits Security Administration (EBSA) listed three pre-rule stage items, nine proposed rule stage items, and five final rule stage items in its recently released regulatory agenda. Pre-Rule Stage: Improving Participant Engagement and Effectiveness: The DOL’s EBSA has been tasked with finding ways to improve retirement plan disclosures to enhance outcomes for employees. The EBSA will start by consulting with plan sponsors and other stakeholders to explore ways to improve such disclosures. Pooled Employer Plans: The SECURE Act of 2019 amended the Employee Retirement Income Security Act of 1974 (ERISA) to allow pooled employer plans to be a type of single employer pension benefit plan. The EBSA will begin exploring the need for regulatory guidance to run these plans. Requirements Related to Advanced Explanation of Benefits and Other Provisions Under the Consolidated Appropriations Act of 2021: The EBSA is reviewing whether regulation or guidance is needed to ensure patients have transparency in their health care treatment options and expected costs before a scheduled service. Request for comments closed in November 2022 and an analysis is expected in April 2023. Proposed-Rule Stage Definition of the Term “Fiduciary”: The DOL’s is proposing to amend ERISA’s definition of fiduciary to more closely reflect today’s relationships between participants, service providers, and others who provide investment advice for a fee. This proposal has been carried over since the Spring 2021 regulatory agenda and has no timeline for completion. Improvement of the Form 5500 and Implementing Related Regulations: Working with the Internal Revenue Service and Pension Benefit Guaranty Corporation, the DOL intends to modernize the Form 5500 to make investment data more mineable. This proposal has been carried over since Fall 2021 and movement on it is expected by June 2023. Definition of Employer Under Section 3(5) of ERISA – Association Health Plans: The EBSA will explore whether to replace or remove its 2018 final rule that set alternative criteria when an employer association could act on behalf of an employer to create a multiple employer group health plan. Action on this is expected in March 2023. Adoption of Amended and Restated Voluntary Fiduciary Correction Program: The EBSA took public comments until January 20, 2023 on its plan to expand the scope of transactions eligible for self-correction. Final Rule Stage Pension Benefit Statements – Lifetime Income Illustrations: The SECURE Act added a lifetime income illustration requirement for certain defined contribution plans. The final rule is expected to be released in May 2023. Prohibited Transaction Exemption Procedures: An April 2023 final rule is expected that would modify the DOL’s process for granting prohibited transaction exemption. Independent Contractor Classification Under the Wage and Hour Division agenda, the DOL announced that it expects to issue a final rule clarifying independent contractor status in May 2023. This ruling has been issued, delayed, and debated in court by the Biden and Trump administrations. The current administration believes the 2021 regulation does not reflect what is written in the Fair Labor Standards Act and will issue its updated rule to complement the law. Employee Benefit Plan Page [...] Read more...
November 11, 2022As we approach the new year, it is time for individuals to review their 2022 and 2023 tax situations and identify opportunities to reducing, deferring or accelerating their tax obligations. Click the the picture below to read the full issue on 2022 Year-End Tax Planning for Individuals: Highlights from this guide: Individual Tax Planning Highlights with tax brackets Timing of Income and Deductions Long-Term Capital Gains with rate brackets Retirement Plan Contributions Foreign Earned Income Exclusion Kiddie Tax Alternative Minimum Tax Limitations on Deduction of State and Local Taxes ( Salt Limitations) Charitable Contributions Net Operating Losses and Excess Busoness Loss Limitation Estate and Gift Taxes [...] Read more...
June 15, 2022The Internal Revenue Service on June, 9th announced an increase in the optional standard mileage rate for the final 6 months of 2022. Taxpayers may use the optional standard mileage rates to calculate the deductible costs of operating an automobile for business and certain other purposes. For the final 6 months of 2022, the standard mileage rate for business travel will be 62.5 cents per mile, up 4 cents from the rate effective at the start of the year. The new rate for deductible medical or moving expenses (available for active-duty members of the military) will be 22 cents for the remainder of 2022, up 4 cents from the rate effective at the start of 2022. These new rates become effective July 1, 2022. In recognition of recent gasoline price increases, the IRS made this special adjustment for the final months of 2022. The IRS normally updates the mileage rates once a year in the fall for the next calendar year. For travel from Jan. 1 through June 30, 2022. While fuel costs are a significant factor in the mileage figure, other items enter into the calculation of mileage rates, such as depreciation and insurance and other fixed and variable costs. The optional business standard mileage rate is used to compute the deductible costs of operating an automobile for business use in lieu of tracking actual costs. This rate is also used as a benchmark by the federal government and many businesses to reimburse their employees for mileage. Taxpayers always have the option of calculating the actual costs of using their vehicle rather than using the standard mileage rates. The 14 cents per mile rate for charitable organizations remains unchanged as it is set by statute. Midyear increases in the optional mileage rates are rare, the last time the IRS made such an increase was in 2011. Mileage Rate Changes PurposeRates 1/1 through 6/30/22Rates 7/1 through 12/31/22Business58.562.5Medical/Moving1822Charitable1414 Link to the full article on the IRS website: https://www.irs.gov/newsroom/irs-increases-mileage-rate-for-remainder-of-2022 Link to Optional Standard Mileage Rates IRS Announcement: https://www.irs.gov/pub/irs-drop/a-22-13.pdf https://harrisgroupadvisors.com//services/tax-planning-compliance/ [...] Read more...
February 7, 2022This year we sift through the noise of headlines to understand what is actually happening in the economy. Steve Scranton, CFA from Washington Trust Bank dives into the economic outlook for the Treasure Valley and also insight into Supply Chain issues around the world. We concluded with a tax update by our very own Robert Shappee, CPA, CCIFP reviewing recent legislation, and what strategies you might be able to take advantage of in 2022. Below is a video of our full presentation. https://www.youtube.com/watch?v=AG7psMQxp00&t=3s [...] Read more...
January 21, 2022Employers have spent the last two years dealing with many challenges and disruptions, and they are now looking to move forward in 2022 against a backdrop of economic and pandemic-related uncertainty and market volatility. To help plan sponsors navigate the challenging road ahead, professionals from BDO’s ERISA Center of Excellence recently held a year-end webinar: ERISA Update—Past, Present and Future. Here, we outline four themes that plan sponsors should be keeping a close eye on in 2022. The #1 Financial Story of the Year: Inflation You can’t go anywhere without hearing about inflation—and for a good reason. The Consumer Price Index (CPI) rose 6.8% from November 2020 to November 2021, the largest 12-month increase in nearly 40 years. But how do increases in prices for gas (up 58%), meat (up 13%) and cars (up 31%) affect retirement accounts? For participants in defined contribution plans, these price hikes mean that their paychecks don’t go as far in covering living expenses. As a result, some participants may choose to decrease their plan contribution rates to increase the amount of take-home pay. A significant number of participants may stop contributing altogether, which could alter the plan’s fee structures. Rising prices could also lead to increases in loans and hardship withdrawals. Finally, while financial wellness plans have been in place at many organizations for some time, plan sponsors should consider whether such benefits properly address participants’ concerns about inflation. New Strategies for Massive Shifts in the Labor Market The coronavirus pandemic caused many companies to shut their doors and employees to work from home. As a result, the hybrid and remote work environment evolved faster than expected. In addition, there was a massive exodus from traditional 9-to-5 jobs in America. According to data from the Bureau of Labor Statistics (BLS), 6.3 million people left the workforce in November 2021 alone. In response to the tight labor market, employers should consider a variety of strategies to attract and retain top talent. Potential solutions include stronger retirement benefits (such as matching contributions), referral bonuses, more flexible hours, remote work stipends, childcare assistance or parental family leave and shorter work days around holiday time. Cybersecurity Practices Draw Increasing DOL Scrutiny Last April, the Department of Labor (DOL) released its first-ever guidance on cybersecurity best practices for fiduciaries, recordkeepers and participants. Soon after that, the DOL began conducting investigations on retirement plan cybersecurity practices. The DOL has asked for a comprehensive set of documents related to the plan’s cybersecurity or data security practices to assess cybersecurity risk and the safety of plan data. The DOL is also reviewing relationships with service providers, such as recordkeepers, attorneys, investment managers, and advisors, to ensure that they are doing their part to protect plan data. Plan sponsors should take a proactive approach to cybersecurity in 2022, including reviewing the DOL’s guidance and comparing it to their plan operations to determine whether operational changes are required. Plan sponsors also should discuss cyber risk measures with service providers to learn about their cybersecurity protocols. In particular, plan sponsors should review whether service providers are contractually permitted to cross-sell participant data. Lastly, plan sponsors should carefully review providers’ SOC1 reports, which is an essential step to monitor service providers properly. Growing Interest in ESOPs We are receiving many inquiries about setting up and administering Employee Stock Ownership Plans (ESOPs), which are qualified defined contribution plans available for S corporations and C corporations. Starting in 2020, the Setting Every Community Up for Retirement Enhancement (SECURE) Act of 2019 allows employers to retroactively adopt and fund a tax-qualified retirement plan, including an ESOP, by the extended due date of the employer’s federal tax return, creating a retroactively effective tax deduction. The National Defense Authorization Act signed into law on December 27, 2021 contains the first-ever government contracting program to specifically encourage ESOPs. Section 874 of the new law creates a five-year Department of Defense pilot program that allows companies that are or become 100% ESOP-owned to receive noncompete follow-on contracts for federal government work. In addition, pending bills in Congress include provisions that may encourage more employers to pursue this structure. ESOPs can be an attractive exit strategy for employers who want to leave their business in employees’ hands, protect their legacy and continue to influence the company’s trajectory after the transaction. The latest figures (2019) show that there are nearly 6,600 ESOPs in the U.S., covering 14 million participants with $1.7 billion in plan assets. Insight: Do Your Homework to Hit the Ground Running in 2022 While the direct health implications of the COVID-19 pandemic continue to dominate headlines, issues created in the wake of this crisis will garner increased attention in 2022. Inflation, the rapidly changing workforce, cybersecurity and other audit concerns are areas that plan sponsors will need to focus on in the upcoming year. Employee Benefit Plan Page [...] Read more...
December 8, 2021Over the past few years, several laws and regulations were passed to loosen rules on hardship distributions for 401(k) and 403(b) retirement plans. These new provisions came in handy for many participants who needed an easier way to access retirement accounts during the pandemic. While there was an extension to give plan sponsors more time to revise plans to reflect the changes, the final day to amend pre-approved qualified retirement plans that adopted hardship distribution regulations is Dec. 31, 2021. While it is not required, plans can include provisions that allow in-service distributions if the participant has an immediate and heavy need and the withdrawal is necessary to meet that need. In summary, here are the five ways that plans could have been changed to make hardship withdrawals: Eliminate the six-month suspension on contributions after hardship withdrawal Expand safe harbors to include federally declared disaster-related expenses Replace facts and circumstances test with three-part test to determine financial need Eliminate need of loan requirement prior to hardship distribution Expand sources of funds for hardship distributions Plans need to have the proper amendments if hardship withdrawals were allowed on or after Jan. 1, 2020. With the Dec. 31 deadline approaching, plan sponsors should act quickly to examine whether these changes were made to their plans. As listed in a previous Insight, some of these changes were mandatory, while others were optional. Pre-approved plans should contact service providers to see whether amendments were added to the plan document. In addition, safe harbor plans should ensure that the safe harbor notice includes the proper hardship withdrawal information. Employee Benefit Plan Page [...] Read more...
December 3, 2021As the U.S. entered 2021, many assumed that newly elected President Joe Biden along with Democratic majorities in the House and Senate would swiftly enact tax increases on both corporations and individuals to pay for the cost of proposed new infrastructure and social spending plans, potentially using the budget reconciliation process to do so. Since then, various versions of tax and spending measures have been negotiated and debated by members of Congress and the White House. As 2021 heads to a close, tax increases are still expected, but the timing and content of final changes are still not certain. On November 5, 2021, the U.S. House of Representatives delayed voting on its version of the Build Back Better Act (H.R. 5376), a package of social spending measures funded by tax increases. The delay allows members more time to review the budget impact of the provisions in the bill. Some of the legislation’s major tax proposals, which mainly target large profitable corporations and high-income individuals, include: A 15% corporate alternative minimum tax on companies that report financial statement profits of over $1 billion. A 1% surtax on corporate stock buybacks. A 15% country-by-country minimum tax on foreign profits of U.S. corporations. A 5% surtax on individual incomes over $10 million, an additional 3% surtax on incomes over $25 million and expansion of the 3.8% Net Investment Income Tax. At the time of writing, the House had not yet voted on the Build Back Better Act. Once the House votes, the legislation will be taken up by the Senate. If enacted in its current form, the legislation would generally be effective for taxable years beginning after December 31, 2021; however, many of the corporate and international proposals affecting businesses would apply for taxable years beginning after December 31, 2022 – i.e., they would be deferred for one year. The information contained in this article is based on tax proposals as of November 4, 2021 and is subject to change based on final legislation. Businesses should continue to track the latest tax proposals to understand the impacts of possible new legislation, particularly when engaging in tax planning. Despite the delays and uncertainty around exactly what tax changes final legislation will contain, there are actions that businesses can consider taking to minimize their tax liabilities. Consider tax accounting method changes and strategic tax elections The 2017 Tax Cuts and Jobs Act (TCJA) lowered the regular corporate tax rate to 21% and eliminated the corporate alternative minimum tax beginning in 2018. The current version of the proposed Build Back Better Act would leave the 21% regular corporate tax rate unchanged but, beginning in 2023, would create a new 15% corporate alternative minimum tax on the adjusted financial statement income of corporations with such income over $1 billion. Companies with adjusted financial statement income over $1 billion, therefore, should take into account the proposed 15% corporate alternative minimum tax when considering 2021 tax planning actions that could affect future years. Companies that want to reduce their 2021 tax liability should consider traditional tax accounting method changes, tax elections and other actions for 2021 to defer recognizing income to a later taxable year and accelerate tax deductions to an earlier taxable year, including the following: Changing from recognizing certain advance payments (e.g., upfront payments for goods, services, gift cards, use of intellectual property, sale or license of software) in the year of receipt to recognizing a portion in the following taxable year. Changing from the overall accrual to the overall cash method of accounting. Changing from capitalizing certain prepaid expenses (e.g., insurance premiums, warranty service contracts, taxes, government permits and licenses, software maintenance) to deducting when paid using the “12-month rule.” Deducting eligible accrued compensation liabilities (such as bonuses and severance payments) that are paid within 2.5 months of year end. Accelerating deductions of liabilities such as warranty costs, rebates, allowances and product returns under the “recurring item exception.” Purchasing qualifying property and equipment before the end of 2021 to take advantage of the 100% bonus depreciation provisions and the Section 179 expensing rules. Deducting “catch-up” depreciation (including bonus depreciation, if applicable) by changing to shorter recovery periods or changing from non-depreciable to depreciable. Optimizing the amount of uniform capitalization costs capitalized to ending inventory, including changing to simplified methods available under Section 263A. Electing to fully deduct (rather than capitalize and amortize) qualifying research and experimental (R&E) expenses attributable to new R&E programs or projects that began in 2021. Similar planning may apply to the deductibility of software development costs attributable to new software projects that began in 2021. (Note that capitalization and amortization of R&E expenditures is required beginning in 2022, although the proposed Build Back Better Act would delay the effective date until after 2025). Electing to write-off 70% of success-based fees paid or incurred in 2021 in connection with certain acquisitive transactions under Rev. Proc. 2011-29. Electing the de minimis safe harbor to deduct small-dollar expenses for the acquisition or production of property that would otherwise be capitalizable under general rules. Is “reverse” planning better for your situation? Depending on their facts and circumstances, some businesses may instead want to accelerate taxable income into 2021 if, for example, they believe tax rates will increase in the near future or they want to optimize usage of NOLs. These businesses may want to consider “reverse” planning strategies, such as: Implementing a variety of “reverse” tax accounting method changes. Selling and leasing back appreciated property before the end of 2021, creating gain that is taxed currently offset by future deductions of lease expense, being careful that the transaction is not recharacterized as a financing transaction. Accelerating taxable capital gain into 2021. Electing out of the installment sale method for installment sales closing in 2021. Delaying payments of liabilities whose deduction is based on when the amount is paid, so that the payment is deductible in 2022 (e.g., paying year-end bonuses after the 2.5-month rule). Write-off bad debts and worthless stock Given the economic challenges brought on by the COVID-19 pandemic, businesses should evaluate whether losses may be claimed on their 2021 returns related to worthless assets such as receivables, property, 80% owned subsidiaries or other investments. Bad debts can be wholly or partially written off for tax purposes. A partial write-off requires a conforming reduction of the debt on the books of the taxpayer; a complete write-off requires demonstration that the debt is wholly uncollectible as of the end of the year. Losses related to worthless, damaged or abandoned property can generate ordinary losses for specific assets. Businesses should consider claiming losses for investments in insolvent subsidiaries that are at least 80% owned and for certain investments in insolvent entities taxed as partnerships (also see Partnerships and S corporations, below). Certain losses attributable to COVID-19 may be eligible for an election under Section 165(i) to be claimed on the preceding taxable year’s return, possibly reducing income and tax in the earlier year or creating an NOL that may be carried back to a year with a higher tax rate. Maximize interest expense deductions The TCJA significantly expanded Section 163(j) to impose a limitation on business interest expense of many taxpayers, with exceptions for small businesses (those with three-year average annual gross receipts not exceeding $26 million ($27 million for 2022), electing real property trades or businesses, electing farming businesses and certain utilities. The deduction limit is based on 30% of adjusted taxable income. The amount of interest expense that exceeds the limitation is carried over indefinitely. Beginning with 2022 taxable years, taxpayers will no longer be permitted to add back deductions for depreciation, amortization and depletion in arriving at adjusted taxable income (the principal component of the limitation). The Build Back Better Act proposes to modify the rules with respect to business interest expense paid or incurred by partnerships and S corporations (see Partnerships and S corporations, below). Maximize tax benefits of NOLs Net operating losses (NOLs) are valuable assets that can reduce taxes owed during profitable years, thus generating a positive cash flow impact for taxpayers. Businesses should make sure they maximize the tax benefits of their NOLs. Make sure the business has filed carryback claims for all permitted NOL carrybacks. The CARES Act allows taxpayers with losses to carry those losses back up to five years when the tax rates were higher. Taxpayers can still file for “tentative” refunds of NOLs originating in 2020 within 12 months from the end of the taxable year (by December 31, 2021 for calendar year filers) and can file refund claims for 2018 or 2019 NOL carrybacks on timely filed amended returns. Corporations should monitor their equity movements to avoid a Section 382 ownership change that could limit annual NOL deductions. Losses of pass-throughs entities must meet certain requirements to be deductible at the partner or S corporation owner level (see Partnerships and S corporations, below). Defer tax on capital gains Tax planning for capital gains should consider not only current and future tax rates, but also the potential deferral period, short and long-term cash needs, possible alternative uses of funds and other factors. Noncorporate shareholders are eligible for exclusion of gain on dispositions of Qualified Small Business Stock (QSBS). The Build Back Better Act would limit the gain exclusion to 50% for sales or exchanges of QSBS occurring after September 13, 2021 for high-income individuals, subject to a binding contract exception. For other sales, businesses should consider potential long-term deferral strategies, including: Reinvesting capital gains in Qualified Opportunity Zones. Reinvesting proceeds from sales of real property in other “like-kind” real property. Selling shares of a privately held company to an Employee Stock Ownership Plan. Businesses engaging in reverse planning strategies (see Is “reverse” planning better for your situation? above) may instead want to move capital gain income into 2021 by accelerating transactions (if feasible) or, for installment sales, electing out of the installment method. Claim available tax credits The U.S. offers a variety of tax credits and other incentives to encourage employment and investment, often in targeted industries or areas such as innovation and technology, renewable energy and low-income or distressed communities. Many states and localities also offer tax incentives. Businesses should make sure they are claiming all available tax credits for 2021 and begin exploring new tax credit opportunities for 2022. The Employee Retention Credit (ERC) is a refundable payroll tax credit for qualifying employers that have been significantly impacted by COVID-19. Employers that received a Paycheck Protection Program (PPP) loan can claim the ERC but the same wages cannot be used for both programs. The Infrastructure Investment and Jobs Act signed by President Biden on November 15, 2021, retroactively ends the ERC on September 30, 2021, for most employers. Businesses that incur expenses related to qualified research and development (R&D) activities are eligible for the federal R&D credit. Taxpayers that reinvest capital gains in Qualified Opportunity Zones may be able to defer the federal tax due on the capital gains. An additional 10% gain exclusion also may apply if the investment is made by December 31, 2021. The investment must be made within a certain period after the disposition giving rise to the gain. The New Markets Tax Credit Program provides federally funded tax credits for approved investments in low-income communities that are made through certified “Community Development Entities.” Other incentives for employers include the Work Opportunity Tax Credit, the Federal Empowerment Zone Credit, the Indian Employment Credit and credits for paid family and medical leave (FMLA). There are several federal tax benefits available for investments to promote energy efficiency and sustainability initiatives. In addition, the Build Back Better Act proposes to extend and enhance certain green energy credits as well as introduce a variety of new incentives. The proposals also would introduce the ability for taxpayers to elect cash payments in lieu of certain credits and impose prevailing wage and apprenticeship requirements in the determination of certain credit amounts. Partnerships and S corporations The Build Back Better Act contains various tax proposals that would affect partnerships, S corporations and their owners. Planning opportunities and other considerations for these taxpayers include the following:  Taxpayers with unused passive activity losses attributable to partnership or S corporation interests may want to consider disposing of the interest to utilize the loss in 2021. Taxpayers other than corporations may be entitled to a deduction of up to 20% of their qualified business income (within certain limitations based on the taxpayer’s taxable income, whether the taxpayer is engaged in a service-type trade or business, the amount of W-2 wages paid by the business and the unadjusted basis of certain property held by the business). Planning opportunities may be available to maximize this deduction. Certain requirements must be met for losses of pass-through entities to be deductible by a partner or S corporation shareholder. In addition, an individual’s excess business losses are subject to overall limitations. There may be steps that pass-through owners can take before the end of 2021 to maximize their loss deductions. The Build Back Better Act would make the excess business loss limitation permanent (the limitation is currently scheduled to expire for taxable years beginning on or after January 1, 2026) and change the manner in which the carryover of excess business losses may be used in subsequent years. Under current rules, the abandonment or worthlessness of a partnership interest may generate an ordinary deduction (instead of a capital loss) in cases where no partnership liabilities are allocated to the interest. Under the Build Back Better Act, the abandonment or worthlessness of a partnership interest would generate a capital loss regardless of partnership liability allocations, effective for taxable years beginning after December 31, 2021. Taxpayers should consider an abandonment of a partnership interest in 2021 to be able to claim an ordinary deduction. Following enactment of the TCJA, deductibility of expenses incurred by investment funds are treated as “investment expenses”—and therefore are limited at the individual investor level— if the fund does not operate an active trade or business (i.e., if the fund’s only activities are investment activities). To avoid the investment expense limitation, consideration should be given as to whether a particular fund’s activities are so closely connected to the operations of its portfolio companies that the fund itself should be viewed as operating an active trade or business. Under current rules, gains allocated to carried interests in investment funds are treated as long-term capital gains only if the investment property has been held for more than three years. Investment funds should consider holding the property for more than three years prior to sale to qualify for reduced long-term capital gains rates. Although the Build Back Better Act currently does not propose changes to the carried interest rules, an earlier draft of the bill would have extended the current three-year property holding period to five years. Additionally, there are multiple bills in the Senate that, if enacted, would seek to tax all carry allocations at ordinary income rates. Under the Build Back Better Act, essentially all pass-through income of high-income owners that is not subject to self-employment tax would be subject to the 3.8% Net Investment Income Tax (NIIT). This means that pass-through income and gains on sales of assets allocable to partnership and S corporation owners would incur NIIT, even if the owner actively participates in the business. Additionally, taxpayers that currently utilize a state law limited partnership to avoid self-employment taxes on the distributive shares of active “limited partners” would instead be subject to the 3.8% NIIT. If enacted, this proposal would be effective for taxable years beginning after December 31, 2021. Taxpayers should consider accelerating income and planned dispositions of business assets into 2021 to avoid the possible additional tax. The Build Back Better Act proposes to modify the rules with respect to business interest expense incurred by partnerships and S corporations effective for taxable years beginning after December 31, 2022. Under the proposed bill, the Section 163(j) limitation with respect to business interest expense would be applied at the partner and S corporation shareholder level. Currently, the business interest expense limitation is applied at the entity level (also see Maximize interest expense deductions, above). Various states have enacted PTE tax elections that seek a workaround to the federal personal income tax limitation on the deduction of state taxes for individual owners of pass-through entities. See State pass-through entity tax elections, below. Planning for international operations The Build Back Better Act proposes substantial changes to the existing U.S. international taxation of non-U.S. income beginning as early as 2022. These changes include, but are not limited to, the following: Imposing additional interest expense limitations on international financial reporting groups. Modifying the rules for global intangible low-taxed income (GILTI), including calculating GILTI and the corresponding foreign tax credits (FTCs) on a country-by-country basis, allowing country specific NOL carryforwards for one taxable year and reducing the QBAI reduction to 5%. Modifying the existing FTC rules for all remaining categories to be calculated on a country-by-country basis. Modifying the rules for Subpart F, foreign derived intangible income (FDII) and the base erosion anti-abuse tax (BEAT). Imposing new limits on the applicability of the Section 245A dividends received deduction (DRD) by removing the application of the DRD rules to non-controlled foreign corporations (CFCs). Modifying the rules under Section 250 to remove the taxable income limitation as well as reduce the GILTI and FDII deductions to 28.5% and 24.8%, respectively. Businesses with international operations should gain an understanding of the impacts of these proposals on their tax profile by modeling the potential changes and considering opportunities to utilize the favorable aspects of the existing cross-border rules to mitigate the detrimental impacts, including: Considering mechanisms/methods to accelerate foreign source income (e.g., prepaying royalties) and associated foreign income taxes to maximize use of the existing FTC regime and increase current FDII benefits. Optimizing offshore repatriation and associated offshore treasury aspects while minimizing repatriation costs (e.g., previously taxed earnings and profits and basis amounts, withholding taxes, local reserve restrictions, Sections 965 and 245A, etc.). Accelerating dividends from non-CFC 10% owned foreign corporations to maximize use of the 100% DRD currently available. Utilizing asset step-up planning in low-taxed CFCs to utilize existing current year excess FTCs in the GILTI category for other CFCs in different jurisdictions. Considering legal entity restructuring to maximize the use of foreign taxes paid in jurisdictions with less than a 16% current tax rate to maximize the GILTI FTC profile of the company. If currently in NOLs, considering methods to defer income or accelerate deductions to minimize detrimental impacts of existing Section 250 deduction taxable income limitations in favor of the proposed changes that will allow a full Section 250 deduction without a taxable income limitation. In combination with the OECD Pillar One/Two advancements coupled with U.S. tax legislation, reviewing the transfer pricing and value chain structure of the organization to consider ways to adapt to such changes and minimize the future effective tax rate of the organization. Review transfer pricing compliance Businesses with international operations should review their cross-border transactions among affiliates for compliance with relevant country transfer pricing rules and documentation requirements. They should also ensure that actual intercompany transactions and prices are consistent with internal transfer pricing policies and intercompany agreements, as well as make sure the transactions are properly reflected in each party’s books and records and year-end tax calculations. Businesses should be able to demonstrate to tax authorities that transactions are priced on an arm’s-length basis and that the pricing is properly supported and documented. Penalties may be imposed for non-compliance. Areas to consider include: Have changes in business models, supply chains or profitability (including changes due to the effects of COVID-19) affected arm’s length transfer pricing outcomes and support? These changes and their effects should be supported before year end and documented contemporaneously. Have all cross-border transactions been identified, priced and properly documented, including transactions resulting from merger and acquisition activities (as well as internal reorganizations)? Do you know which entity owns intellectual property (IP), where it is located and who is benefitting from it? Businesses must evaluate their IP assets — both self-developed and acquired through transactions — to ensure compliance with local country transfer pricing rules and to optimize IP management strategies. If transfer pricing adjustments need to be made, they should be done before year end, and for any intercompany transactions involving the sale of tangible goods, coordinated with customs valuations. Multinational businesses should begin to monitor and model the potential effects of the recent agreement among OECD countries on a two pillar framework that addresses distribution of profits among countries and imposes a 15% global minimum tax. Considerations for employers Employers should consider the following issues as they close out 2021 and head into 2022: Employers have until the extended due date of their 2021 federal income tax return to retroactively establish a qualified retirement plan and fund the plan for 2021. Contributions made to a qualified retirement plan by the extended due date of the 2021 federal income tax return may be deductible for 2021; contributions made after this date are deductible for 2022. The amount of any PPP loan forgiveness is excluded from the federal gross income of the business, and qualifying expenses for which the loan proceeds were received are deductible. The CARES Act permitted employers to defer payment of the employer portion of Social Security (6.2%) payroll tax liabilities that would have been due from March 27 through December 31, 2020. Employers are reminded that half of the deferred amount must be paid by December 31, 2021 (the other half must be paid by December 31, 2022). Notice CP256-V is not required to make the required payment. Employers should ensure that common fringe benefits are properly included in employees’ and, if applicable, 2% S corporation shareholders’ taxable wages. Partners should not be issued W-2s. Publicly traded corporations may not deduct compensation of “covered employees” — CEO, CFO and generally the three next highest compensated executive officers — that exceeds $1 million per year. Effective for taxable years beginning after December 31, 2026, the American Rescue Plan Act of 2021 expands covered employees to include five highest paid employees. Unlike the current rules, these five additional employees are not required to be officers. Generally, for calendar year accrual basis taxpayers, accrued bonuses must be fixed and determinable by year end and paid within 2.5 months of year end (by March 15, 2022) for the bonus to be deductible in 2021. However, the bonus compensation must be paid before the end of 2021 if it is paid by a Personal Service Corporation to an employee-owner, by an S corporation to any employee-shareholder, or by a C corporation to a direct or indirect majority owner. Businesses should assess the tax impacts of their mobile workforce. Potential impacts include the establishment of a corporate tax presence in the state or foreign country where the employee works; dual tax residency for the employee; and payroll tax, benefits, and transfer pricing issues. State and local taxes Businesses should monitor the tax rules in the states in which they operate or make sales. Taxpayers that cross state borders—even virtually—should review state nexus and other policies to understand their compliance obligations, identify ways to minimize their state tax liabilities and eliminate any state tax exposure. The following are some of the state-specific areas taxpayers should consider when planning for their tax liabilities in 2021 and 2022: Does the state conform to federal tax rules (including recent federal legislation) or decouple from them? Not all states follow federal tax rules. (Note that states do not necessarily follow the federal treatment of PPP loans. See Considerations for employers, above.) Has the business claimed all state NOL and state tax credit carrybacks and carryforwards? Most states apply their own NOL/credit computation and carryback/forward provisions. Has the business considered how these differ from federal and the effect on its state taxable income and deductions? Has the business amended any federal returns? Businesses should make sure state amended returns are filed on a timely basis to report the federal changes. If a federal amended return is filed, amended state returns may still be required even there is no change to state taxable income or deductions. Has a state adopted economic nexus for income tax purposes, enacted NOL deduction suspensions or limitations, increased rates or suspended or eliminated some tax credit and incentive programs to deal with lack of revenues due to COVID-19 economic issues? The majority of states now impose single-sales factor apportionment formulas and require market-based sourcing for sales of services and licenses/sales of intangibles using disparate sourcing methodologies. Has the business recently examined whether its multistate apportionment of income is consistent with or the effect of this trend? Consider the state and local tax treatment of merger, acquisition and disposition transactions, and do not forget that internal reorganizations of existing structures also have state tax impacts. There are many state-specific considerations when analyzing the tax effects of transactions. Is the business claiming all available state and local tax credits, e.g., for research activities, employment or investment? For businesses selling remotely and that have been protected by P.L. 86-272 from state income taxes in the past, how is the business responding to changing state interpretations of those protections with respect to businesses engaged in internet-based activities? Has the business considered the state tax impacts of its mobile workforce? Most states that provided temporary nexus and/or withholding relief relating to teleworking employees lifted those orders during 2021 (also see Considerations for employers, above). Has the state introduced (or is it considering introducing) a tax on digital services? The definition of digital services can potentially be very broad and fact specific. Taxpayers should understand the various state proposals and plan for potential impacts. Remote retailers, marketplace sellers and marketplace facilitators (i.e., marketplace providers) should be sure they are in compliance with state sales and use tax laws and marketplace facilitator rules. Assessed property tax values typically lag behind market values. Consider challenging your property tax assessment. State pass-through entity elections The TCJA introduced a $10,000 limit for individuals with respect to federal itemized deductions for state and local taxes paid during the year ($5,000 for married individuals filing separately). At least 20 states have enacted potential workarounds to this deduction limitation for owners of pass-through entities, by allowing a pass-through entity to make an election (PTE tax election) to be taxed at the entity level. PTE tax elections present state and federal tax issues for partners and shareholders. Before making an election, care needs to be exercised to avoid state tax traps, especially for nonresident owners, that could exceed any federal tax savings. (Note that the Build Back Better Act proposes to increase the state and local tax deduction limitation for individuals to $80,000 ($40,000 for married individuals filing separately) retroactive to taxable years beginning after December 31, 2020. In addition, the Senate has begun working on a proposal that would completely lift the deduction cap subject to income limitations.) Accounting for income taxes – ASC 740 considerations The financial year-end close can present unique and challenging issues for tax departments. Further complicating matters is pending U.S. tax legislation that, if enacted by the end of the calendar year, will need to be accounted for in 2021. To avoid surprises, tax professionals can begin now to prepare for the year-end close: Evaluate the effectiveness of year-end tax accounting close processes and consider modifications to processes that are not ideal. Update work programs and train personnel, making sure all team members understand roles, responsibilities, deliverables and expected timing. Communication is especially critical in a virtual close. Know where there is pending tax legislation and be prepared to account for the tax effects of legislation that is “enacted” before year end. Whether legislation is considered enacted for purposes of ASC 740 depends on the legislative process in the particular jurisdiction. Document whether and to what extent a valuation allowance should be recorded against deferred tax assets in accordance with ASC 740. Depending on the company’s situation, this process can be complex and time consuming and may require scheduling deferred tax assets and liabilities, preparing estimates of future taxable income and evaluating available tax planning strategies. Determine and document the tax accounting effects of business combinations, dispositions and other unique transactions. Review the intra-period tax allocation rules to ensure that income tax expense/(benefit) is correctly recorded in the financial statements. Depending on a company’s activities, income tax expense/(benefit) could be recorded in continuing operations as well as other areas of the financial statements. Evaluate existing and new uncertain tax positions and update supporting documentation. Make sure tax account reconciliations are current and provide sufficient detail to prove the year-over-year change in tax account balances. Understand required tax footnote disclosures and build the preparation of relevant documentation and schedules into the year-end close process. Begin Planning for the Future Future tax planning will depend on final passage of the proposed Build Back Better Act and precisely what tax changes the final legislation contains. Regardless of legislation, businesses should consider actions that will put them on the best path forward for 2022 and beyond. Business can begin now to: Reevaluate choice of entity decisions while considering alternative legal entity structures to minimize total tax liability and enterprise risk. Evaluate global value chain and cross-border transactions to optimize transfer pricing and minimize global tax liabilities. Review available tax credits and incentives for relevancy to leverage within applicable business lines. Consider the benefits of an ESOP as an exit or liquidity strategy, which can provide tax benefits for both owners and the company. Perform a cost segregation study with respect to investments in buildings or renovation of real property to accelerate taxable deductions, and identify other discretionary incentives to reduce or defer various taxes. Perform a state-by-state analysis to ensure the business is properly charging sales taxes on taxable items, but not exempt or non-taxable items, and to determine whether the business needs to self-remit use taxes on any taxable purchases (including digital products or services). Evaluate possible co-sourcing or outsourcing arrangements to assist with priority projects as part of an overall tax function transformation. [...] Read more...
December 3, 2021As we approach year end, now is the time for individuals, business owners, and family offices to review their 2021 and 2022 tax situations and identify opportunities for reducing, deferring, or accelerating tax obligations. Areas potentially impacted by proposed tax legislation still in play should be reviewed, as well as applicable opportunities and relief granted under legislation enacted during the past year.   The information contained within this article is based on tax proposals as presented in the November 3, 2021, version of the Build Back Better Act. Our guidance is subject to change when final legislation is passed. Taxpayers should consult with a trusted advisor when making tax and financial decisions regarding any of the items below.   Individual Tax Planning Highlights   2021 Federal Income Tax Rate Brackets 2022 Federal Income Tax Rate Brackets Proposed Surcharge on High-Income Individuals, Estates and Trusts The draft Build Back Better Act released on November 3, 2021 would impose a 5% surcharge on modified adjusted gross income that exceeds $5 million for married individuals filing separately, $200,000 for estates and trusts and $10 million for all other individuals. An additional 3% surcharge would be imposed on modified adjusted gross income in excess of $12.5 million for married individuals filing separately, $500,000 for estates and trusts and $25 million for all other individuals. The proposal would be effective for taxable years beginning after December 31, 2021 (i.e., beginning in 2022). While keeping the proposed surcharges in mind, taxpayers should consider whether they can minimize their tax bills by shifting income or deductions between 2021 and 2022. Ideally, income should be received in the year with the lower marginal tax rate, and deductible expenses should be paid in the year with the higher marginal tax rate. If the marginal tax rate is the same in both years, deferring income from 2021 to 2022 will produce a one-year tax deferral and accelerating deductions from 2022 to 2021 will lower the 2021 income tax liability. Actions to consider that may result in a reduction or deferral of taxes include:  Delaying closing capital gain transactions until after year end or structuring 2021 transactions as installment sales so that gain is deferred past 2021 (also see Long Term Capital Gains, below).  Considering whether to trigger capital losses before the end of 2021 to offset 2021 capital gains.  Delaying interest or dividend payments from closely held corporations to individual business-owner taxpayers.  Deferring commission income by closing sales in early 2022 instead of late 2021.  Accelerating deductions for expenses such as mortgage interest and charitable donations (including donations of appreciated property) into 2021 (subject to AGI limitations).  Evaluating whether non-business bad debts are worthless by the end of 2021 and should be recognized as a short-term capital loss.  Shifting investments to municipal bonds or investments that do not pay dividends to reduce taxable income in future years. On the other hand, taxpayers that will be in a higher tax bracket in 2022 or that would be subject to the proposed 2022 surcharges may want to consider potential ways to move taxable income from 2022 into 2021, such that the taxable income is taxed at a lower tax rate. Current year actions to consider that could reduce 2022 taxes include: Accelerating capital gains into 2021 or deferring capital losses until 2022.  Electing out of the installment sale method for 2021 installment sales.  Deferring deductions such as large charitable contributions to 2022. Long-Term Capital Gains The long-term capital gains rates for 2021 and 2022 are shown below. The tax brackets refer to the taxpayer’s taxable income. Capital gains also may be subject to the 3.8% Net Investment Income Tax. 2021 Long-Term Capital Gains Rate Brackets 2022 Long-Term Capital Gains Rate Brackets Long-term capital gains (and qualified dividends) are subject to a lower tax rate than other types of income. Investors should consider the following when planning for capital gains: Holding capital assets for more than a year (more than three years for assets attributable to carried interests) so that the gain upon disposition qualifies for the lower long-term capital gains rate. Considering long-term deferral strategies for capital gains such as reinvesting capital gains into designated qualified opportunity zones. Investing in, and holding, “qualified small business stock” for at least five years. (Note that the November 3 draft of the Build Back Better Act would limit the 100% and 75% exclusion available for the sale of qualified small business stock for dispositions after September 13, 2021.) Donating appreciated property to a qualified charity to avoid long term capital gains tax (also see Charitable Contributions, below). Net Investment Income Tax An additional 3.8% net investment income tax (NIIT) applies on net investment income above certain thresholds. For 2021, net investment income does not apply to income derived in the ordinary course of a trade or business in which the taxpayer materially participates. Similarly, gain on the disposition of trade or business assets attributable to an activity in which the taxpayer materially participates is not subject to the NIIT. The November 3 version of the Build Back Better Act would broaden the application of the NIIT. Under the proposed legislation, the NIIT would apply to all income earned by high income taxpayers unless such income is otherwise subject to self-employment or payroll tax. For example, high income pass-through entity owners would be subject to the NIIT on their distributive share income and gain that is not subject to self-employment tax. In conjunction with other tax planning strategies that are being implemented to reduce income tax or capital gains tax, impacted taxpayers may want to consider the following tax planning to minimize their NIIT liabilities: Deferring net investment income for the year. Accelerating into 2021 income from pass-through entities that would be subject to the expanded definition of net investment income under the proposed tax legislation. Social Security Tax The Old-Age, Survivors, and Disability Insurance (OASDI) program is funded by contributions from employees and employers through FICA tax. The FICA tax rate for both employees and employers is 6.2% of the employee’s gross pay, but only on wages up to $142,800 for 2021 and $147,000 for 2022. Self-employed persons pay a similar tax, called SECA (or self-employment tax), based on 12.4% of the net income of their businesses. Employers, employees, and self-employed persons also pay a tax for Medicare/Medicaid hospitalization insurance (HI), which is part of the FICA tax, but is not capped by the OASDI wage base. The HI payroll tax is 2.9%, which applies to earned income only. Self-employed persons pay the full amount, while employers and employees each pay 1.45%. An extra 0.9% Medicare (HI) payroll tax must be paid by individual taxpayers on earned income that is above certain adjusted gross income (AGI) thresholds, i.e., $200,000 for individuals, $250,000 for married couples filing jointly and $125,000 for married couples filing separately. However, employers do not pay this extra tax. Long-Term Care Insurance and Services Premiums an individual pays on a qualified long-term care insurance policy are deductible as a medical expense. The maximum deduction amount is determined by an individual’s age. The following table sets forth the deductible limits for 2021 and 2022 (the limitations are per person, not per return): Retirement Plan Contributions Individuals may want to maximize their annual contributions to qualified retirement plans and Individual Retirement Accounts (IRAs) while keeping in mind the current proposed tax legislation that would limit contributions and conversions and require minimum distributions beginning in 2029 for large retirement funds without regard to the taxpayer’s age. The maximum amount of elective contributions that an employee can make in 2021 to a 401(k) or 403(b) plan is $19,500 ($26,000 if age 50 or over and the plan allows “catch up” contributions). For 2022, these limits are $20,500 and $27,000, respectively. The SECURE Act permits a penalty-free withdrawal of up to $5,000 from traditional IRAs and qualified retirement plans for qualifying expenses related to the birth or adoption of a child after December 31, 2019. The $5,000 distribution limit is per individual, so a married couple could each receive $5,000. Under the SECURE Act, individuals are now able to contribute to their traditional IRAs in or after the year in which they turn 70½. The SECURE Act changes the age for required minimum distributions (RMDs) from tax-qualified retirement plans and IRAs from age 70½ to age 72 for individuals born on or after July 1, 1949. Generally, the first RMD for such individuals is due by April 1 of the year after the year in which they turn 72. Individuals age 70½ or older can donate up to $100,000 to a qualified charity directly from a taxable IRA. The SECURE Act generally requires that designated beneficiaries of persons who die after December 31, 2019, take inherited plan benefits over a 10-year period. Eligible designated beneficiaries (i.e., surviving spouses, minor children of the plan participant, disabled and chronically ill beneficiaries and beneficiaries who are less than 10 years younger than the plan participant) are not limited to the 10-year payout rule. Special rules apply to certain trusts. Small businesses can contribute the lesser of (i) 25% of employees’ salaries or (ii) an annual maximum set by the IRS each year to a Simplified Employee Pension (SEP) plan by the extended due date of the employer’s federal income tax return for the year that the contribution is made. The maximum SEP contribution for 2021 is $58,000. The maximum SEP contribution for 2022 is $61,000. The calculation of the 25% limit for self-employed individuals is based on net self-employment income, which is calculated after the reduction in income from the SEP contribution (as well as for other things, such as self-employment taxes). 2021 could be the final opportunity to convert non-Roth after-tax savings in qualified plans and IRAs to Roth accounts if legislation passes in its current form. Proposed legislation would prohibit all taxpayers from funding Roth IRAs or designated Roth accounts with after-tax contributions starting in 2022, and high-income taxpayers from converting retirement accounts attributable to pre-tax or deductible contributions to Roths starting in 2032. Proposed legislation would require wealthy savers of all ages to substantially draw down retirement balances that exceed $10 million after December 31, 2028, with potential income tax payments on the distributions. As account balances approach the mandatory distribution level, extra consideration should be given before making an annual contribution. Foreign Earned Income Exclusion The foreign earned income exclusion is $108,700 in 2021, to be increased to $112,000 in 2022. Alternative Minimum Tax A taxpayer must pay either the regular income tax or the alternative minimum tax (AMT), whichever is higher. The established AMT exemption amounts for 2021 are $73,600 for unmarried individuals and individuals claiming head of household status, $114,600 for married individuals filing jointly and surviving spouses, $57,300 for married individuals filing separately and $25,700 for estates and trusts. For 2022, those amounts are $75,900 for unmarried individuals and individuals claiming the head of household status, $118,100 for married individuals filing jointly and surviving spouses, $59,050 for married individuals filing separately and $26,500 for estates and trusts. Kiddie Tax The unearned income of a child is taxed at the parents’ tax rates if those rates are higher than the child’s tax rate. Limitation on Deductions of State and Local Taxes (SALT Limitation) For individual taxpayers who itemize their deductions, the Tax Cuts and Jobs Act (TCJA) introduced a $10,000 limit on deductions of state and local taxes paid during the year ($5,000 for married individuals filing separately). The limitation applies to taxable years beginning on or after December 31, 2017 and before January 1, 2026. Various states have enacted new rules that allow owners of pass-through entities to avoid the SALT deduction limitation in certain cases. The November 3 draft of the Build Back Better Act would extend the TCJA SALT deduction limitation through 2031 and increase the deduction limitation amount to $72,500 ($32,250 for estates, trusts and married individuals filing separately). An amendment currently on the table proposes increasing the deduction limitation amount to $80,000 ($40,000 for estates, trusts and married individuals filing separately). The proposal would be effective for taxable years beginning after December 31, 2020, therefore applying to the 2021 calendar year. Charitable Contributions The Taxpayer Certainty and Disaster Relief Act of 2020 extended the temporary suspension of the AGI limitation on certain qualifying cash contributions to publicly supported charities under the CARES Act. As a result, individual taxpayers are permitted to take a charitable contribution deduction for qualifying cash contributions made in 2021 to the extent such contributions do not exceed the taxpayer’s AGI. Any excess carries forward as a charitable contribution that is usable in the succeeding five years. Contributions to non-operating private foundations or donor-advised funds are not eligible for the 100% AGI limitation. The limitations for cash contributions continue to be 30% of AGI for non-operating private foundations and 60% of AGI for donor advised funds. The temporary suspension of the AGI limitation on qualifying cash contributions will no longer apply to contributions made in 2022. Contributions made in 2022 will be subject to a 60% AGI limitation. Tax planning around charitable contributions may include: Maximizing 2021 cash charitable contributions to qualified charities to take advantage of the 100% AGI limitation. Deferring large charitable contributions to 2022 if the taxpayer would be subject to the proposed individual surcharge tax. Creating and funding a private foundation, donor advised fund or charitable remainder trust. Donating appreciated property to a qualified charity to avoid long term capital gains tax. Estate and Gift Taxes The November 3 draft of the Build Back Better Act does not include any changes to the estate and gift tax rules. For gifts made in 2021, the gift tax annual exclusion is $15,000 and for 2022 is $16,000. For 2021, the unified estate and gift tax exemption and generation-skipping transfer tax exemption is $11,700,000 per person. For 2022, the exemption is $12,060,000. All outright gifts to a spouse who is a U.S. citizen are free of federal gift tax. However, for 2021 and 2022, only the first $159,000 and $164,000, respectively, of gifts to a non-U.S. citizen spouse are excluded from the total amount of taxable gifts for the year. Tax planning strategies may include: Making annual exclusion gifts. Making larger gifts to the next generation, either outright or in trust. Creating a Spousal Lifetime Access Trust (SLAT) or a Grantor Retained Annuity Trust (GRAT) or selling assets to an Intentionally Defective Grantor Trust (IDGT). Net Operating Losses The CARES Act permitted individuals with net operating losses generated in taxable years beginning after December 31, 2017, and before January 1, 2021, to carry those losses back five taxable years. The unused portion of such losses was eligible to be carried forward indefinitely and without limitation. Net operating losses generated beginning in 2021 are subject to the TCJA rules that limit carryforwards to 80% of taxable income and do not permit losses to be carried back. Excess Business Loss Limitation A non-corporate taxpayer may deduct net business losses of up to $262,000 ($524,000 for joint filers) in 2021. The limitation is $270,000 ($540,000 for joint filers) for 2022. The November 3 draft of the Build Back Better Act would make permanent the excess business loss provisions originally set to expire December 31, 2025. The proposed legislation would limit excess business losses to $500,000 for joint fliers ($250,000 for all other taxpayers) and treat any excess as a deduction attributable to a taxpayer’s trades or businesses when computing excess business loss in the subsequent year. [...] Read more...
November 12, 2021Harris CPAs has announced a merger with Deagle Ames, LLC and Ataraxis Accounting and Advisory, Chtd of Twin Falls, Idaho effective October 16, 2021. The mergers add a total of 22 professionals to the Harris CPAs team, and a new office location in Twin Falls. Deagle Ames, LLC offers tax planning and preparation, advisory and accounting services and has worked side by side with their business owners to help them stay competitive and profitable for nearly 65 years from two office in Twin Falls and Buhl. “This merger provided a unique opportunity for us to expand our service offerings to our clients. Their core values strongly mirror our own and we are excited to be a part of their continuous growth,” said Pam McClain, managing partner of Deagle Ames. Pam and her team of 12 other professionals remain in their current office locations in Twin Falls on 5th Ave S and in Buhl on Main St. Ataraxis Accounting and Advisory Services, Chtd is located in Twin Falls and provides tax planning and preparation, advisory and accounting services. They have an established reputation for quality service and deep client relationships in the area. “We are enthusiastic to continue the high level of service we have provided our clients for nearly 50 years,” said Lisa Donnelley, Managing Partner at Ataraxis. “Joining the team at Harris CPAs will allow us to take advantage of their advanced technology in service delivery and provide our clients additional technical resources.” Lisa and her team of 7 other professionals have relocated to the new Harris location at 161 5th Ave S, Suite 200 in the historic downtown Twin Falls. Harris CPAs has been a leading provider of assurance, tax, accounting, and advisory services in Idaho since 1996 with additional offices in Meridian, Boise and Coeur d’Alene. They serve clients throughout the United States and in all stages of the business cycle. The merger also provides Harris CPAs with a new competitive advantage in the agriculture industry. A ribbon cutting with the Twin Falls Chamber of Commerce will take place on December 2, 2021 at 161 5th Ave S, Suite 200, Twin Falls, ID 83301, followed by a welcoming reception. For more information, please contact Tara Davis, Marketing Manager for Harris CPAs at (208) 333-8965 or taradavis@harriscpas.com. [...] Read more...
September 13, 2021When workers change jobs and relocate, plan sponsors face several challenges, including locating former employees who have left funds in a qualified retirement plan and failed to keep their contact information current. The scope of the missing participants problem is enormous: A 2018 survey found that one out of every five job changes results in a missing participant. Now that the COVID-19 pandemic has resulted in economic and physical dislocation of millions of employees, the issue has taken on even greater urgency: Some 5% of U.S. adults relocated due to the financial pressures of the pandemic, according to a poll by the Pew Research Center. In early 2021, the Department of Labor (DOL) issued a three-part package of sub-regulatory guidance related to missing participants that addresses the fiduciary responsibilities of plan sponsors related to these plan participants and beneficiaries. DOL’s Recommended Best Practices for Missing Participants The DOL’s “Missing Participants — Best Practices for Pension Plans” describes a range of steps that retirement plan fiduciaries should consider to locate missing or nonresponsive participants. Plan fiduciaries should determine which practices will be most effective for the plan’s specific population. Some examples of the DOL’s recommended best practices include: Maintain accurate information by periodically contacting participants and their beneficiaries to confirm or update their information (i.e. home and business addresses, phone numbers, social media handles, and next of kin/emergency contact information) Implement effective communication strategies, including using plain language in all communications and building steps into plan onboarding, enrollment, and exit processes to confirm or update contact information Search for missing participants by performing the following: Checking related plan and employer records for contact information  Attempt to contact them via email addresses, phone numbers, and social media Use free online search engines, public record databases (such as those for licenses, mortgages and real estate taxes), obituaries, social media engines, certified mail, and/or a commercial locator services to locate individuals Document all procedures, communications, and actions taken to implement policies. For plans using third-party recordkeepers to maintain plan records and handle participant communications, ensure that the recordkeeper is performing agreed-upon services and work with them to identify and correct shortcomings in the plan’s recordkeeping and communication practices. Outlining EBSA’s Investigative Approach The Compliance Assistance Release 2021-01 outlines the general investigative approach that will guide the Employee Benefits Security Administration (EBSA) under the Terminated Vested Participants Project audits. It is also intended to facilitate voluntary compliance efforts on the part of plan fiduciaries. In opening an investigation, EBSA seeks to determine the scope of any potential problems a plan may have with recordkeeping or administration of benefits for terminated vested participants and beneficiaries. Potential red flags that an EBSA investigator would look for are the following: Systemic errors in plan recordkeeping and administration, which may include missing and incomplete data, such as names, dates of birth, and social security numbers Inadequate procedures to identify and locate missing participants and beneficiaries Inadequate procedures to contact terminated vested participants (TVPs) nearing normal retirement age to inform them of their right to commence payment of their benefits Inadequate procedures for contacting TVPs and the beneficiaries of deceased TVPs who are not in pay status at or near the date that they must begin taking required minimum distributions (RMDs) Inadequate procedures for addressing uncashed distribution checks Making Use of the PBGC Missing Participant Program Additionally, the Field Assistance Bulletin (FAB) 2021-01 announced a temporary enforcement policy applicable to terminating defined contribution plans. The DOL will not pursue Plan fiduciaries of such plans that use the PBGC Missing Participants Program as long as they satisfy certain conditions to qualify for the safe harbor by conducting a “diligent search.” Following the transfer of the assets, the PBGC will include participants’ information in a searchable database and take certain steps to locate the participants. The guidance describes which participant accounts may be transferred to the PBGC and the rules for participant notices. The PBGC cites multiple benefits of the program, including: Benefits of any size can be transferred to the PBGC Periodic active searches by the PBGC increase the likelihood of connecting missing participants with their benefits Benefits aren’t diminished by ongoing maintenance fees or distribution charges Transferred amounts grow with interest Lifetime income options are available for balance transfers over $5,000 Insight: Meeting your fiduciary obligations with respect to missing participants While the DOL’s latest guidance on missing participants doesn’t have the force and effect of the law, plan sponsors should carefully review this guidance and adjust their processes and procedures as necessary ahead of any potential missing participant investigations. Your representative is available to review your plan, address any red flags, and implement best practices in managing the challenges caused by missing participants. [...] Read more...
September 13, 2021One of the provisions of the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) was to introduce the Paycheck Protection Program. This allowed small business to obtain crucial funding and keep their staff employed through the pandemic. Now that the dust has settled on the three rounds of PPP loan funding, it important to consider the tax implications of these loans and the forgiveness thereof. First off, if the loan was not forgiven (the business for whatever reason did not qualify for forgiveness), the loan is treated the same as any other debt. The principle will be required to be paid back and the interest will be deductible as a business expense. If the business does qualify for forgiveness, the amount forgiven will be treated as tax-exempt income. This created some initial confusion as expenses incurred to generate tax-exempt income are generally not deductible (thus making the forgiveness essentially taxable in a roundabout way). As this was not the intent of congress, the CARES Act was amended by the Tax Relief Act of 2020 to allow for these expenses to be fully deductible. This was a win-win for taxpayers as it allowed for the exclusion from income of the forgiveness while still being able to deduct the payroll, rent, utilities, and other qualifying expenses used to obtain the forgiveness. If you or your business has taken advantage of the tax-favorable provision and have questions or need assistance applying for forgiveness, please reach out to one of our advisors. We are always happy to help! By: Matt Goodfellow, CPA- Harris [...] Read more...
April 13, 2021Efforts to keep up with the myriad of challenges that retirement plan sponsors faced in 2020 may have caused some to overlook significant changes related to hardship distributions that were enacted before the onset of the COVID-19 pandemic. These changes are designed to make it easier for participants to access funds from their 401(k) plans if they are experiencing significant financial hardship, and several changes apply to 403(b) plans as well. Some of these provisions were optional from 2018 to 2019 but became mandatory in 2020 for plan sponsors that chose to allow hardship distributions. Now is the time for plan sponsors to examine whether they are complying with these changes in how they administer their plans and whether their plan documents accurately reflect these changes. Background on Hardship Distribution Rule Changes Plans are allowed—but not required—to offer taxable, in-service hardship distributions to participants who demonstrate an “immediate and heavy financial need” that could be satisfied only by taking money from their retirement accounts. In the past, that need was determined by facts and circumstances and certain safe harbors built into the law. Over the past several years, legislation (e.g., the Tax Cuts and Jobs Act of 2017 and the Bipartisan Budget Act of 2018) and Internal Revenue Service (IRS) regulations have introduced changes to make it easier for participants to withdraw funds from their accounts via hardship distributions. Significant Hardship Distribution Provisions Now in Effect The most significant changes related to hardship distributions that are now in effect include: Elimination of six-month suspension on contributions (mandatory): Previously, plan sponsors were required to suspend participant contributions for six months after the participant took a hardship distribution. Some plan sponsors viewed this suspension as a way to help participants seriously consider the consequences of taking a distribution on their retirement savings, and not view their 401(k) as an ATM. For hardship distributions made on or after January 1, 2020, plan sponsors cannot impose the six-month suspension and must allow participants to immediately contribute to their retirement accounts. This change was optional in 2019 but became mandatory in 2020. Expanded safe harbors (mandatory): To determine whether participants qualify for hardship distributions, plans can use the hardship safe harbor test and/or the hardship facts and circumstances without regard to any safe harbors. Many plans include both options for maximum flexibility. Previously, there were six safe harbors that plan sponsors could use to determine whether participants qualify for hardship distributions; these safe harbors were available if the participant needed funds to pay for medical expenses, home purchases, college tuition, funeral expenses and home casualty repairs, as well as to prevent eviction or foreclosure. The new rules add a seventh safe harbor to this list: disaster-related expenses of participants who live in a federally declared disaster area. Plan sponsors had the option of including this as a safe harbor in 2019, but its inclusion became mandatory in 2020. Three-part test replaces some facts-and-circumstances determinations (mandatory): Previously, plan sponsors had to evaluate certain facts and circumstances to determine whether a participant qualified for a hardship distribution. For hardship distributions made on or after January 1, 2020, the new rules allow employees to self-certify that: 1) distributions do not exceed the amount the employee needs; 2) participants exhausted other resources, including deferred compensation; and 3) participants do not have reasonably available assets to take care of their needs. Elimination of loan requirement (optional): Previously, participants had to have taken the maximum allowed loans from their plans before being allowed to permanently withdraw funds via a hardship distribution. Now plan sponsors can—but are not required to—allow participants to take a hardship distribution without first having to take a loan. Expanded sources of funds for hardship distributions (optional): Plan sponsors now can—but are not required to—allow hardship distributions to be made from Qualified Non-Elective Employer Contributions (QNECs), Qualified Matching Contributions (QMACs), and traditional and Qualified Automatic Contribution Arrangement (QACA) safe harbor contributions and earnings. Our Insight: Ensure Operational and Plan Document Alignment Before December 31, 2021 Deadline Plan sponsors need to be aware that some of the changes discussed above were optional in 2018 and 2019 but became mandatory in 2020, while others remain optional. This creates a confusing situation for plan sponsors as they work to comply with these changes—especially amid all of the other changes related to the pandemic. Regardless, plan sponsors need to understand the hardship distribution-related changes and comply with them, both in terms of how they operate their plans and how they are reflected in the plan document. Plan sponsors have until December 31, 2021 to amend their documents to reflect these changes. In addition, it is important to notify participants about these changes. Plan sponsors, even those that use preapproved plans, should meet with their service providers and advisors to review the current plan operations and plan document to identify any areas that are not aligned with the new rules. Lastly, while it is better to bring the plan in compliance as soon as possible, the IRS also has its Employee Plans Compliance Resolution System to fix errors found in retirement plans. [...] Read more...
March 18, 2021The American Rescue Plan Act of 2021 (ARPA), signed into law by President Biden on March 11, 2021, provides additional major relief to individuals and businesses that continue to be impacted by the COVID-19 pandemic. The ARPA includes the following provisions related to individual taxpayers:​ Additional recovery rebate credit Unemployment compensation received in 2020 partially excluded from gross income Child tax credit expanded for 2021 Child and dependent care credit enhanced and refundable Student loan discharges excluded from gross income Additional Recovery/Rebate Credit Two rounds of economic impact payments have already been sent to individual taxpayers. The Coronavirus Aid, Relief, and Economic Security Act (CARES Act) enacted on March 27, 2020 granted eligible individuals a recovery rebate credit of $1,200 for single filers and $2,400 for joint filers (plus $500 per qualifying child). The rebate amount was advanced based on 2018 or 2019 income, but the credit is determined based on 2020 income. The Covid-Related Tax Relief Act of 2020 (CRTRA), enacted as part of the Consolidated Appropriations Act on December 27, 2020, granted eligible individuals a second refundable tax credit against their 2020 taxable income equal to $600 for single filers and $1,200 for joint filers (plus $600 per qualifying child). The CRTRA rebate amount is determined based on 2020 income, but the credit was advanced to taxpayers based on their 2019 income tax return. The ARPA grants eligible individuals a third refundable tax credit equal to $1,400 for single filers and $2,800 for joint filers, plus $1,400 for each dependent of the taxpayer. The credit is for the 2021 tax year; however, the rebate amount is advanced based on 2019 income, or 2020 income if the 2020 tax return has been filed. Similar to the CARES Act and CRTRA, the ARPA credit begins to phase out when the single filer’s adjusted gross income (AGI) exceeds $75,000 ($150,000 for joint filers and $112,500 for head of household filers). The credit completely phases out when a single filer’s AGI exceeds $80,000 ($160,000 for joint filers and $120,000 for head of household filers). Individuals eligible for the third economic impact payment do not include nonresident aliens, individuals who may be claimed as a dependent on another person’s return, estates or trusts. Children who are or can be claimed as dependents by their parents are not eligible individuals, even if the parent chooses not to claim the child as a dependent. A dependent of the taxpayer includes a qualifying child and a qualifying relative. A qualifying child includes a child, stepchild, eligible foster child, brother, sister, stepbrother or stepsister, or a descendent of any of them (i) who is under age 19 or a student under age 24 at the end of the year, (ii) who has not provided more than half of their own support, (iii) who has lived with the taxpayer for more than half of the year and (iv) who has not filed a joint return (other than only for a refund claim) with the individual’s spouse. For a qualifying child who is permanently and totally disabled at any time during the tax year, all of the foregoing requirements apply except for age—age is irrelevant. A qualifying relative includes a child, stepchild, eligible foster child, brother, sister, stepbrother or stepsister, father or mother, grandparent, stepfather or stepmother, or an individual with the same place of abode as taxpayer (i) whose gross income is less than $4,300 (excluding social security benefits), (ii) who has not provided more than half of their own support, and (iii) who is not a qualifying child. For a qualifying relative who is permanently and totally disabled at any time during the tax year, gross income does not include income for services performed at a school that provides special instruction or training designed to alleviate the disability of the individual and that is operated as a non-profit organization. The availability of medical care at the school must be the principal reason for the individual’s presence there, and the income must arise solely from activities at the school that are incidental to the medical care. The ARPA provides that no advance refund amount will be made if the taxpayer was deceased before January 1, 2021, nor will any amount be determined for a qualifying dependent of a taxpayer if the taxpayer (both taxpayers on a joint return) was deceased before January 1, 2021. Further, in the case of a joint return where only one spouse has a valid Social Security number (SSN), that spouse is eligible to receive the $1,400 rebate if he or she meets all other requirements of joint filers (i.e., AGI limitations). However, for military service members, both spouses are eligible for the economic income payment if at least one spouse was a member of the U.S. armed forces at any time during the tax year and at least one spouse’s SSN in included on the joint return. If a dependent is considered when calculating the credit, the dependent must have a valid SSN. Individuals who did not file a tax return in 2019 or 2020 may still receive an automatic advance based on the individual’s status as a beneficiary of social security, railroad retirement benefits or VA (Veteran’s Administration) benefits. Individuals who otherwise are not required to file and are not receiving social security benefits are still eligible for the rebate but will be required to file a tax return to claim the benefit. Unemployment Income For tax year 2020, if a taxpayer’s adjusted gross income is less than $150,000, the taxpayer may exclude up to $10,200 of unemployment compensation from gross income. There is no phaseout, and the $150,000 limit applies to single filers, joint filers and head of household filers. In the case of joint filers, the $10,200 exclusion amount applies separately to each filer. If the taxpayer has filed his or her 2020 tax return, the he or she will need to file an amended return to receive the tax benefit. The act also extends the federal unemployment compensation benefits in the amount of $300 per week through September 6, 2021. Child Tax Credit The ARPA expands the child tax credit amounts and eligibility requirements for tax year 2021. The credit is increased from $2,000 to $3,000 per qualifying child ($3,600 for children under age 6). The definition of a qualifying child is expanded to include a child who has not turned 18 by the end of 2021. The credit is fully refundable for a taxpayer with a principal place of abode in the U.S. for more than one-half the tax year, or for a taxpayer who is a bona fide resident of Puerto Rico for the tax year. The additional $1,000 credit amount per qualifying child ($1,600 per qualifying child under age 6) begins to phase out at a rate of $50 for each $1,000 when a single filer’s modified adjusted gross income (MAGI) exceeds $75,000 ($150,000 for joint filers and $112,500 for head of household filers). A single filer with one qualifying child over age 6 will phase out of the increased credit amount if the taxpayer’s MAGI exceeds $95,000. Similarly situated joint filers will phase out of the increased credit amount if their MAGI exceeds $170,000. After application of the phase-out rules for the temporarily increased credit amount, the remaining $2,000 of credit is subject to the phaseout rules under existing law ($400,000 for joint filers and $200,000 for all other filers). A single filer with one qualifying child will phase out of the remaining credit if his or her MAGI exceeds $240,000, while joint filers with one qualifying child will phase out of the remaining credit if their MAGI exceeds $440,000. The ARPA directs the IRS to establish a program in which monthly advance payments equal to 1/12th of the estimated 2021 Child Tax Credit amount will be paid to the taxpayer during the period July 2021 through December 2021. The remaining 50% of the annual estimated amount will be claimed on the 2021 tax return. Initially, the advanced amount will be determined based on a taxpayer’s 2019 or 2020 tax filing. However, upon receipt of a more recent tax filing or other taxpayer-provided eligibility information, the IRS may modify the advance amount. The IRS announced on March 12, 2021 that it is reviewing implementation plans for the ARPA and that it will be issuing guidance on relevant provisions. Child and Dependent Care Credit The child and dependent care credit also is expanded for tax year 2021. The limitation for employment-related expenses considered in determining the credit is increased from $3,000 to $8,000 for one qualifying individual and from $6,000 to $16,000 for two or more qualifying individuals. Further, the applicable percentage of employment-related expenses that are allowed as a credit against tax is increased from 35% to 50%. As a result, for taxpayers with one qualifying individual, the maximum credit is increased from $1,050 to $4,000. For taxpayers with two or more qualifying individuals, the maximum credit is increased from $2,100 to $8,000. The credit begins to phase out when the taxpayer’s AGI exceeds $125,000. The applicable percentage is reduced by 1 percentage point for each $2,000 (or fraction thereof) by which the taxpayer’s AGI exceeds $125,000. However, the applicable percentage is not reduced below 20% except for taxpayers with AGI in excess of $400,000. Consequently, the applicable percentage is 50% for taxpayers with AGI of $125,000 or less, 20% for taxpayers with AGI greater than $185,000 but not greater than $400,000, and phases out completely for taxpayers with AGI greater than $440,000. The credit is refundable for taxpayers that have a principal place of abode in the U.S. for more than one-half of the tax year. Student Loan Discharges For tax years 2021 through 2025, partial or full discharge of an eligible student loan may be excluded from gross income. The types of eligible student loans include (1) loans for post-secondary educational if made, insured or guaranteed by a federal, state or local government; (2) certain private education loans; and (3) original or refinanced loans made by an educational institution, charitable contributions to which would be limited to 50% of an individual taxpayer’s AGI if the loan is made with federal, state or local government or with certain private education lenders pursuant to a program designed to encourage students to serve in occupations, or areas, with unmet needs under the supervision of a tax-exempt governmental unit or organization described in Internal Revenue Code section 501(c)(3). If the discharge of a loan made by an educational organization or a private education lender is in exchange for services performed for that organization or private lender, these rules do not exclude the discharge of the loan from gross income. [...] Read more...
March 16, 2021  The Coronavirus Aid, Relief and Economic Security (CARES) Act was a rapid response by the federal government to help businesses and employees cope with the economic issues caused by the pandemic. Many aspects of the wide-range law make significant changes affecting employer-sponsored retirement plans and their participants. Since Congress passed the CARES Act in March 2020, we have received numerous questions from plan sponsors about the law’s impact on plans and participants. Below is a list of some of the most common questions plan sponsors face, along with our brief answers. 1. Did COVID-19 furloughs create partial plan terminations? If an employer furloughed a significant portion of its workforce because of COVID-19 or the resulting economic downturn, it is possible that those furloughs triggered a partial plan termination. A partial plan termination happens generally when 20% or more of participants terminate employment without full vesting during a particular year. Partial terminations can occur in connection with a significant corporate event such as a plant closing, or as a result of general employee turnover due to adverse economic conditions or other reasons that are not within the employer’s control. A furlough is an involuntary, unpaid temporary leave, but the individual is still considered an employee.  A furloughed employee would generally not be considered in the calculation for a partial plan termination as long as the employee returns to work within the plan year.  Determining whether a partial plan termination occurred requires plan sponsors to calculate the turnover rate as well as take a careful look at the facts and circumstances surrounding the action(s). There is no one perfect formula that fits all situations. Plan sponsors now have until March 31, 2021 to return the size of their workforces to a level that would avoid a partial plan termination. 2. If yes, do plans sponsors have to vest everyone or just the furloughed workers? When a partial plan termination does occur, affected employees (i.e., those who have been terminated) automatically become 100% vested in all employer contributions, including matching contributions. Please visit our plan termination article for more information. 3. When do plan sponsors apply the partial termination rules? The applicable period depends upon the plan’s circumstances, but it usually takes place during a specific plan year; the timeframe may be extended to more than one plan year if there are multiple, related severance events. See the Internal Revenue Service’s (IRS) issue snapshot on partial plan terminations. 4. Are sick leave and family leave payments that are mandated by the Families First Coronavirus Response Act (FFCRA) treated as plan compensation? Probably yes, since FFCRA paid time off would be included in Box 1 of Form W-2 and many retirement plans define “compensation” as including Box 1, W-2 compensation. But plan sponsors will need to look at how their plan defines “compensation.” If paid time off is excluded, then FFCRA paid time off would likewise be excluded (but such exclusion seems to be rare). 5. Why are auditors asking plan sponsors to document their Going Concern positions in a memo? Many plan sponsors are unsure of their ability to fund Employer contributions to their plans and have made changes to plans as a result of the pandemic. As outlined in FASB ASU 2014-15, the responsibility for performing the annual going-concern assessment is placed on management.  It is critical for management to prepare this analysis for their financial statements, including a memo on their considerations. The memo helps auditors evaluate whether there is substantial doubt about the plan’s ability to continue as a going concern. This formerly was the auditor’s responsibility, but in the past five years, this has shifted and is now a standard duty of the plan sponsor. 6. What are the most commonly adopted provisions from the CARES Act? According to research from Plan Sponsor Council of America, 46% of surveyed plans have elected to allow repayment of coronavirus-related distributions during the next three years, followed closely by 45% allowing some distributions until December 31, 2020. Only 9% of those surveyed adopted or plan to adopt no provisions. 7. What is the difference between “temporary impairment” and “other than temporary impairment”? These are accounting principles used to describe the nature of the decrease in an asset’s value, which is a standard topic that needs explanation in the plan’s audit. “Temporary impairment” refers to normal market fluctuations in a specific investment; “other than temporary impairment” refers to a permanent decline in the investment with little to no chance of recovery. Given the extraordinary nature of the COVID-19 pandemic and its varying economic impact across industries and businesses, it is important to work with auditors to determine the correct classification of losses. 8. How can plan sponsors change the timing and frequency of the employer matching contribution from each pay cycle to a year-end contribution? There are IRS and plan document limitations related to changes in certain types of Employer contributions, such as Safe Harbor contributions. However, generally a sponsor can more easily change the timing of the deposit of those contributions into the plan, rather than change the formula and eligibility provisions of the Employer contribution. When cashflow is tight, consider funding the contribution on an annual, quarterly, monthly, or per payroll period basis to fit your needs. Employers generally have until the extended due date of their federal income tax return for that tax year to deposit Employer contributions into the retirement plan. Plan sponsors should check their plan documents (and summary plan description) to see if an amendment is needed to change the timing of when Employer contributions are made to the plan. 9. Do plan sponsors have to implement the CARES Act provisions for the new distribution and loan options? The CARES Act expanded current rules on coronavirus-related distributions and loans, increasing the amount affected participants can pull from their accounts as well as the time they can take to repay the money, if applicable to the transaction. It’s important for plan sponsors to understand that the distribution and loan provisions are optional, as outlined in IRS Notice 2020-50. Plan sponsors should be aware that they may choose amongst the provisions and adopt the ones that they feel their participants would benefit from the most. 10. If plan sponsors implement a change to their plan allowed by the CARES Act, when should the plan document be amended to reflect the change? Plan sponsors are permitted to make the CARES Act options available immediately even before a written amendment is made to the plan document.  The deadline to formally adopt the amendments has been extended to December 31, 2022 (for calendar years) or the end of the plan year starting in 2022 (for non-calendar years).    11. Can plan sponsors stop making employer contributions? In general, plans can reduce or eliminate discretionary non-elective and discretionary matching contributions without needing to amend plan documents, but plan sponsors need to examine plan documents to make this decision. Note that plans operating as Safe Harbor plans face a different set of requirements. See the section, “Can plans reduce or eliminate matching contributions?” in this BDO article to learn more about these requirements and other options plan sponsors have for conserving cash during the pandemic. 12. Can participants still take a Required Minimum Distribution (RMD) even though RMDs were waived for 2020? Yes, but only if the plan allows withdrawals. The CARES Act allows participants to waive the RMD for 2020, but the law does not prohibit participants from taking a withdrawal. First, check the plan document to see whether withdrawals are allowed; then, see whether the plan has relaxed withdrawal rules as a result of the CARES Act to determine maximum amounts. [...] Read more...
March 5, 2021  The Consolidated Appropriations Act of 2021 (Act), signed into law on December 27, 2020, contains significant enhancements and improvements to the Employee Retention Credit (ERC).  The ERC, which was created by the CARES Act on March 27, 2020, is designed to encourage employers (including tax-exempt entities) to keep employees on their payroll and continue providing health benefits during the coronavirus pandemic. The ERC is a refundable payroll tax credit for wages paid and health coverage provided by an employer whose operations were either fully or partially suspended due to a COVID-19-related governmental order or that experienced a significant reduction in gross receipts.   Employers may use ERCs to offset federal payroll tax deposits, including the employee FICA and income tax withholding components of the employer’s federal payroll tax deposits. ERC for 2020 The Act makes the following retroactive changes to the ERC, which apply during the period March 13, 2020 through December 31, 2020: Employers that received PPP loans may qualify for the ERC with respect to wages that are not paid with proceeds from a forgiven PPP loan.   The Act clarifies how tax-exempt organizations determine “gross receipts.” Group health care expenses are considered “qualified wages” even when no other wages are paid to the employee. INSIGHTS: Employers that received a PPP loan and that were previously prohibited from claiming the ERC may now retroactively claim the ERC for 2020. With respect to the retroactive measures in the Act, employers that paid qualified wages in Q1 through Q3 2020 may elect to treat the qualified wages as being paid in Q4 2020. This should allow employers to claim the ERC in connection with such qualified wages via a timely filed IRS Form 7200 or Form 941, as opposed to requiring an amended return (IRS Form 941-X) for the prior quarter(s) in 2020. ERC for 2021 (January 1 – June 30, 2021) In addition to the retroactive changes listed above, the following changes to the ERC apply from January 1 to June 30, 2021:   Increased Credit Amount   The ERC rate is increased from 50% to 70% of qualified wages and the limit on per-employee wages is increased from $10,000 for the year to $10,000 per quarter. Broadened Eligibility Requirements The gross receipts eligibility threshold for employers is reduced from a 50% decline to a 20% decline in gross receipts for the same calendar quarter in 2019. A safe harbor is provided allowing employers to use prior quarter gross receipts compared to the same quarter in 2019 to determine eligibility. Employers not in existence in 2019 may compare 2021 quarterly gross receipts to 2020 quarters to determine eligibility. The credit is available to certain government instrumentalities, including colleges, universities, organizations providing medical or hospital care, and certain organizations chartered by Congress. Determination of Qualified Wages The 100-full time employee threshold for determining “qualified wages” based on all wages paid to employees is increased to 500 or fewer full-time employees. The Act strikes the limitation that qualified wages paid or incurred by an eligible employer with respect to an employee may not exceed the amount that employee would have been paid for working during the 30 days immediately preceding that period (which, for example, allows employers to take the ERC for bonuses paid to essential workers). Advance Payments Under rules to be drafted by Treasury, employers with less than 500 full-time employees will be allowed advance payments of the ERC during a calendar quarter in which qualifying wages are paid. Special rules for advance payments are included for seasonal employers and employers that were not in existence in 2019. INSIGHTS: Employers that previously reached the credit limit on some of their employees in 2020 can continue to claim the ERC for those employees in 2021 to the extent the employer remains eligible for the ERC. Qualification for employers in 2021 based on the reduction in gross receipts test may provide new opportunities for businesses in impacted industries. Eligible employers with 500 or fewer employees may now claim up to $7,000 in credits per quarter, paid to all employees, regardless of the extent of services performed. Previously this rule was applicable to employers with 100 or fewer employees and a maximum of $5,000 in credit per employee per year. Aggregation rules apply to determine whether entities under common control are treated as a single employer. The Act may provide significant opportunities for your company. However, the interplay between the Act, the CARES Act and various Internal Revenue Code sections is nuanced and complicated so professional advice may be needed.   [...] Read more...
January 4, 2021https://youtu.be/nTyvfuZLQyk A video introduction of our new office at 1120 S Rackham Way, Meridian   While 2020 has dealt its fair share of curve balls, one thing that has not wavered is our commitment to helping our clients and their businesses succeed and make it through these unforeseen circumstances. We are grateful to each and every one of our clients for the relationships we have created over the years. Our success would not be possible without you. We have been excited to see our team grow significantly over the last few years, and the time has come where we have finally outgrown our current space. We are excited to announce that we have moved and are now open at our new location! It was important to us to remain in Meridian, which has become a central location for the entire Treasure Valley, and to continue to provide easy access to our office for our clients. Our new office location is just down the road from our former location, and is in the new Eagle View Landing Business Complex in Meridian. We look forward to celebrating this move with you and inviting you to our new space when it is safe to do so. We truly value our relationship with each and every one of our clients and look forward to working with you in the new year! NEW ADDRESS:1120 S Rackham Way, Suite 100 | Meridian, ID 83642(Map Source: https://bvadev.com/properties) Take a Look Inside: (Swipe to advance slideshow) [...] Read more...

 

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