Month: August 2022

The Senate Democrats have agreed on a tax bill titled the “Inflation Reduction Act of 2022” (Act) that is anticipated to raise $450 billion in taxes to pay for clean energy and inflation reduction. While the full Senate has not approved this measure, the Act seeks to raise substantially less tax revenue than President Biden’s proposed Build Back Better legislation, that was rejected by the Senate earlier this year because it sought to raise $1.7 trillion of new taxes.

The significant areas where the Act seeks to raise taxes are as follows:

• Corporate Minimum Tax – The Act would impose a minimum tax of 15% on corporations that have more than $1 billion of book income – as determined by the corporation’s financial statement (not its tax return). The tax would not apply to S Corporations and real estate investment trusts.
• Expand the Carried Interest Rule – The Act would increase the holding period from three years to five years for taxpayers with adjusted gross income of $400,000 or more to receive long-term capital gains treatment. Long-term capital gains are taxed at a rate of 20%, while ordinary income is taxed at 37% .

It should be noted that when compared to the Build Back Better legislation, the Act does not increase individual tax rates, capital gains rates, eliminate the tax-free IRC § 1031 real property exchange or limit the tax benefit of IRC §1202 – the gain exclusion for owners of small businesses.

One area of the Act that will impact taxpayers is its allocation of revenue to IRS enforcement and administration. The Act appropriates $80 billion to the IRS over 10 years. The funds will be used by the IRS in the following areas:

• Taxpayer Services: Filing assistance, education, account services and taxpayer advocacy.
• Enforcement: Hiring additional IRS field agents, expansion of exam technology, and increasing the rate of audits and criminal investigations.
• Operations & Administration: This includes the improvement of offices, telecommunications, technical research, security, and information technology development.

While this legislation is not final and may be revised – RVG & Company will keep you informed of any developments.

Small businesses have several options when it comes to providing retirement savings plans for their employees and owners. These plans are generally easy to set up and do not require complex annual filings or costly administration. This article will review the choices available to small business owners and self-employed individuals.

By starting a retirement savings plan businesses help their employees and owners save for their future. Retirement plans enable employers to attract and retain qualified employees. Also, the plans offer tax savings to the business. The common tax advantages are that the employer contributions are deductible from the employer’s income and employee contributions are not taxed until they are distributed to the employee. In addition, the money in the plan grows tax-free and qualifying employers may receive credit for certain startup costs.

This summary will focus on defined contribution plans and Individual Retirement Accounts (IRAs) where the employer and/or employee make the contributions.

Retirement Plan Options That Small Businesses May Consider

SIMPLE IRA (Savings Incentive Match Plan for Employees):

This is available to any business that has 100 or fewer employees. Under a SIMPLE IRA, employees can contribute $14,000 in 2022 and $17,000 if age 50 or older. Employers are required to either match the employees’ contribution dollar for dollar – up to 3 percent of an employee’s compensation – or make a fixed contribution of 2% of compensation for all eligible employees, even if the employees choose not to contribute. Employee contributions to the SIMPLE IRA are excluded from the employee’s taxable income but are subject to Social Security, Medicare (FICA), and Federal Unemployment Tax Act (FUTA) withholding taxes. Employer contributions are deductible from the business’s taxable income. Lastly, the employee vests into all contributions immediately.

SIMPLE 401K:

Like the SIMPLE IRA, this plan is available to businesses that have 100 or fewer employees, and each receives at least $5,000 in compensation. Under the SIMPLE 401K, an employee may elect to defer a portion of their compensation. But unlike a regular 401K, the employer must make either: (i) a matching contribution of up to 3% of each employee’s pay, or (ii) a contribution of 2% of each eligible employee’s pay. For 2022, an employee can contribute up to $14,000 (an employee over age 50 can contribute up to $3,000 more). Employee contributions are excluded from taxable income but are subject to FICA and FUTA withholding. Employer contributions are deductible from the business’s taxable income. Lastly, employees are immediately 100% vested in all contributions. While this plan requires the annual filing of Form 5500, it is not subject to the complex non-discrimination rules of regular 401Ks, which may limit the participation of highly compensated employees.

SEP (Simplified Employee Pension):

A SEP plan allows employers to create SEP IRAs for themselves and each of their employees. Self-employed individuals can also establish a SEP. Employers must contribute a uniform percentage of pay for each employee, although they do not have to make contributions every year. Employer contributions are limited to the lesser of 25% of pay or $61,000 for 2022. Catch-up contributions for employees that are age 50 or older are not permitted. SEPs have low start-up and operating costs and can be set up with Form 5305-SEP. The amounts contributed to a SEP can vary each year – offering flexibility when business conditions change. Employees immediately vest into the SEP. Employers often start a SEP plan so that they can contribute to their retirement at higher levels than a traditional IRA permits. Employers receive a tax deduction for contributions made to a SEP and these amounts are not included as employee wages for income tax withholding but are subject to FICA and FUTA.

Payroll Deduction IRAs:

Under this IRA, employees establish a Traditional or Roth IRA with a financial institution and authorize a payroll deduction amount for it. Any size business and self-employed individual can establish a Payroll Deduction IRA plan. The employer does not make any contributions, they merely arrange for the employees to make a payroll deduction and transmit the contributions to a financial institution. There a no filing requirements. The benefit for the employee is that they make IRA contributions throughout the year as opposed to the end of the year when they may not have funds.

Solo / One Participant 401Ks:

This plan is a traditional 401(K) that covers a business owner with no employees, or the business owner and their spouse. If the business owner is both an employee and employer, they can make an elective deferral for 2022 of up to $20,500; plus 25% of their compensation. However, the total contribution for 2022 cannot exceed $61,000. For self-employed individuals, there is a special computation for contribution limits that are based on earned income. The benefit of a Solo 401(K) is that it permits a greater amount to be saved towards retirement than traditional IRAs, SEPs, and SIMPLE plans. While this plan may have higher administrative costs, the employer does not have to perform nondiscrimination testing for highly compensated employees and can file Form 5500 EZ as opposed to the complex Form 5500.

Conclusion:

While each of these retirement plans requires planning and a form to be filed, employer-sponsored IRA, SEP, and SIMPLE plans are the easiest plans to create and maintain. They offer benefits like qualified plans, such as Regular 401Ks, pensions, and profit-sharing plans, but without complex annual filings and significant administrative costs.

If you would like to discuss the potential retirement plan opportunities available to your business, please call RVG & Company at 954.233.1767, and we can help you evaluate the appropriate solution.

On August 16, 2022, President Biden signed the Inflation Reduction Act (“Act”) into law. The legislation contains significant changes related to tax, climate change, energy, and health care. The new law is expected to raise approximately $222 billion over $10 years. As an overview, the Act includes a 15% corporate alternative minimum tax (AMT), a 1% excise tax on stock buybacks, a two-year extension of the excess business loss limitation rules, and additional funding for the IRS. The Act also contains several energy-tax incentive provisions.

It should be noted that the Act does not increase individual tax rates, capital gains rates, change the estate and gift tax rules, eliminate the tax-free IRC § 1031 real property exchange, or limit the tax benefit of IRC §1202 – the gain exclusion for owners of small businesses.

Summary of Tax the Provisions

15% AMT:

The Act imposes a 15% corporate AMT on large corporations that have an average of $1 billion of income based on their financial statements for a three-year period. The AMT is effective for tax years beginning after December 31, 2022.

Excise Tax on Corporate Stock Buybacks:

The Act levies a 1% tax on stock repurchases by publicly traded corporations. The tax applies to repurchases of stock after December 31, 2022. The tax is imposed on the fair market value of the stock repurchased by the corporation during the tax year, reduced by the value of stock issued by the corporation during the tax year.

Extension of Excess Business Loss Limitation Rules (EBLL):

Under this provision, the deduction of business losses of a non-corporate taxpayer is limited. The Act extends this limitation until December 31, 2028. Before the Act, the limitation was set to expire at the end of 2026. Under the EBLL, taxpayers may not deduct an excess business loss against other nonbusiness income (generally, net business deductions over business income) if the loss exceeds $250,000 ($500,000 in the case of a joint return). The excess loss becomes a net operating loss in subsequent years and is available to offset 80% of taxable income each year.

Enhancement of IRS Resources:

The Act will allocate $80 billion to IRS enforcement and administration over 10 years. The resources will be focused on: (i) Taxpayer Services – such as filing assistance, account services, and taxpayer advocacy; (ii) Enforcement – hiring additional IRS field agents, expansion of exam technology, and increasing the rate of audits and criminal investigations; and (iii) Operations & Administration – this includes the improvement of offices, telecommunications, technical research, security, and information technology development.

Energy & Climate Tax Credits:

The Act provides not only new energy tax incentives, but also provides new means to deliver them. In some instances, the Act allows direct payments from the federal government to taxpayers in lieu of tax credits. In other instances, the tax credits can be transferred, or sold, to other taxpayers. Some of the notable credits are:

• The Production Tax Credit – This is for renewable electricity production.
• Investment Tax Credit – This is for the installation of renewable energy property.
• Carbon Oxide Credit – The Act expanded the credit for capturing each metric ton of qualified carbon oxide using special equipment.
• Other Fuel Credits – The Act also provides for the broadening of credits for biodiesel and sustainable aviation fuel along with a new credit for clean hydrogen production.

RVG & Company

If you would like to discuss the potential impact that the Act may have on you, or possible tax strategies please contact your Trusted Advisor at RVG & Company at 954.233.1767.