Employers Should Prepare to Comply with Year-End Reporting Requirements for Qualified Sick and Family Leave Wages Paid in 2021
The IRS has issued guidance to employers on year-end reporting for sick and family leave wages that were paid in 2021 to eligible employees under recent federal legislation.
IRS Notice 2021-53, issued on September 7, 2021, provides that employers must report “qualified leave wages” either on a 2021 Form W-2 or on a separate statement, including:
- Qualified leave wages paid from January 1, 2021 through March 31, 2021 (Q1) under the Families First Coronavirus Response Act (FFCRA), as amended by the Consolidated Appropriations Act, 2021 (CAA).
- Qualified leave wages paid from April 1, 2021 through September 30, 2021 (Q2 and Q3) under the American Rescue Plan Act of 2021 (ARPA).
The notice also explains how employees who are also self-employed should report such paid leave.
This guidance builds on IRS Notice 2020-54, issued in July 2020, which explained the reporting requirements for 2020 qualified leave wages.
Employers should work with their IT department and/or payroll service provider as soon as possible to review the payroll system, earnings codes configuration and W-2 mapping to ensure that these paid leave wages are captured timely and accurately for year-end W-2 reporting.
In March 2020, the FFCRA imposed a federal mandate requiring eligible employers to provide paid sick and family leave from April 1, 2020 to December 31, 2020, up to specified limits, to employees unable to work due to certain COVID-related circumstances. The FFCRA provided fully refundable tax credits to cover the cost of the mandatory leave.
In December 2020, the CAA extended the FFCRA tax credits through March 31, 2021, for paid leave that would have met the FFCRA requirements (except that the leave was optional, not mandatory). The ARPA further extended the credits for paid leave through September 30, 2021, if the leave would have met the FFCRA requirements.
In addition to employer tax credits, under the CAA, a self-employed individual may claim refundable qualified sick and family leave equivalent credits if the individual was unable to work during Q1 due to certain COVID-related circumstances. The ARPA extended the availability of the credits for self-employed individuals through September 30, 2021. However, an eligible self-employed individual may have to reduce the qualified leave equivalent credits by some (or all) of the qualified leave wages the individual received as an employee from an employer.
Eligible employers who claim the refundable tax credits under the FFCRA or ARPA must separately report qualified sick and family leave wages to their employees. Employers who forgo claiming such credits are not subject to the reporting requirements.
Qualified leave wages paid in 2021 under the FFCRA and ARPA must be reported in Box 1 of the employee’s 2021 Form W-2. Qualified leave wages that are Social Security wages or Medicare wages must be included in boxes 3 and 5, respectively. To the extent the qualified leave wages are compensation subject to the Railroad Retirement Tax Act (RRTA), they must also be included in box 14 under the appropriate RRTA reporting labels.
In addition, employers must report to the employee the following types and amounts of wages that were paid, with each amount separately reported either in box 14 of the 2021 Form W-2 or on a separate statement:
- The total amount of qualified sick leave wages paid for reasons described in paragraphs (1), (2) or (3) of Section 5102(a) of the Emergency Paid Sick Leave Act (EPSLA) with respect to leave provided to employees during the period beginning on January 1, 2021, through March 31,2021. The following, or similar language, must be used to label this amount: “Sick leave wages subject to the $511 per day limit paid for leave taken after December 31, 2020, and before April 1, 2021.”
- The total amount of qualified sick leave wages paid for reasons described in paragraphs (4), (5), or (6) of Section 5102(a) of the EPSLA with respect to leave provided to employees during the period beginning on January 1, 2021, through March 31, 2021. The following, or similar language, must be used to label this amount: “Sick leave wages subject to the $200 per day limit paid for leave taken after December 31, 2020, and before April 1, 2021.”
- The total amount of qualified family leave wages paid to the employee under the Emergency Family and Medical Leave Expansion Act (EFMLEA) with respect to leave provided to employees during the period beginning on January 1, 2021, through March 31, 2021. The following, or similar language, must be used to label this amount: “Emergency family leave wages paid for leave taken after December 31, 2020, and before April 1, 2021.”
- The total amount of qualified sick leave wages paid for reasons described in paragraphs (1), (2) or (3) of Section 5102(a) of the EPSLA with respect to leave provided to employees during the period beginning on April 1, 2021, through September 30, 2021. The following, or similar language, must be used to label this amount: “Sick leave wages subject to the $511 per day limit paid for leave taken after March 31, 2021, and before October 1, 2021.”
- The total amount of qualified sick leave wages paid for reasons described in paragraphs (4), (5), and (6) of Section 5102(a) of the EPSLA with respect to leave provided to employees during the period beginning on April 1, 2021, through September 30, 2021. The following, or similar language, must be used to label this amount: “Sick leave wages subject to the $200 per day limit paid for leave taken after March 31, 2021, and before October 1, 2021.”
- The total amount of qualified family leave wages paid to the employee under the EFMLEA with respect to leave provided to employees during the period beginning on April 1, 2021, through September 30, 2021. The following, or similar language, must be used to label this amount: “Emergency family leave wages paid for leave taken after March 31, 2021, and before October 1, 2021.”
If an employer chooses to provide a separate statement and the employee receives a paper 2021 Form W-2, then the statement must be included with the Form W-2 sent to the employee. If the employee receives an electronic 2021 Form W-2, then the statement must be provided in the same manner and at the same time as the Form W-2.
In addition to the above required information, the notice also suggests that employers provide additional information about qualified sick and family leave wages that explains that these wages may limit the amount of the qualified sick leave equivalent or qualified family leave equivalent credits to which the employee may be entitled with respect to any self-employment income.
If you have questions about complying with year-end reporting requirements or other tax questions, please contact the accounting professionals at BSB. We can help you plan for your unique situation to maximize your tax benefits while remaining compliant with current tax law.
If you travel for business, your per-diem rates are changing. The Internal Revenue Service (IRS) recently announced updated per-diem rates that will be used to substantiate ordinary and business expenses incurred during travel away from home. The new rates will be in effect from Oct. 1, 2021, to Sept. 30, 2022.
Employees who travel after Oct. 1 will be paid the adjusted per-diem rates, which specifically cover meals, lodging, and incidental expenses related to business travel.
The new per-diem rates represent a slight increase from last year at $202 for locations within the continental United States and $296 for high-cost locations. High-cost locations, listed in the new IRS guidance, are areas with a federal per-diem rate of $249 or more (up from $245 last year). This rate includes payment for meals and incidentals.
Meal and incidental-only rates have also slightly increased to $64 for locations within the U.S. and $74 to high-cost locations. The per-diem for incidental expenses will not change and will remain at $5 per day regardless of travel location. Incidentals include tips and fees for baggage carriers and staff in hotels and on ships.
Special rates that apply to the transportation industry have also been raised by $3 from last year to $69 within the United States and $74 for travel outside of the country.
When calculating expenses, taxpayers can use per-diem rates or actual expenses. However, anyone planning to use actual allowable expenses must keep detailed records and documentation to provide evidence of expenses for tax purposes.
If you have questions about business travel rates, please contact the accounting professionals at BSB. We can help you plan for your unique situation to maximize your tax benefits while remaining compliant with current tax law.
Section 1202 of the Internal Revenue Code is growing in popularity among investors and may become even more valuable in 2022.
Section 1202 allows founders and investors of corporations to exclude up to 100% of their capital gains derived from the sale of qualified small business stock (QSBS) held for more than five years (subject to limitations). Because the gain exclusion percentage for a shareholder depends on the QSBS issuance date, as time goes on more investors are becoming eligible for the full, 100% exclusion—and thus its rise in popularity.
Further, the 2021 Green Book proposes far-reaching changes to the taxation of long-term capital gains, which are taxed at graduated rates under the individual income tax. Today, the highest rate is generally 20% (23.8% including the net investment income tax, if applicable, based on the taxpayer’s modified adjusted gross income (AGI)).
Under the Green Book proposal, long-term capital gains of taxpayers with AGI of more than $1 million would be taxed at ordinary income tax rates to the extent that the taxpayer’s income exceeds $1 million ($500,000 for married filing separately), indexed for inflation after 2022. Currently, the highest rate for individuals is 37% (40.8% including the net investment income tax), though the Green Book also includes a proposal to raise the individual rate to up to 39.6% (43.4% including the net investment income tax).
While reinvestments into Qualified Opportunity Zones, like-kind exchanges for real property (possibly limited going forward), and reinvestment of proceeds into qualified replacement property from sales of corporate stock to an Employee Stock Ownership Plan of 30% or more of the corporation’s outstanding stock provide some deferral opportunities, Section 1202 is the only provision that provides an exclusion opportunity for QSBS. The higher that the capital gains tax rate goes up, the greater the potential tax benefit of utilizing an available Section 1202 exclusion.
Every situation is different and unique. If you have questions about Section 1202 and would like to speak to a tax professional, please contact BSB today. We will help you plan according to your specific circumstances.
The choice of entity is among the most important decisions facing taxpayers when starting a business or investment activity. The choice of tax entity generally includes a C corporation, S corporation or partnership, each having its own advantages and disadvantages that must be evaluated in terms of how the entity’s tax and legal characteristics align with the goals of the business and its investors.
Existing businesses should also evaluate their choice of entity—especially now, in light of President Biden’s proposals to increase the tax burden on corporations and high-wealth individuals. Depending on the circumstances, it may make sense to consider converting an existing entity to a different type of tax entity or structure in order for businesses and their owners to better manage their overall tax obligations. An analysis should be performed to determine the amount of any immediate tax cost that would be incurred upon changing entity classification compared to the future tax benefits of conversion.
Choice of entity decisions need to take into account many tax and legal considerations based on the taxpayer’s specific facts and circumstances, as well as business and investment goals. Taxpayers should keep in mind that current tax proposals would raise tax rates and make other changes to the federal income tax system for corporations and high-wealth individuals. These proposals should be monitored, and their potential effects should be considered when evaluating the short and long-term benefits of a particular entity choice.
Tax considerations when choosing an entity
There any many tax considerations that play into the choice of entity decision, some of which are discussed below. All of the considerations should be analyzed together with other important factors, such as whether investors intend to distribute or reinvest available cash, income projections including whether the business anticipates upfront losses, the expected rate of return on investment, the time horizon for exit and available exit strategies.
Effective tax rate on earnings
The rate at which businesses pay tax on their earnings impacts after-tax cash flow and return on investment. Further, whether the business distributes or reinvests its available cash affects enterprise value.
C corporations pay tax on their earnings at the corporate level at a 21% rate, and earnings distributed as dividends are subject to tax again at the shareholder level. This double taxation amounts to an overall effective tax rate on distributed earnings of around 40%, as opposed to a single 21% rate on earnings that are reinvested in the business. President Biden’s tax proposals would increase the corporate tax rate to 28%, which would increase the overall rate on distributed earnings to 45%—or even higher for individuals that would, under his tax plan, be subject to ordinary income tax rates on dividends.
Passthrough entities (S corporations and partnerships), on the other hand, do not pay entity level tax. Instead, their earnings are reported by and taxed at the rates of their owners, regardless of whether the earnings are distributed. For individual owners, this means a top marginal tax rate of 37% on passthrough earnings, or 29.6% if the qualified business income deduction applies. President Biden’s plan would increase an individual owner’s top rate to 39.6% and phase out the qualified business income deduction at income levels exceeding $400,000.
Although, based on the difference in tax rates, C corporations that reinvest their earnings may be able to generate greater after-tax cash flow than a passthrough entity, the analysis should not end there. A C corporation shareholder may pay more tax upon disposing of its investment than a passthrough owner, especially in cases where no viable tax planning strategy exists (see “Exit Strategies,” below). In addition, C corporations that do not pay dividends may be subject to the accumulated earnings tax and the personal holding company tax.
The amount of tax owed on exit plays a very important role in the choice of entity decision. Due to the difference in the build-up of tax basis in investments in C corporations versus investments in passthrough entities, C corporation shareholders will generally have a larger gain on the disposition of their investment than passthrough entity owners. The tax on disposition will depend on the owners’ tax rates and the amount of ordinary income recapture, among other factors.
There are certain exit strategies that may be used to defer the tax on gains from dispositions of investments. These strategies include:
- Reinvesting the gains in qualified opportunity zones or qualified opportunity funds;
- Selling the shares of a C corporation to an employee stock ownership plan; and
- Transferring the investment through estate planning. Note that under President Biden’s tax proposals, the tax basis step-up of property at death would be limited.
In addition, non-corporate shareholders may be permitted to exclude part or all of the gain from the sale or exchange of “qualified small business stock” (QSBS) of C corporations that has been held for at least five years. The overall gain exclusion per issuer is limited to the greater of $10 million or 10 times the aggregate adjusted basis of the disposed shares. Each partner in a partnership and each shareholder in an S corporation is entitled to their own $10 million limitation on dispositions of QSBS by the partnership or the S corporation.
Changes to entity classification
Converting from one type of entity to another requires thoughtful consideration, analysis, and planning, and certain entity types may provide more flexibility than others for changing entity status. Converting to a different type of entity may trigger immediate tax consequences, which must be measured relative to any potential future tax benefits. Examples of possible tax consequences include taxable liquidations, tax on built-in gains, gain on liabilities in excess of tax basis, deferred revenue recognition, and changes in accounting methods.
Other tax considerations
The following are among the many other tax issues to consider when choosing an entity, the tax treatment for which can vary by entity type:
- International tax rules, such as taxation of controlled foreign corporations, foreign tax credit limitations, and consequences of repatriation tax deferral;
- Deductibility of upfront net operating losses;
- Self-employment taxes (note that the social security base would increase under President Biden’s tax proposals);
- State income taxes, which vary by state;
- Estate and inheritance tax consequences for individual owners and their families; and
- Tax reporting requirements, which in certain cases can be less onerous for C corporations as opposed to passthrough entities.
While the choice of entity is often a tax driven decision, there are also many non-tax factors to consider, such as:
- Liability protection for owners and management;
- Flexibility for making day-to-day management decisions and for binding the organization;
- Access to capital;
- Transferability of ownership interests; and
- Available exit strategies and succession planning.
How We Can Help
We can help you better understand the requirements and operational differences between C corporations, S corporations and partnerships, as well as model the immediate and long-term costs and benefits of converting, or not converting, from your current entity status or form.
As state and local governments look for new ways to stimulate their economies, incentivize employment and keep businesses afloat, the pressure for states to generate additional tax revenue continues. In response to this pressure, states are revisiting taxpayers’ compliance with their “nexus” rules and other tax policies and considering new taxes on digital services. In addition, many state governments are reconsidering the extent to which they are willing to conform to federal tax rules and legislation.
Taxpayers need to be aware of the tax rules in the states in which they operate. 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 tax issues taxpayers should monitor and plan for in 2021:
1. Passthrough entity (PTE) income tax elections
It looks like the federal $10,000 “SALT cap” is sticking around, and more states are enacting a workaround in response. A growing number of states are allowing partnerships and S corporations to elect to be taxed at the entity level to help their resident owners get around the SALT cap. However, it is important that individuals understand the broad, long-term implications of the PTE tax election. Care needs to be exercised to avoid state tax traps, especially for nonresidents, that could exceed any federal tax savings.
2. Impacts of federal income tax changes
Federal tax legislation also has impact at the state level. While many states quickly settle on approaches to conform with or decouple from the federal legislation, other states have done nothing, leaving taxpayers to file state income tax returns with very little guidance on how or whether the federal changes apply.
Now that tax years impacted by the Tax Cuts and Jobs Act are well into their audit cycles, state taxpayers that unknowingly did not correctly take federal changes into account when calculating their state taxes may be confronted by not only audit exposure, but in some cases refund opportunities. Taxpayers should review their state tax returns to identify opportunities to minimize exposure and identify refunds well in advance of state tax audits.
3. Taxes on digital advertising services
Maryland was the first state to enact a digital advertising services tax. Large tech companies immediately sued the state, and in response the legislature passed a bill to delay the implementation of the controversial tax until 2022. To date, several other states have introduced similar digital advertising taxes, and some states are proposing to include these services in their sales tax base. States will be closely following the litigation in Maryland, as they consider their own legislation.
The definition of digital advertising services can potentially be very broad and fact specific. Taxpayers should understand the various state proposals and plan for their potential impact.
4. Sales and use tax nexus: Remote sellers and marketplaces
Florida and Kansas have finally joined the ranks of states with a bright-line economic nexus threshold for remote retailers and marketplace providers. At this point, the only state without a bright-line standard or marketplace rules is Missouri.
However, retailers should not forget about physical presence. Even though most states have implemented economic nexus rules since Wayfair, the traditional physical presence rules are still alive and well. States are continuing to assess retailers that, sometimes unknowingly, have some form of physical presence in the state.
E-retailers should be sure they are in compliance with state sales and use tax laws and marketplace facilitator rules and have considered all planning opportunities.
5. Property taxes
Assessed property tax values typically lag behind market values. If you think your property is being over-assessed compared to the fair market value of the property, then a consultation with a valuation expert can help to determine whether the property tax should be challenged.
How We Can Help
We are experienced in income, franchise, gross receipts, sales and use and property taxes, as well as unclaimed property and credits and incentives. We can help taxpayers monitor state tax laws and nexus requirements, understand where they have state obligations and how to minimize them, identify and implement planning opportunities, identify and quantify tax exposures, and assist with state tax audits.
The Internal Revenue Service (IRS) recently announced the delay of the start of tax season to February 12, meaning the IRS will not start accepting or processing any 2020 tax returns until that date. Compared with last year’s start of January 27, this change could significantly delay refunds for many taxpayers.
The change was designed to allow for programming and testing of new IRS systems needed for updated tax laws after the latest legislation and second round of stimulus checks. The IRS was already experiencing a backlog and the economic impact payments or stimulus payments, which were distributed in March and December, slowed down the tax return processing significantly.
Many states have not yet passed conformity legislation, so it may be necessary to extend or amend.
Even with the delayed start, taxpayers can still file electronically with direct deposit. Electronic filing is highly recommended to cut down on processing time and avoid even more delays. As soon as you have the required documents, please reach out to your tax professional to begin your tax return.
At this time, the tax deadline is still April 15.
With the constantly changing tax guidelines, it’s important to work with a professional who can help plan and maximize your tax situation while remaining compliant with tax law. The tax professionals at BSB are here to help. Contact us today.
With 2020 finally behind us, now is the time to think about taxes. This year, there will be a few changes to consider. The Internal Revenue Service (IRS) has released a new Form 1040 U.S. Individual Tax Return, which will be used for filing tax returns for the 2020 tax year.
Here are a few things to look for on the new 1040:
- The new form makes it easier to list withholding by separating it into three separate lines: W2, Form 1099, and other forms. Self-employed taxpayers should pay special attention to this section and be sure to scrutinize deductions even more carefully.
- The new form also provides a simpler way for taxpayers to report estimated tax payments carried over from last year’s return.
- The IRS is examining virtual currency carefully, with a question listed prominently on the main page, right after the taxpayer’s name and address. If you received any virtual currency in 2020, make sure to report it here.
- The CARES Act added a few temporary tax changes that are reflected on the new Form 1040.
- The “Amount You Owe” section now indicates that the form may not represent all taxes owed. Additional taxes may include social security taxes that were temporarily deferred by employers. The deferral also applies to self-employed taxpayers.
- There is a separate line for the “recovery rebate credit” Taxpayers can reconcile any changes that may affect stimulus checks. For example, if a taxpayer made too much money to qualify in 2019, had a child in 2020, or had other changes that impacted their eligibility or amount received from the first economic recovery checks, those changes will be recorded on the new form.
- The new form will also have a place for the temporary above-the-line deduction of $300 for charitable contributions. The CARES Act enabled this one-time deduction for 2020 taxes even for taxpayers who take the standard deduction.
- There are a few areas for taxpayers who want to make changes. Individuals who want to change language for communications received from the IRS can fill out a new Schedule LEP on the 1040 form.
- Taxpayers aged 65 and older can use Form 1040-SR, U.S. Tax Return for Seniors. The simplified FORM 1040-SR features a larger font, larger spaces for information, and an embedded table that highlights the increased standard deduction.
If you need help with tax planning or preparation, contact the tax professionals at BSB. We remain abreast of changes to tax policies to help you maximize your tax benefits while remaining in compliance with current law.
The past few months have brought many financial changes. And some of these changes may affect your 2020 taxes. With the continual release of new government guidance, it’s hard to know what to expect. This year, possibly more than ever, it’s important to plan ahead for tax season.
Here are a few things to start thinking about now.
- Due to the CARES act, required minimum distributions (RMDs) will not be required to be distributed in 2020. If a taxpayer has already taken their required minimum distribution for this year, it will be taxable as before. There is a limited period of 60 days after a distribution that a taxpayer can re-contribute the amounts back into the retirement account if it would otherwise qualify for rollover treatment.
- Standard deductions will change for 2020. The IRS reports the following amounts:
- Married filing jointly will go up by $400 to $24,800.
- Married filing separately will go up by $200 to $12,400
- Head of household will go up by $300 to $18,650
- Single will go up by $200 to $12,400
- As a result of the CARES act, donations to charity up to $300 will be allowable as an “above the line” deduction for taxpayers who normally take the standard deduction. Taxpayers who itemize their deductions will still be able to take their charitable deductions as before.
- While it doesn’t apply to all accounts, there will be increases to the contribution limits for some types of retirement accounts, including 401(k)s, 403(b)s, most 457 plans, and the federal government’s Thrift Savings Plans. The increased limits will also include 401(k) catch-ups, SEP IRAs and Solo 401(k)s, aftertax 401(k) contributions, SIMPLE retirement accounts, and defined benefit plans. IRA contribution limits will not change from 2019.
- Health savings accounts (HSAs) will also have increased contribution limits. For 2020, the individual coverage limit is $3,550 and family coverage is $7,100. These amounts will increase to $3,600 and $7,200 for 2021.
- Due to increased income limits, more taxpayers will be eligible for the Retirement Savings Contribution Credit, also known as the Saver’s Credit.
- The minimum adoption credit will go up from $14,080 to $14,300.
- The earned income tax credit will go up from $6,557 to $6,660 and the AGI limits have gone up from $55,952 to $56,844 for taxpayers who are married filing jointly and up from $50,162 to $50,594 for all other filing statuses.
- Social Security payroll tax income limits will go up to $137,700 from $132,900.
For individuals who received stimulus money, many questions have been raised about whether the payments will count toward taxable income for 2020 taxes. As a prepayment on a tax credit, the payments will not be taxable. In fact, taxpayers who have a drop in income in 2020 may even be eligible for a remaining stimulus payment. On the other side, taxpayers who will have a significantly higher AGI for 2020 than for 2018 and 2019, some of the stimulus money may need to be repaid.
Unemployment Insurance Benefits
Unemployment benefits are generally taxable, so this is also something to consider when planning for the upcoming tax season.
For businesses who received a PPP loan, there may be some tax considerations. Due to the ever-changing guidelines, there will probably be many questions surrounding tax filing. It will be important to consult a professional who can answer those questions.
These are just a few possibilities that may be different for 2020 taxes. There are additional considerations depending on your unique situation.
The tax professionals at BSB are following the changing guidance and staying updated on current tax policies to help you properly plan for the upcoming tax season. Don’t wait! Contact us sooner, rather than later, to plan for 2020 taxes.
By now, working from home has become a new normal for some employees. Even as some offices reopen, many individuals hope to continue working from home indefinitely. But before adjusting to a permanent work-from-home environment, both employees and employers should be aware of possible SALT (state and local tax) implications.
State tax issues are complex and changing. If you are working from home from a temporary residence for a company in another state, you could potentially be liable for taxes in both your state of primary residence and the state you are temporarily living in. Your company may also need to pay tax in the state where you are doing work from a home office.
Many factors affect taxability of income, including days in the home office, location of the company, and type of organization. While states have different guidelines, nearly all states require income taxes from workers who are temporarily employed in the state. For almost half of states, these taxes apply to even one day of work.
Due to COVID-19, 13 states and Washington, DC have agreed not to enforce tax rules. Additionally, some states, including Maryland, Virginia, and DC have agreements with neighboring areas. However, many states including New York and California, will still tax remote workers for 2020.
In some situations, remote workers receive credits for taxes paid in other states. But when the state taxes are higher in the state where the remote work was performed these credits may not be enough to cover taxes owed.
Businesses must also be aware of tax implications since employees working remotely could trigger nexus rules that raise the business’s state taxes.
Now is the time to meet with a tax professional. Contact us today to discuss the specifics of your situation and determine what you need to do to protect yourself or your company from an unpleasant tax surprise.
More than a year after sweeping federal and state tax reform were enacted, businesses of all sizes are still wrapping their arms around the changes. Additional guidance and regulations have been issued nearly every month—indeed, change is the new normal. Strategic tax planning now is key to lowering businesses’ total tax liability. Read on for eight top planning opportunities and considerations businesses should review as part of their 2019 strategy.
1. The GILTI, the FDII, and the BEAT – The 2017 tax reform package introduced several international tax packages that will either create tax liabilities or opportunities. Very generally, the anti-deferral regime is expanded under GILTI, which taxes U.S. shareholders of CFCs on certain types of income earned by the CFCs, similar subpart F income. The BEAT imposes an additional tax on certain corporations that erode the U.S. tax base through certain types of payments made to related foreign persons that meet certain thresholds. And the FDII deduction provides a deduction for certain domestic corporations that service foreign customers or markets when the requirements are satisfied. For 2019, estimating the impact of GILTI, FDII, and the BEAT on their tax liabilities and deductions is a key international tax planning consideration.
2. Section 199A Deduction – The new Section 199A deduction may reduce a pass-through owner’s maximum individual effective tax rate from 37 percent to 29.6 percent. Taxpayers should determine whether they qualify for the 199A deduction when estimating their future taxable income and while evaluating choice of entity considerations post-tax reform. With proper tax planning under the recently-issued final regulations, a number of opportunities exist to possibly separate non-qualifying Specified Service Trade or Businesses (also known as “SSTBs”) from qualifying trades or businesses in order to take advantage of the reduced rate of tax on eligible activities that would otherwise have been recast as a SSTB given the relationship to the underlying activity.
3. Interest Deduction Limitation – Taxpayers now face significant new limitations on their ability to deduct business interest paid or accrued on debt allocable to a trade or business pursuant to Section 163(j). Section 163(j) may limit the deductibility of business interest expense to the sum of (1) business interest income; (2) 30 percent of the adjusted taxable income (ATI) of the taxpayer; and (3) the floor plan financing interest of the taxpayer for the taxable year (applicable to dealers of vehicles, boats, farm machinery or construction machinery). ATI is defined as the taxable income of the taxpayer computed without regard to items not attributable to a trade or business, business interest income or expense, net operating loss and capital loss carryovers and carrybacks, depreciation, amortization and depletion, certain gains from the sale of property and certain items from partnerships and S corporations. For taxable years beginning before 2022, deductions for depreciation, amortization and depletion will not be taken into account in calculating adjusted taxable income. Certain exceptions exist for small business taxpayers whose average annual gross receipts over the past three years do not exceed $25 million, certain electing real property trades or businesses, electing farming businesses, and certain utilities.
4. Economic Nexus/Wayfair – The South Dakota v. Wayfair decision means that states are now free to subject companies to state taxes based on an “economic” presence within their state. Taxpayers must now determine their nexus and filing obligations in states and localities, where compliance was not required before. This landmark decision presents an opportunity for taxpayers to enhance their technology solutions and update their reporting tools as they comply with state law changes.
5. Bonus Depreciation – Expanded bonus depreciation rules allow taxpayers full expensing of both new and used qualifying property placed in service before 2023, creating significant incentives for making new investments in depreciable tangible property and computer software. Bonus depreciation allowances increased from 50 to 100 percent for qualified property acquired and placed in service after September 27, 2017, and before 2023 (January 1, 2024, for longer production period property and certain aircraft). Plan to purchase eligible property to assure maximum use of this annual asset expense election and bonus depreciation, as the 100-percent bonus depreciation deduction ends after 2023. Since bonus depreciation is not allowed on certain long-term property of an electing real property trade or business for Section 163(j) purposes, an analysis should be performed to measure the cost of the forgone depreciation relative to the marginal benefit for the additional interest expense that would otherwise be allowed.
6. Corporate Alternative Minimum Tax (AMT) Rescinded – This change presents a tax planning opportunity, as AMT credits can offset the regular tax liability for years after 2017. Going forward, any prior AMT liabilities may offset the regular tax liability for any taxable year after 2017. In addition, the AMT credit is refundable for any taxable year beginning after 2017 and before 2022 in an amount equal to 50 percent (100 percent for taxable years beginning in 2021) of the excess credit for the taxable year subject to a 6.2 percent sequestration rate. A recent IRS announcement reversed the 6.2 percent holdback by stating that “for tax years beginning after December 31, 2017, refund payments and credit elect and refund offset transactions due to refundable minimum tax credits under Section 53(e) will not be subject to sequestration.”
7. Federal Research Credit – The credit is now even more valuable to businesses after tax reform due in part to the repeal of the corporate AMT and new rules related to net operating loss (NOL) limitations. Now that AMT has been repealed, companies that paid AMT may now be paying regular income tax, which can be offset by the R&D credit, and income tax that can no longer be offset by NOLs, the R&D credit may help offset. Taxpayers seeking to maximize the benefit of immediately deducting R&E expenditures should consider the effective date of the required amortization rule and, if possible, accelerate their R&D activities prior to December 31, 2021.
8. Opportunity Zones (O-Zones) – New O-Zone tax incentives allow investors to defer tax on capital gains by investing in Qualified Opportunity Funds. Taxpayers can defer taxes by reinvesting capital gains from an asset sale into a qualified opportunity fund during the 180-day period beginning on the date of the sale or exchange giving rise to the capital gain. Once rolled over, the capital gain will be tax-free until the fund is divested or the end of 2026, whichever occurs first. The investment in the fund will have a zero-tax basis. If the investment is held for five years, there is a 10-percent step-up in basis and a 15-percent step-up if held for seven years. If the investment is held in the opportunity fund for at least 10 years, those capital gains in excess of the rollover amount (i.e., not the original gain but the post-acquisition appreciation) would be permanently exempt from taxes. To maximize the potential benefits, taxpayers must invest in a Qualified Opportunity Fund before December 31, 2019.
Rather than looking at each credit and new tax provision in a vacuum, we advise clients to look at all the changes holistically to assess their impact and develop their tax planning strategies. It’s important to determine your company’s total tax liability and structure your planning to address the full picture of your organization.
Please contact us if you have any questions or concerns regarding your tax planning for 2019. 703.591.5200 or email@example.com
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