Month: April 2022

Business owners, CFOs, and managers are finding that inflation is outpacing wage increases and the purchasing power of its employees. As a result, workers are resigning at the highest rate and advancing their pay at new employers from 25% to 30%. Additionally, some employers are allowing wages to lag the rate of inflation hoping that as COVID-19 lessens, workers will rejoin the labor market and job openings will moderate, and the pressure to increase wages will ease.

While many employers are waiting for the job market to turn around in their favor, as opposed to increasing wages, other employers are taking steps to attract and retain workers by enhancing salaries, benefits, and other workplace improvements.

This article will outline some of the challenges and measures that employers are taking to deal with the impact of inflation on wages.

Salary Increases

In February the Labor Department reported that the Consumer Price Index rose by 7.9%, which is the fastest rise in 40 years. Also, the Producer Price Index (PPI) rose by 7.9%. The PPI measures the cost of producing goods that are ultimately sold to consumers. When the cost of producing goods rises, consumers will be faced with paying more for goods and services. Consequently, without a corresponding increase in wages, workers’ purchasing power will decline.

While businesses are expected to raise wages, approximately only 44% of employers plan to raise pay by more than 3%. Based on these anticipated wage increases, workers’ salaries will fall behind the rate of inflation. Consequently, workers are seeking new employment to obtain a significant salary increase. Nearly, one-third of workers entering new jobs are getting a salary increase of 30%.

Moreover, the Quit Rate, tracked by the Bureau of Labor Statistics, has been between 2.8% and 3% since June of 2021, which is the highest rate since 2000. The combination of the Quit Rate and the prospect of higher salaries for changing jobs is creating a challenge for employers to attract and retain employees. Therefore, employers are seeking alternative means coupled with wage increases to maintain their current employees and draw new ones.

Benefits and Workplace Incentives

Companies seeking to attract and retain employees are offering workers an array of enticements, including signing bonuses, flexible work schedules, and grants for higher education.

While training and tuition assistance have been available for several years for employees, many employers are now increasing their 401K matching contribution and awarding employees special spot bonuses for exceptional work.

A new feature of the job market that resulted from the COVID-19 pandemic was the ability of many employees to work remotely. This aspect has provided workers with the flexibility to meet the demands of their jobs and personal lives. As the pandemic is receding, many employers are instituting a remote work policy for employees that want to be fully or partially remote. An employer’s willingness to adopt this structure creates an environment to attract a broader range of worker talent.

In addition, employers are evaluating compensation plans that reward a broader base of employees with incentive-based compensation. In this regard, employers are providing bonuses and pay increases that are tied to the success of the company and the employee. This type of incentive-based compensation was once exclusively reserved for senior management, but it is now gaining appeal for all employees. Thus, as the company grows and the employees develop, their wages will increase as well. This provides a greater connection between the employee and the company concerning long-term job retention.

Conclusion

The demands placed upon a business to respond to the impact of inflation on workers’ salaries can be addressed by combining wage increases with other benefits to retain and attract employees.

If you need advice or assistance to evaluate your employees’ benefits, please call RVG & Company today, at (954) 233 1767.

The U.S. Treasury Department released the “Green Book”— which is an explanation of the tax proposals set out in President Biden’s Fiscal Year 2023 Budget. This article will summarize the significant proposals advanced by the Administration. Overall, this proposal contains many of the tax increases outlined in the President’s previous tax bill (Build Back Better) that did not have the support of Congress and was not approved in 2021.

I. Business and International Tax Reform

Corporate Tax Rate: Raise the corporate income tax rate from 21% to 28% The Increase would go into effect for taxable years beginning January 1, 2023.

Increase the Global Intangible Low-Taxed Income (GILTI): Increase the rate to 20%, applied on a jurisdiction-by-jurisdiction basis. The rate increase would be effective for years beginning after December 31, 2022.

Adopt the Undertaxed Profits Rule: The provision would apply to US and foreign corporations that operate on a multinational basis. This proposal would replace the Base Erosion Anti-Abuse Tax (BEAT) with the Under Taxed Profits Rule (UTPR). The BEAT currently applies to corporations that have three-year average gross receipts of $500 million and the UTPR to corporations that have annual gross receipts of $850 million in two of the prior 4 years.

US Jobs Credit: Provide tax incentives for locating jobs and business activities in the US and remove the tax deduction for shipping US jobs overseas. The proposal would create a new general business credit equal to 10 % of the eligible expenses paid or incurred in connection with onshoring a U.S. trade or business. Also, the proposal would disallow deductions for expenses paid or incurred in connection with offshoring a U.S. trade or business.

Reduce Partnership Basis Shifting: Prevent Basis shifting by related parties through partnerships. A partnership is permitted to make a section 754 election to adjust the basis of its property when it makes certain distributions of money or property to a partner. The proposal would reduce the ability of related parties to use a partnership to shift the partnership basis among themselves. The proposal would reduce the ability of related parties to use a partnership to shift the partnership basis among themselves.

PFIC: Revise Passive Foreign Investment Company rules to expand access to retroactive qualified electing fund elections.

II. Individual Income Tax Reform

Increase the Top Marginal Income Tax Rate: Currently, the top marginal tax rate is 37%. This rate applies to taxable income over $647,850 for married individuals filing a joint return and $323,925 for single filers and married individuals filing a separate return. The tax bracket thresholds are indexed for inflation. The proposal would increase the top marginal tax rate to 39.6 percent. The top rate would apply to taxable income over $450,000 for married individuals filing a joint return and $225,000 for unmarried individuals filing a separate return. This provision would go into effect on January 1, 2023.

Taxation of Capital Gains: Currently capital gains are taxed at 20% (plus 3.8% for the net investment income tax (NIIT) if certain income thresholds are met). The proposal would tax long-term capital gains and qualified dividends of taxpayers with taxable income of more than $1 million would be taxed at ordinary rates, with 37% generally being the highest rate (40.8 percent including the net investment income tax). The proposal would only apply to the extent that the taxpayer’s taxable income exceeds $1 million ($500,000 for married filing separately), indexed for inflation after 2023. As noted above, the ordinary rate increase that would be applied to capital gains would be 39.6% – plus the NIIT.

Treat Transfers of Appreciated Property by Gift or on Death as Realization Events: Under current law, a person who inherits an appreciated asset receives a stepped-up basis in that asset equal to the asset’s fair market value (FMV) at the time of the decedent’s death, an appreciation that had accrued during the decedent’s life is never subjected to income tax. Under the proposal, the donor or deceased owner of an appreciated asset would realize a capital gain at the time of the transfer. The amount of the gain taxed would be the excess of the asset’s FMV on the date of the gift or on the decedent’s date of death over the decedent’s basis in that asset. That gain would be taxable income to the decedent on the Federal gift or estate tax return or a separate capital gains return.

Impose a Minimum Tax on the Wealthiest Taxpayers: This proposal imposes an annual minimum tax of 20% on total income. Contrary to current law, total income would include unrealized capital gain for taxpayers with a wealth of $100 million. The provision would be effective for tax years beginning after December 31, 2022. Under the proposal, taxpayers could choose to pay the first year of minimum tax liability in nine equal, annual installments. For subsequent years, taxpayers could choose to pay the minimum tax imposed for those years (not including installment payments due in that year) in five equal, annual installments. Payments of the minimum tax would be treated as a prepayment available to be credited against subsequent taxes on realized capital gains to avoid taxing the same amount of gain more than once. Taxpayers that have illiquid assets, such as collectibles, will have additional rules apply.

Adoption Credit to be Refundable: The proposal would make the adoption credit of $14,890 fully refundable. Thus, taxpayers could claim the full amount of any eligible credit in the year that the expense was first eligible regardless of tax liability. The proposal would also allow families who enter into a guardianship arrangement to claim a refundable credit.

Provide an Income Exclusion for Student Debt Relief: The proposal would make permanent the American Rescue Plan’s exclusion of discharged student loan amounts from gross income. Under current law, the exclusion was to expire on January 1, 2026.

III. Modify Estate and Gift Taxation

Modify Income Estate and Gift Tax Rules for Certain Grantor Trusts: Under current law, a Grantor Retained Annuity Trust (GRAT) can be used to minimize estate taxes. The proposal would revise and seek to limit the ability of a GRAT to reduce estate taxes. The proposal would require the grantor’s remainder interest in a GRAT at the time of the GRAT’s creation to be worth at least 25 percent of the value of the assets transferred. In addition, transfers of assets to grantor trusts that are not fully revocable by the grantor would be treated as taxable for income tax purposes.

Limit The Duration of Generation-Skipping Transfer Exemption: The proposal would provide that the GST exemption would apply only to: (a) direct skips and taxable distributions to beneficiaries no more than two generations below the transferor, and to younger generation beneficiaries who were alive at the creation of the trust; and (b) taxable terminations occurring while any person described in (a) is a beneficiary of the trust.

IV. Other Provisions – Close Loopholes

Tax Carried Interests as Ordinary Income: Under current law, gains realized as “carried interests” are generally eligible to be treated as capital gains (subject to Section 1061, enacted as a part of the Tax Cuts and Jobs Act, requiring a three-year holding period to qualify for long-term capital gain). The proposal would generally tax a partner’s share of income in respect of an “investment services partnership interest” in an investment partnership as ordinary income if the partner’s total taxable income exceeds $400,000.

Repeal the Deferral of Gain from Like-Kind Exchanges (IRC Sec. 1031): Under current law, owners of appreciated real property used in a trade or business or held for investment can defer gain on the exchange of the property for real property of a “like-kind.” The proposal would allow the deferral of gain only up to an aggregate amount of $500,000 for each taxpayer ($1 million in the case of married individuals filing a joint return) each year for like-kind real property exchanges. Any gains from like-kind exchanges more than the threshold amount would be recognized in the year of the exchange.

Conclusion

If you would like to discuss any of the provisions contained in the President’s latest tax proposal, please contact RVG & Company at 954.233.1767.

Even though tax years 2020 and 2021 have closed, it is still possible to claim the Employee Retention Tax Credit (ERTC) for those years. President Biden signed the Infrastructure Innovation and Jobs Act back in November 2021, which ended the ERTC a quarter early. This early “cut-off” eliminated the 4th quarter of 2021 as a qualifying quarter for the ERTC – but it did not prohibit taxpayers from claiming the credit for prior eligible quarters in tax years 2020 and 2021.

Qualifying wages paid prior to October 1, 2021, can still be used to claim the ERTC for applicable quarters and time periods, assuming the gross receipts or government shutdown tests are met. Employers may claim up to $5,000 per employee in 2020, and up to $7,000 per employee per quarter in 2021 (excluding Q4 2021), for a total potential ERTC for all qualifying quarters of $26,000 per employee.

In addition, employers that received Paycheck Protection Program (PPP) loans are eligible to receive the ERTC.

Due Date for Claiming ERTC and Amending Payroll Tax Returns

The ERTC for 2020 and 2021 may be claimed on an amended quarterly payroll tax return (Form 941X). Each quarter must be amended on a separate form. After the IRS processes Form 941X, a check is issued to the taxpayer for the credit amount. The statute of limitations for filing amended payroll tax returns is three years from the due date of the return. For example, to apply for the Employee Retention Tax Credit for the 2nd quarter of 2020, the amended return must be submitted by July 2023. As a result, there is still time to apply for the ERTC.

Wages used to claim the ERTC cannot be deducted on a tax return. Therefore, filing an 941X after a tax return has been filed for 2020 or 2021 will require the filing of an amended tax return (corporate, partnership or S – Corporation) because wages used to calculate the ERTC are disallowed as a tax deduction in 2020 and 2021.

It should be noted that the IRS has up to 5 years to audit the amended Form 941X returns and the supporting information.

ERTC Qualifications

• Reduction in Gross Receipts: To qualify for the ERTC the employer must have a decrease in gross receipts for 2020 and / or 2021. The decrease must occur in each quarter where the ERTC is claimed. To meet the test in 2020, the employer must have a decrease in gross receipts of 50% when compared to the same quarter in 2019. To meet the required decrease in 2021 the employer must have a decrease of 20% of gross receipts when compared to the same quarter in 2019.
• Government Shutdown: Also, an employer will qualify for the ERTC if there was a government order to fully or partially shutdown operations because of the COVID-19 pandemic.
• Large Employer Rules: For 2020, employers with 100 or fewer full-time employees: all employee wages qualified for the ERTC. For employers that had 100 or more full-time employees: qualified wage are wages paid to employees that did not perform services for the employer due to COVID-19 related circumstances. For 2021, employers with 500 or fewer full-time employees – all employee wages qualified for the ERTC.
• Wages Paid to Owners and Relatives: Wages paid by an employer to majority owners and their relatives are not eligible wages for the ERTC. An individual is considered to constructively own stock in an employer that is owned, directly or indirectly, by the individual’s family members, including their spouse and their siblings. Thus, the ownership structure and the status of related party employees must be evaluated. Also, self-employed individuals are not eligible for the ERTC, however, wages paid to their employees are eligible.

Interaction of ERTC and PPP

Initially, the CARES Act prohibited an employer to receive both a PPP loan and the ERTC. The CARES Act was revised to permit employers to receive both, however, an employer cannot claim the ERTC for wages that were paid with PPP loan proceeds. The IRS has issued guidelines regarding the interplay of the ERTC and PPP. In addition, there are strategies that can be used to maximize the benefits of both opportunities.

Conclusion

RVG & Company can assist in evaluating your company’s potential to claim the ERTC for 2020 and 2021. While there are several factors and qualifications to consider, the credit can provide a significant benefit as the economy unwinds from the impact of COVID-19. If you would like to discuss any of the provisions contained in the President’s latest tax proposal, please contact RVG & Company at 954.233.1767.