Category: Advisory

In late December, Senator Joe Manchin (D. West Virginia) indicated that he would not support President Biden’s Build Back Better (BBB) legislation.

As a result, the legislation did not have enough votes in the Senate to be enacted. The BBB had been previously approved by the House of Representatives where the Democrats hold a slim majority. However, the Senate is evenly divided between Democrats and Republicans. Therefore, Senator Manchin’s decision not to endorse the current version of BBB meant that it would not become law.

Senator Manchin’s key disagreements with BBB are that its projected cost of $2 trillion would contribute to the current escalating inflation and that several of the social programs in the legislation did not have a means test to determine if an individual would qualify for the program. In addition, the bill’s proposal to increase the state and local tax deduction generally benefit taxpayers that have high incomes of $400,000 or more. Moreover, Senator Manchin maintained that the full cost of the BBB would approach $4 trillion, which is more than double that the bill’s supporters claimed.

While BBB is currently on hold, negotiations continue to potentially enact some form of the legislation. We will provide updates on any developments. The significant social programs included in the bill related to climate initiatives, healthcare subsidies, universal prekindergarten, childcare, eldercare, paid leave, prescription drug pricing, and affordable housing.

Under the bill, the cost of these programs was to be offset by various tax increases to corporations and high-income individuals. For example, a 15% corporate minimum tax was proposed on corporations that have $1 billion of book income. Taxable income for large corporations can be reduced by net operating losses, tax credits, and interest deductions that result in no income tax liability for the year. The minimum tax was designed to address this issue.

In addition, the BBB bill was going to impose the 3.8% investment income tax on individuals that had an income of $400,000 or more from a trade or business. As a result, active trade or business income allocated to a limited partner of a limited partnership or a shareholder of a subchapter S corporation would have been subject to the net investment income tax. Under current law, the tax applies only to certain portfolios and passive income.
Also, the bill was set to limit the gain exemption under IRC § 1202 for “qualified small business stock”. The exemption would have been reduced from 100% to 50% for taxpayers earning more than $400,000 in a year.

We will monitor any further developments regarding this legislation. It should be noted that Senator Manchin’s dispute with BBB was its cost and potential inflationary impact upon the economy, and not the tax increases. Therefore, if the cost or amount of programs in BBB are reduced it is likely that a variation of the law could be passed – which may include the tax increases described above.

If you have any questions regarding the information in today’s blog post, contact your trusted advisor at RVG & Company, today! (954) 233-1767.

IR-2022-16, January 20, 2022 WASHINGTON — With filing season beginning January 24, the Internal Revenue Service reminded taxpayers about several key items to keep in mind when filing their federal income tax returns this year.

Given the unprecedented circumstances around the pandemic and unique challenges for this tax season, the IRS offers a 5-point checklist that can help many people speed tax return processing and refund delivery while avoiding delays.

1. File an accurate return and use e-file and direct deposit to avoid delays. Taxpayers should electronically file and choose direct deposit as soon as they have everything they need to file an accurate return. Taxpayers have many choices, including using a trusted tax professional. For those using e-file, the software helps individuals avoid mistakes by doing the math. It guides people through each section of their tax return using a question-and-answer format.

2. For an accurate return, collect all documents before preparing a tax return; make sure stimulus payment and advance Child Tax Credit information is accurate. In addition to collecting W-2s, Form 1099s and other income-related statements, it is important people have their advance Child Tax Credit and Economic Impact Payment information on hand when filing.

• Advance CTC letter 6419: In late December 2021, and continuing into January, the IRS started sending letters to people who received advance CTC payments. The letter says, “2021 Total Advance Child Tax Credit (AdvCTC) Payments” near the top and, “Letter 6419” on the bottom righthand side of the page. Here’s what people need to know:
• The letter contains important information that can help ensure the tax return is accurate.
• People who received advance CTC payments can also check the amount of the payments they received by using the CTC Update Portal available on IRS.gov.
• Eligible taxpayers who received advance Child Tax Credit payments should file a 2021 tax return to receive the second half of the credit. Eligible taxpayers who did not receive advance Child Tax Credit payments can claim the full credit by filing a tax return.
• Third Economic Impact Payment letter 6475: In late January 2022, the IRS will begin issuing letters to people who received a third payment in late January 2021. The letter says, “Your Third Economic Impact Payment” near the top and, “Letter 6475” on the bottom righthand side of the page. Here’s what people need to know:
• Most eligible people already received their stimulus payments. This letter will help individuals determine if they are eligible to claim the Recovery Rebate Credit (RRC) for missing stimulus payments.
• People who are eligible for RRC must file a 2021 tax return to claim their remaining stimulus amount.
• People can also use IRS online account to view their Economic Impact Payment amounts.

Both letters – 6419 and 6475 – include important information that can help people file an accurate 2021 tax return. If a return includes errors or is incomplete, it may require further review while the IRS corrects the error, which may slow the tax refund. Using this information when preparing a tax return electronically can reduce errors and avoid delays in processing.

3. Avoid lengthy phone delays; use online resources before calling the IRS. Phone demand on IRS assistance lines remains at record highs. To avoid lengthy delays, the IRS urges people to use IRS.gov to get answers to tax questions, check a refund status or pay taxes. There’s no wait time or appointment needed — online tools and resources are available 24 hours a day.

Additionally, the IRS has several ways for taxpayers to stay up to date on important tax information:

• Follow the IRS’ official social media accounts and email subscription lists to stay current on the latest tax topics and alerts.
• Download the IRS2Go mobile app, watch IRS YouTube videos, or follow the IRS on Twitter, Facebook, LinkedIn and Instagram for the latest updates on tax changes, scam alerts, initiatives, products and services.
• Taxpayers can also get information in their preferred language. The IRS translates tax resources into several languages and currently has basic tax information in 20 languages. People can also file Schedule LEP, Request for Change in Language Preference, to receive written communications from the IRS in their preferred language.

4. Waiting on a 2020 tax return to be processed? Special tip to help with e-filing a 2021 tax return: In order to validate and successfully submit an electronically filed tax return to the IRS, taxpayers need their Adjusted Gross Income, or AGI, from their most recent tax return. For those waiting on their 2020 tax return to be processed, here’s a special tip to ensure the tax return is accepted by the IRS for processing. Make sure to enter $0 (zero dollars) for last year’s AGI on the 2021 tax return. For those who used a Non-Filer tool in 2021 to register for an advance Child Tax Credit or third Economic Impact Payment in 2021, they should enter $1 as their prior year AGI. Everyone else should enter their prior year’s AGI from last year’s return. Remember, if using the same tax preparation software as last year, this field will auto-populate.

5. Free resources are available to help taxpayers file. During this challenging year, the IRS reminds taxpayers there are many options for free help, including many resources on IRS.gov. For those looking to avoid the delays with a paper tax return, IRS Free File is an option. With Free File, leading tax software providers make their online products available for free as part of a 20-year partnership with the Internal Revenue Service. This year, there are eight products in English and two in Spanish. IRS Free File is available to any person or family who earned $73,000 or less in 2021. Qualified taxpayers can also find free one-on-one tax preparation help around the nation through the Volunteer Income Tax Assistance (VITA) and Tax Counseling for the Elderly (TCE) programs.

While the 2021 tax season presented challenges for the Internal Revenue Service and taxpayers, filing tax returns early can significantly reduce and minimize issues faced by both the IRS and individuals.

IRS Challenges

In a recent report issued by the National Taxpayer Advocate (NTA) to Congress, the NTA recognized the challenges faced by the IRS during 2021 and indicated that the IRS performed well under the circumstances. Similar to all organizations, the IRS was faced with a reduced workforce and closed offices resulting from COVID-19. Nevertheless, Congress charged the IRS with administering several COVID-19 pandemic relief programs during the filing season, These programs include: 1) the third round of stimulus payment in March of 2021 (also known as Economic Impact Payments); 2) monthly payments of the Advance Child Tax Credit; 3) implementing the provision to reduce of the taxability of unemployment compensation; 4) process tax returns and claims related to the Employee Retention Credit (ERC), and 5) assist the Small Business Administration is developing forms and guidelines for the Paycheck Protection Program loans.

This increased responsibility for the IRS led to significant delays in processing tax returns and refunds for taxpayers. During this period of time, corporate and individual taxpayers filed refund claims related to an expansion of the Net Operating Loss rules, Earned Income Tax Credits, ERC, and stimulus payments. As a result, there IRS saw a significant increase in tax returns to be processed.

In addition to the IRS encountering delays in processing tax returns and refunds, it was difficult for taxpayers to contact the IRS through their customer service lines. According to the NTA’s report, only 11% of calls made to the IRS customer representatives were answered. Also, during this time the IRS online tool titled “Where’s My Fund?” was often nonfunctional and unable to provide guidance for taxpayers.

Taxpayer Solutions – File as Early as Possible

In general, the IRS will process tax returns in the order that they are received. Moreover, tax returns that are filed electronically do not require processing by hand and their related refunds will be expedited. In addition, to efficient processing and turn-around time by the IRS, filing as early as possible does have several benefits that we will discuss below.

Stimulus Credits – As noted above, a significant reason to file early is to receive whatever is due back to you faster. This year, that not only includes refunds, but also any money from the third economic stimulus payment in March 2021 and the Child Tax Credit. While most of the payments were sent out correctly, some taxpayers’ circumstances changed during 2021 or they did not get the entire amount for which they qualified.

Avoid Tax Scammers – Filing your tax return as soon as possible is one of the best ways to guard against tax-related identity theft. In these instances, a criminal files a fraudulent return and collects a refund in your name before you file your return. If you file your legitimate return before a scammer attempts to file one for you, the fraudulent return is rejected. To protect yourself, remember that the IRS will not initiate requests for personal or financial information by email, text, or social media.

Obtain Tax Documents – 1099s, W-2s, and K-1s – Proactively ask financial institutions, employers, and charities for the appropriated documentation. Receiving these items early allows taxpayers to review their information to correct mistakes or any misunderstandings.

In sum, the challenges faced by the IRS during the 2021 tax season are expected to continue. While the IRS is taking steps to ensure a more efficient tax filing season, there are measures that taxpayers can take to minimize these issues.

If you have any questions regarding the information in today’s blog post, contact your trusted advisor at RVG & Company, today! (954) 233-1767.

Inflation, the rise in prices for goods and services, has many effects on one’s financial situation. The primary effect of inflation is that it reduces the purchasing power of consumers and businesses. On the other hand, inflation can encourage spending and investing activities as well as reduce unemployment. However, inflation also impacts an individual’s taxes. This article will highlight some of these instances.

Inflation, the rise in prices for goods and services, has many effects on one’s financial situation. The primary effect of inflation is that it reduces the purchasing power of consumers and businesses. On the other hand, inflation can encourage spending and investing activities as well as reduce unemployment. However, inflation also impacts an individual’s taxes. This article will highlight some of these instances.

In November 2021, inflation rose 6.8% from the same month in 2020. This was the fastest increase since 1982. The price for new cars has risen 11% and prices at restaurants have risen by 7.9%. With the rise of prices for various goods and services comes the adjustments for inflation for wage earners, retirement savers, social security recipients.

While the income of taxpayers in the 1970s had risen with inflation to account for the cost of living, tax brackets have remained static. Thus, during the 1970s, taxpayers were owing more taxes on additional income, which also caused a decrease in purchasing power. Inflation indexing, or the automatic cost-of-living adjustments built into tax provisions to keep pace with inflation, was enacted in 1981, after several years of inflation and rising prices. Congress indexed the income-tax brackets and a handful of other tax provisions for inflation. However, not all tax provisions have been indexed.

Two key provisions that have not been indexed for inflation for home buyers and sellers are the $750,000 cap on total mortgage debt where interest is tax-deductible, and an exemption of up to $250,000 of profit for single filers and $500,000 for married couples on the sale of a home.

If the gain exemptions on the sale of a home were adjusted for inflation, it would significantly increase to $411,000 for single filers and $822,000 for joint filers. A taxpayer that has significant taxable gain from the sale of an appreciated home will owe higher taxes due to inflation. The home-sellers exemption was enacted in 1997 and is in dire need of an adjustment for inflation in the current economic environment and the escalation of housing prices in recent years.

Wage-earners will see their net income (take-home pay) increase in 2022. This is due to the inflation factor used to adjust the federal tax withholding tables has increased by 3% for 2022. The inflation factor increased because of the adjustment of the inflation indexing. This increase lowers the amount of taxes deducted from paychecks and results in more money in taxpayers’ pockets.

Additionally, people who are saving for retirement will benefit from the change in the inflation factor because the inflation factor for a retirement plan uses a different inflation index than for wages and is more beneficial. The top tax-deductible contribution to a 401(k) for savers under age 50 will rise to $20,500 from $19,500 in 2021. However, Traditional and Roth IRAs will not see an increase in the contribution limit. However, people over age 50 can make an additional $1,000 contribution to a Roth or Traditional IRA.

Lastly, higher inflation will also increase Social Security benefits for 2022 by 5.9%, the most since 1982. The increase in the benefits will also result in increased taxes for recipients. The income thresholds where 85% of Social Security payments become taxable have not been adjusted for inflation since 1994. The income threshold for joint-filing couples is $44,000 whereas for single filers it is $34,000.

If the thresholds were adjusted for inflation, they would be about $80,400 for couples and $62,200 for singles in 2022. See our previous article on the Cost-of-Living Adjustment (COLA) for social security recipients for a more detailed explanation.

In sum, while several provisions of the tax code take inflation into account, other provisions remain unaffected.

If you have any questions regarding the information in today’s blog post, contact your trusted advisor at RVG & Company, today! (954) 233-1767.

Inflation, the rise in prices for goods and services, has many effects on one’s financial situation. The primary effect of inflation is that it reduces the purchasing power of consumers and businesses. On the other hand, inflation can encourage spending and investing activities as well as reduce unemployment. However, inflation also impacts an individual’s taxes. This article will highlight some of these instances.

Even though tax filing season is well underway, there’s still time to make a regular IRA contribution for 2021. You have until your tax return due date (not including extensions) to contribute up to $6,000 for 2021 ($7,000 if you were age 50 or older on or before December 31, 2021). For most taxpayers, the contribution deadline for 2021 is Monday, April 18, 2022.

You can contribute to a traditional IRA, a Roth IRA, or both, as long as your total contributions don’t exceed the annual limit (or, if less, 100% of your earned income). You may also be able to contribute to an IRA for your spouse for 2021, even if your spouse didn’t have any 2021 income.

Traditional IRA

You can contribute to a traditional IRA for 2021 if you had taxable compensation. However, if you or your spouse were covered by an employer-sponsored retirement plan in 2021, then your ability to deduct your contributions may be limited or eliminated, depending on your filing status and modified adjusted gross income (MAGI). (See table below.) Even if you can’t make a deductible contribution to a traditional IRA, you can always make a nondeductible (after-tax) contribution, regardless of your income level. However, if you’re eligible to contribute to a Roth IRA, in most cases you’ll be better off making nondeductible contributions to a Roth, rather than making them to a traditional IRA.

Making a last-minute contribution to an IRA may help you reduce your 2021 tax bill. If you qualify, your traditional IRA contribution may be tax-deductible. And if you had low to moderate-income and meet eligibility requirements, you may also be able to claim the Saver’s Credit for 2021 based on your contributions to a traditional or Roth IRA.

You have until your tax return due date (not including extensions) to contribute up to $6,000 for 2021 ($7,000 if you were age 50 or older on December 31, 2021) to all IRAs combined. For most taxpayers, the contribution deadline for 2021 is April 18, 2022. Claiming this nonrefundable tax credit may help reduce your tax bill and give you an incentive to save for retirement. For more information, visit irs.gov.

Roth IRA

You can contribute to a Roth IRA if your MAGI is within certain limits. For 2021, if you file your federal tax return as single or head of household, you can make a full Roth contribution if your income is $125,000 or less. Your maximum contribution is phased out if your income is between $125,000 and $140,000, and you can’t contribute at all if your income is $140,000 or more. Similarly, if you’re married and file a joint federal tax return, you can make a full Roth contribution if your income is $198,000 or less. Your contribution is phased out if your income is between $198,000 and $208,000, and you can’t contribute at all if your income is $208,000 or more. If you’re married filing separately, your contribution phases out with any income over$0, and you can’t contribute at all if your income is $10,000 or more.

Even if you can’t make an annual contribution to a Roth IRA because of the income limits, there’s an easy workaround. You can make a nondeductible contribution to a traditional IRA and then immediately convert that traditional IRA to a Roth IRA. Keep in mind, however, that you’ll need to aggregate all traditional IRAs and SEP/SIMPLE IRAs you own — other than IRAs you’ve inherited — when you calculate the taxable portion of your conversion. (This is sometimes called a “back-door” Roth IRA.)

If you make a contribution — no matter how small — to a Roth IRA for 2021 by your tax return due date and it is your first Roth IRA contribution, your five-year holding period for taking qualified tax-free distributions from all your Roth IRAs (other than inherited accounts) will start on January 1, 2021.

If you have any questions regarding the information in today’s blog post, contact your trusted advisor at RVG & Company, today! (954) 233-1767.

This article will focus on the developing issue related to the imposition of income taxes by cities and local governments.

Businesses that operate in the city of San Francisco must register in the city and pay a license fee. Moreover, businesses may be subjected to three additional taxes: the San Francisco Gross Receipts tax, the Homeless Gross Receipts Tax, and the Commercial Rent Tax. While these types of taxes are common in several large cities, such as New York City and Philadelphia, smaller cities in Ohio, Colorado, and Michigan impose similar income and gross receipts taxes. Additionally, local municipalities and towns are reviewing their charters to determine if they can enact income, gross receipts, and license taxes to raise revenue.

In San Francisco, the nexus standards include maintaining a fixed place of business within the city; performing any work, including solicitation, within the city for all or part of any seven days during the calendar year; or generating more than $500,000 in San Francisco-sourced gross receipts during the calendar year. Except in certain limited circumstances, tax filing must be made online.

With the recent increase in the sale of goods and services provided through the online-virtual economy, businesses will have to consider the potential consequences of city taxes. For example, a taxpayer may be subject to the New York City corporate income tax based upon sales to customers located in the city. New York City takes a market-based approach to sourcing sales in its jurisdiction. As a result, a service provider located outside New York City may be subject to the City’s corporate income tax because it has a customer located in New York City that receives a benefit from the out-of-state service provider.

The city of Philadelphia imposes the Business Income and Receipts Tax (BIRT). Every individual, partnership, limited liability company, and corporation is subject to tax. The tax has two components comprised of an income tax and gross receipts base. The tax is generally imposed on businesses that have a location in Philadelphia, however, the seller of software and SaaS may be subject to the BIRT if they have customers that receive a benefit in Philadelphia.

It should also be noted that Ohio has over 600 city and municipal jurisdictions that impose income taxes. Moreover, Michigan has almost 20 cities that impose an income tax and Colorado has five cities that impose similar taxes.

Based upon state and local jurisdictions increasing need for tax revenue, local income taxes and fees will be an emerging issue for businesses.

If you need assistance in determining if your business’s expansion is potentially liable for local taxes, please contact an advisor in our tax practice.

If you have any questions regarding the information in today’s blog post, contact your trusted advisor at RVG & Company, today! (954) 233-1767.

With the benefit of tax-free compounded growth offered by Roth IRAs, contributions made to a child’s IRA can have significant growth.

Compounded Growth

With the benefit of tax-free compounded growth offered by Roth IRAs, contributions made to a child’s IRA can have significant growth. For example, assuming an 8% expected rate of return, the investments made by age 19 will grow to FORTY times its value by the time they reach 67 (current full retirement age). For example, $2,500 invested before high school graduation will be $100,000 at retirement. This exponential growth is known as compounding.

Compounding interest and growth occurs when interest and growth is earned on the initial contribution of principal and the growth of the investment over time. Allowing more time for the investment to grow, will allow for more substantial growth to occur. By starting to save prior to graduating from high school, the investment will have almost fifty years of compounding growth until your child’s retirement.

Contributions to Roth IRA’s must be made with after-tax contributions and any earnings are tax-free if the rules are followed.

How to Generate Income for Your Child

Any child, regardless of age, can contribute to an IRA provided they have earned income; others can contribute too, if those amounts do not exceed the amount of the child’s earned income. For 2021 and 2022, the maximum a child can contribute to an IRA (either traditional or Roth) is the lesser of $6,000 or their taxable earnings for the year. For example, if your child earns $3,000 this year, they could contribute up to $3,000 to an IRA. However, if your child earns $10,000, they could only contribute $6,000, which is the maximum contribution. If your child has no earnings, they cannot contribute at all.

It should be noted that your child must have earned income during the year for which a contribution is made. Money from an allowance or investment income does not qualify as earned income and thus cannot be used towards contributions.

Ideally, your child will receive a W-2 or Form 1099 for work performed to document their earned income. But of course, that does not always occur with entrepreneurial jobs such as babysitting, yard work, dog-walking, and other common youth-oriented jobs. It is recommended to keep receipts or other documentation. These should include the following:

• Type of work
• When the work was performed
• For whom the work was performed
• The amount your child was paid

As noted above, earned income cannot be an allowance (even if the child does chores for it) or a cash gift given directly to the child. Still, although allowances are not allowed considered earned income, you may be able to pay your child for work done around the house, provided it is legitimate, and the pay is at a market rate. (For example, $1,000 for two hours of babysitting, would be unreasonable.)

It helps if the child does similar work for outsiders—doesn’t just mow the family’s lawn, but they mow the lawns of others in the neighborhood. Or, if you have your own business, you can employ your child to perform age-appropriate tasks for reasonable wages.

If you have any questions regarding 1099 Requirements or other obligations, please contact RVG & Company, today! (954) 233-1767.

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.