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Business and Individual Federal Tax Update

Jan 30, 2024

With tax law changes on the way, it’s critical for you to be aware of what’s changed and what opportunities exist. This webinar covers the recent key tax developments impacting individuals and businesses.


Benjamin Aspir:Welcome everybody. Thank you for joining us today on today's webcast. We're very excited. We have a slate of topics to talk about regarding the individual and business tax updates and planning for the upcoming tax year. My name is Ben Aspir. I'm a tax partner in EisnerAmper's Private Client Services Group and I'll be covering the first half of today's session, the individual tax portion. The last year, 2023 was quiet from a legislative perspective, but several new tax provisions went into effect going forward, especially in 2024 for tax legislation that passed in prior years. Additionally, there is some proposed tax legislation that may go into effect. I'll be covering the individual side of that and most of the provisions were business tax provisions and Tom will be talking about that in the second half of today. In front of you at this point-

Thomas Cardinale:Thanks, Ben. I just rejoined. Thanks for taking it.

Benjamin Aspir:In front of your screen are the 2023 individual tax brackets, I'm not going to spend too much time on it, just so you're aware, for your 2023 taxes. I will point out, if you look at the 35% row, if you compare the single column and the married filing joint column, the 35% rate ends a lot quicker if you're married filing jointly. Essentially this is called the marriage penalty in the tax code. Not the marriage penalty if you forget an anniversary, but this is a tax penalty where you end up paying more tax if you file jointly as opposed to filing as single. And you'll see that in a couple other items that I'll highlight. Again here, there are just the 2024 brackets just so you have for your own reference. The standard deduction, which increased significantly when the tax cuts and Jobs Act PAC passed the end of 2017, they almost doubled. And as you'll see here, they have had a material increase year over year. They're adjusted for inflation, so some planning for 2024.

Certain items, it's hard for you to plan around that you can deduct. Real estate taxes, they are what they are. Mortgage interest, it is what it is. But as far as charitable planning, if at the end of 2024, if you're close to the standard deduction limit, it may be worth it to itemize and accelerate some of those charitable deductions so that you can benefit from itemizing your deductions and then in the subsequent year, take the standard deduction. Some retirement plan contribution limits, these are the 2024 numbers. Now would be a good time, now that we're in the new year to check if you're participating in a plan a 401(k) or 403(b), whatever type of plan you're in, see if you're able to maximize. I know many people either contribute based on a percentage of their salary or a set number every single pay period. So I would suggest checking, going on your retirement plan website to make sure that if you're interested in maximizing the limit that you are maximizing it, which is currently 23,000. And then there's a catch-up if you're age 50 or older.

As I mentioned, the Tax Cuts and Jobs Act, I'll refer as the TCJA. The TCJA passed at the end of 2017. It went into effect in 2018. So, why am I talking about this now if it's already coming on six years old? So many of the provisions in the TCJA, the corporate provisions, many of them are permanent. However, on the individual tax side, many of those provisions will change or sunset if there's no action in Congress. In less than two short years, that may change. Some of them are significant, some of them are beneficial, and some of them would increase tax on many taxpayers.

The individual tax rates would revert to the old levels, pre-TCJA, so what they were in 2017. So the top tax rate would be 39.6% instead of 37%, but it wouldn't just be the top tax bracket that would be affected. What you see. So the 15% rate, that's the old rate that would be from the 12% rate that would be increased. So, many of the brackets would be affected and it would essentially be a tax increase for almost every single bracket except for the 10% bracket. The standard deduction, which I previously mentioned, that would be cut in half, essentially if it's allowed to expire. Personal exemptions that went away with the TCJA and if any of you have tried to fill out a W4 if you switch jobs or want to adjust your withholdings, so that concept of a personal exemption would return. The child tax credit, which is currently $2,000, that would be reduced to a $1,000 and it would be a much lower income threshold phase out. Taxpayers would phase out much quicker under the child tax credit if TCJA parts of it aren't extended.

The maximum additional child tax credit, which is essentially the refundable portion of the credit, that would be reduced. And lastly, as far as the child tax credit, there's a credit that was created, a $500 credit as part of TCJA that was created a credit for other dependents, essentially adult dependents that normally wouldn't be eligible for the child tax credit. So that would go away as well. Moving expenses, so technically moving expenses is still available but only to active duty military. Prior to TCJA, if you moved more than 50 miles for a job, you were able to deduct certain expenses, so that would be reinstated. So, that would be a favorable change, one of the few of them, if there's no action on TCJA. Charitable contributions, currently you can deduct up to 60% of your adjusted gross income. So for example, if your adjusted gross income was $100,000, you could deduct up to $60,000. That would be reduced to 50%. So in the same situation, you would be able to deduct up to 50% or $50,000.

And last but not least on this page is the state and local tax cap, which has gotten a lot of press and that would be a pretty significant change. Since the enactment of TCJA, there have been many attempts to raise the $10,000 cap that limits your deduction on state and local taxes, which is especially relevant in high tax states where real estate taxes are high or income taxes or both. That's something to certainly keep an eye on and there was a lot of business tax planning regarding once the cap went in effect. So absent any action, the $10,000 state and local tax cap would sunset and it would go back to under the old rules and there would not be a cap on the state and local taxes. Some additional provisions that would change as of January 1st, the mortgage interest deduction. Currently it's up to, you can deduct interest up to $750,000. It would increase up to a million dollars of debt that you can deduct.

Personal, casualty and theft losses, currently only federally declared disasters are you allowed to claim that that would no longer be required, so that would technically be another favorable change. You wouldn't need a federally declared disaster to claim a casualty or theft loss. This is one that affected many of our clients. The 2% limit on miscellaneous itemized deductions. So our fees, our tax prep fees used to be deductible as long as they exceeded the 2% limit. If you have a broker and you're paying investment fees, those used to be deductible and a lot of times that could be a significant amount of money that could have been deducted is no longer deducted under TCJA. Additionally unreimbursed employee expenses that is no longer deductible under TCJA if it were allowed to be reinstated, so if you have a work-related clothes specific to that job or you have unreimbursed travel and auto expenses, those would be deductible.

Pre-TCJA, this would be an unfavorable reinstatement, but there was an itemized deduction phase out. So if you had a certain amount of deductions and your income limit was a certain level, your itemized deductions would start to phase out up to a certain point. So that phase out would be removed. Another significant change that would hit owners of pass through entities, such as partnerships, S corp, even if you have a Schedule C, the 20% 199A qualified business deduction, which allows a taxpayer to deduct up to 20% of their qualified business income. So if that's allowed to sunset, you would be no longer able to take the 20% deduction, that would be pretty significant. That would change the conversation on what type of entity if you own a business, whether it might be worth to be a corporation. But that's an analysis that may need to be done if the 20% deduction is allowed to sunset.

Last but not least, the state and gift tax exclusion. Anyone that this applies to, it would be reduced significantly. Currently for 2024, the state and gift tax exclusion is 13.6 million. It would be reduced to likely, it's projected to be less than half that. So anyone that is in that situation should certainly be looking to maximize their estate and gift tax exclusion before January 1st because they would be grandfathered in if the gift tax exclusion was reduced significantly on January 1st.

Moving on, I mentioned this earlier in my introduction, there is a proposal out there for some tax changes. It's called the Tax Relief for American Families and Workers Act. Many of the changes, which we'll hear about from Tom later, are on the business side. There was one significant individual tax effect from this proposal. Again, it's in proposal. It passed the Ways and Means Committee, but that's where it is right now. So, the individual tax effect from the proposal would gradually increase the refundable portion of the child tax credit from $1,800 to $2,000 through 2025. The calculation of the refundable credit would be determined on a per child basis. You would take your earned income because for the child tax credit, you need to have earned income. Any income more than $2,500 would be multiplied times 15%. You would take that result and multiply it times the total number of children, which would get you the refundable amount.

Additionally, another favorable change if this were to be passed into law is the child tax credit would be adjusted for inflation in 2024 and 2025. Currently it's not adjusted for inflation. The cap is $2,000 and it does not adjust from year to year. Some of the changes that went into effect, this was a part of the Inflation Reduction Act, which passed in the summer of 2022. There were some business tax changes in part of the Inflation Reduction Act, but the main event, the main part of the Inflation Reduction Act was green energy credits. So anyone that owns a home or even a second home that they reside in, there's a credit that often gets missed, a 30% tax credit. It's not refundable, but it does carry over on certain energy efficient home improvements. Usually if you purchase the product, there is a sticker. If you go to Home Depot or Lowe's or any other home improvement store, there's usually a sticker that lets you know if they're energy efficient or you could even go on the Department of Energy website.

So one of the changes of the inflation Reduction Act, like I mentioned it not only on your primary residence you could also use on a secondary residence that you live in. It also lifted the annual credit limit. The prior credit before the Inflation Reduction Act was only $500 and that was forever. It was a lifetime limit. This limit is $2,000 annually, so there may be some planning around that as well. If you have some renovations that you're thinking of doing at the end of the year, may want to spread it out. If you maybe put the doors in, the energy efficient doors in December of '24 and put in the energy efficient windows in December '25, that would allow you to maximize the credit. The credit's around for 10 years. Additionally, there's a $2,000 limit for certain heat pumps and biomass stoves and boilers. So, the combined maximum credit per year is $3,200. And there is also an additional limit within the credit, so it's $250 per door up to two doors and then there's a $600 limit for windows, central air, hot water boilers.

So this credit, like I mentioned, often gets overlooked. So if you're thinking of doing any work on your residence that you own, this should certainly be considered. Another major change as part of the Inflation Reduction Act was the electric vehicle credits for 2024. I'm really going to focus on 2024 electric vehicle credit because electric vehicles have become more popular in the last few years and the 2023 credit changed many times. So the maximum electric vehicle credit for 2024 is $7,500, but you have to meet two requirements. It has to meet certain critical mineral requirements. That will get you $3,750. And the other half of that, the vehicle would have to meet battery component requirements. The easiest way, honestly, if you're buying an EV, an electric vehicle, I put on the bottom the link to the government website. You could literally type in the make, the year, and the model of your car and it'll tell you what your car is eligible for. That's honestly the easiest part.

Another additional change, a new change is you can now claim the EV credit up to $4,000 on used vehicles, but that's only for vehicles that are $25,000 or less. You're probably thinking, how do you claim this credit? Well, there's two ways to claim the credit. You can claim it when you file your 1040 in April. So, it would be in April of 2015. Or new for 2024, they let you take an advance on the credit from the dealer. So essentially the dealer, assuming you're eligible for $7,500, it fronts you the credit, whatever you're eligible for. And the dealer then just gets reimbursed for the credit and then you still would have to just report that on your 1040 to make sure... It's not taxable, but you have to report it to the government that you claimed it because they want to make sure that you are actually eligible for the credit.

And there are also price limits on certain electric vehicles to claim the EV credit. For new vehicles, the limit is $80,000 for SUVs and pickups. If the car costs more than that, if the MSRP is more than that, you won't be eligible. And for sedans, the cap is $55,000 on the MSRP. Also note that if you do take the advanced EV credit, the limit is two per person. You could do that twice a year per person. So each spouse, if you want four EVs, you each can do that, take the credit upfront. But it's elective. It's up to the taxpayer if they want to claim the tax credit upfront or if they want to claim it on their personal tax return. There are some caveats with the EV credit. Here are the limits just for your own reference. If you're over the cap, you can't claim the EV credit. So what happens if you claim the EV credit at the dealer, you take the advance and your income ends up being over the limits? Well, you would have to repay that back when you file your personal tax return.

And if you look at the bottom of the slide, the income limits for used vehicles are significantly less. Just so you're aware that if you're thinking of purchasing a used electric vehicle. Let's move on to our next polling question. The individual tax provisions of the Tax Cuts and Jobs Act expire as of December 31, 2024. True or false? You'll have 60 seconds. So someone asked one of our credit Q&A, how do we get to know if the EV met the critical mineral and battery component requirements? Like I mentioned, you can go on the government website, put in the exact make and model so you don't have to figure out what exactly the definition means. And it'll tell you whether you're eligible for both or one and how much the maximum credit would be.

Someone asked regarding the energy efficient home credit, does a new heater and air conditioner qualify in your primary residence? It does if they meet energy efficient requirements. That's also something you can certainly look up on the government website and it'll tell you if it meets the requirements. Is there a bill number for the Tax Relief for American Families and Workers Act? I do not know that offhand. I don't know if Tom does. Let's see. We're going to be closing the polling question shortly. Here we go. 69% got the polling question correct. The answer is false. They expire after 12/31/25. So we have two more years, but we thought it was very important that people be aware of the changes and if it gets close to the deadline and there are no changes, it may be some plan that should be done if tax... If tax rates are going to be going up, it may be worth it to accelerate income, sell appreciated assets to benefit from it. That'll be a topic for next year's webcast.

Retirement provisions. Moving on, retirement provisions for 2024 that went into effect. The Secure Act passed. Actually there were two Secure Acts. There was a Secure 1.0 that passed in 2019 and then there was a Secure 2.0 that passed at the end of 2022 and it was really meant to encourage American citizens, taxpayers to put money away for retirement. An interesting provision if it's adopted by your employer, your plan sponsor, it extended matching contributions to those paying student loans. So for example, an employer, the employee, let's say they pay $10,000 towards their student loans during the year. The employer can say, let's say make up a number of 5%. 5% of that can be used as a matching contribution towards that employee's 401(k) or 402(b), whatever retirement plan they're in.

Workplace emergency counts. This again, if it's adopted by the plan sponsor is not available for highly compensated employees, which is currently more than $150,000, but it's basically an emergency savings account that's set up for a maximum balance of $2,500. It's called PLESA’s. An interesting provision, part of the Secure Act, it allows 529 rollovers to a Roth IRA. There are some catches though. There's a $35,000 lifetime limit and the plan must have been open for at least 15 years and you're also subject to the annual Roth contribution limits. Therefore you wouldn't be able to roll over the entire $35,000 in one year because it's significantly more than the annual limit. Penalty fee withdrawals for certain emergency expenses, they created that. You can make it a taxable withdrawal, but it's exempt from the 10% penalty that generally comes if you're under 59 and a half and that is allowed to be repaid if you decide to do that taxable withdrawal. The problem is if you do that after your end, you would have to go back and amend your 1040. So I don't know if it's worth it.

The benefit from this is if you take a hardship withdrawal, you can't pay that back. It's just money out of your retirement plan. With this type of withdrawal, you can pay the money back and it's money back into your plan. Here's a big change that was supposed to go into effect in 2024. If someone was a 50 or over if they wanted to do a catch-up contribution on the 401(k) or the 403(b), if you're in excess of $145,000 in income in the prior year in salary, the catch-up contribution had to be a Roth. They delayed that rule through 2025. Required minimum distributions. That was also changed as far as the Secure Act, as you'll see. Depending on the age that you turn, depending on the year, that's when you have to take required minimum distributions. The government recognizes that people are working longer, they're living longer, so they delayed the RMDs.

Let's move on to our next polling question. There are no income limits to claim that electric vehicle tax credit. True or false? So if you purchase a new or used electric vehicle, assuming they meet the requirements, standards by the government, true or false, there are no income limits to claim the credit? It'll have 60 seconds. Let's see what other questions we've got. Oh, here's a good question going with your, somebody asked about... So I gave the 5% example related to employer match for student loans. Is there a cap on that? Does that count towards the 401(k) max for the year? Yes it does. It does apply. Polling results, 75.9% got the answer correct. There are income limits and like I mentioned, they're significantly lower if you're purchasing a US vehicle. I'm going to turn it over to Tom to cover the business tax update for today.

Thomas Cardinale:Hello. Okay, sorry about that. Thank you everybody. I appreciate the patience with our connections. Thank you, Ben, also. So I'm going to take us through the business side and, as Ben was mentioning, the big update is this pending Tax Relief Act. It's still gaining some traction in Congress. It's bipartisan, but so I'm going to give you a tale of two business tax updates. What will be assuming this tax relief does not pass and what will happen if it does. I'm going to give an Employer Retention Credit update. That's been very hot lately, especially from the IRS pushing back on processing further claims. Want to give some clearer guidance on the R&D capitalization and what the IRS now is deeming to be research and development costs. There's been a lot of confusion on that. Some things could be qualified for an R&D cost and some things purely for Section 174 capitalization. And then we'll just go through a miscellaneous update and inflation adjustments on several business tax provisions.

So the Tax Relief Act, again, it is not up for a floor vote. We've been tracking it every day. Mike Johnson, the Speaker, has all the power to put this up for a vote. It has not been put up yet, but as you can see it is widely passed on a bipartisan basis through the House Ways and Means Committee. Only three votes against it, this a week and a half ago. So there is limited opposition and if it does get an up or down vote, it will very likely pass. So we thought it would be important to give you an update on it because there are significant changes. The tax breaks or the pending tax breaks are fully funded by ending the Employer Retention Credit early. It's about an 80-ish billion dollar cost and ending the ERC program early has a corresponding 80% savings to fund this.

So, it is fully paid for. So, hopefully that takes away a political pawn away from the discussion about any kind of tax act that's passed is how do we pay for it. It largely rolls back a lot of the most unpopular tax provisions from the Tax Cuts and Jobs Act. So, I'm sure that's welcome news for businesses if that passes. At the same time, a lot of the changes are retroactive and as CPAs we always fear that word because it brings up an issue we have in dealing with clients is, well, does that mean we have a bunch of amended returns to do? Which of course is added costs to companies or could it be a possible catch-up adjustment we could just make with the current year return and adjust any kind of income tax accounting adjustment through a form 3115. So that would be the most preferable because then it allows you to just catch it up in a current year filing.

So, we'll just call this pending tax act the TRAFWA for now. It's going to retroactively delay the capitalization requirement for domestic. I'm underlining domestic. It's not all research and development or research and experimental expenses until 2026. So, it initially started in 2022 and now it's getting a three year or four year delay. It does not cover however foreign-based research and experimental. So if you're offshoring your research and development, whether it's software development or just any kind of development, functional development or improvement of a product, you still have a 15-year capitalization period to do for that. But still for the US side, which most of our companies are doing, that would be a welcome adjustment because it would allow a full write off of the research and development expenses starting after 12/31/21 and before 2026. The five-year capitalization will commence again, so this is basically a deferment after tax years ending after 12/31/25.

163(j) is the business interest deduction limitation and the TRAFWA proposes to extend the use of EBITDA. We always seem to flip back and forth between using tax bases EBIT and EBITDA. So the TRAFWA is proposing to use that again, which will in the end increase the deduction amount that will be taken by taxpayers. So as of today, no law, if there was no law, you still have to use EBIT by default. So you're not allowed to use depreciation and amortization in computing your interest expense limitation. So for tax years beginning after '21, again retroactive and so this is essentially tax years '22 and '23. By default you still need to use EBIT, but what this pending TRAFWA bill does is it allows companies to elect to use EBITDA for '22 and '23.

So they're doing that, which I think is actually a bit clever, because to some people the impact may be immaterial or it's just a carryover issue that may be used anyway. So, you're already taking amended returns off the table and for companies that it does have more meaningful impact, you could elect to make that and then it would be a decision whether you have to amend or file a 3115. And then for tax years after 12 31 25, the ATI, which stands for adjusted taxable income goes back to EBIT. So again, we have another deferment of this one provision

And we're going to move on to our I believe third polling question. How will the cost of the pending TRAFWA tax relief bill be funded? And mind the wording of the question, it's not what would be the most popular way to pay. Got some questions on the ERC already, we're going to cover that in a minute. Question on 174, what do about capitalization and taxes pay for file amended return. Well, that's going to be, we're still waiting for guidance on that. If that's going to mean you have to file an amended, what the IRS usually do after drastic changes, they'll come out with guidance. It could be a relief guidance on filing a 3115. It could be adjusting your carryover impact to the change. So, we're still waiting for guidance on that. Can we now proceed to our answers and see how we did? All right. Most of you got it right. It is ending the ERC program early. 64% got it right. Although I do appreciate the Super Bowl bets, had to put that in there.

Continuing on with this pending TRAFWA bill, one of the more popular tax write-offs that our companies enjoy is bonus depreciation. It's been a hundred percent bonus for a few years and then it's been on a 20% per year cascading or waterfall or sunset away every year. So in 2023, you can only use 80% bonus and in 2024 at 60%. So, the pending TRAFWA bill extends the 100% for another couple of years through the end of 12/31/25 through the end of December '25, placed in service right back to 100%. However, after that, in 2026, you don't start the 20% cascading over again. It's a cliff provision to 20%. So we're going to have a 100%, 100%, 100% and then it's just going to drop to 20%. But knowing that they've always seemed to extend the 100% bonus as it gets near the deadline, I wouldn't count on that 20% even coming into play, but we'll see.

IRC 179, Section 179 expensing. This is almost like a fifth wheel to business tangible property write-offs. If you don't have a bonus, if you're not applying bonus, you could also take a direct write-off for Section 179. On business property, it's limited to 1.29 million. It's increasing the maximum from a little over 1 million placed in service after '23, increases the phase out threshold. So if you have a company buying too much property, you don't get the 179 deduction. So the maximum amount increasing the phase out is 3.2 million for property placed in service after '24 and then both amounts are adjusted annually for inflation.

A couple other provisions, this one I think is welcome. If anyone is reporting 1099s or runs into 1099 compliance each year, we've been stuck with this $600 threshold for seems like decades. And they're finally increasing it a little bit as a catch-up for inflation. It is now up to $1,000 for 1099 miscellaneous or NEC reporting and going forward it's going to be adjusted for inflation. So, we don't know what those inflation amounts will be yet. Normally they do it on a year to year basis or maybe two years at a time. So, you can expect maybe a 3% to 5% inflation. The US-Taiwan, this is kind of a behind the scenes, it's not going to affect most of you, but it's just an interesting one because Taiwan is not considered a separate country. It's part of China, but the US has this proposal to have a deemed tax treaty with them. It has all the same benefits, removing of double taxation, favorable permanent establishment definitions, so that was included as well.

So now I have to do the other side of the coin. What if this TRAFWA bill does not pass? So, I decided this put a quick summary for everyone just for ease of explanation. These are the four main provisions of what you have to continue to use if there's no bill. So the interest expense limitation, you have to use 30% of EBIT instead of EBITDA. The R&D capitalization you must continue to use over five years for domestic R&D costs. Just note the bonus depreciation amounts, if there's no bill, it's 80% in '23, 60% in '24. And then ERC claims, which I'm going to cover next, can continue to be filed up to April '25. That depends on the year of the claim or what you're measuring on. So if it's a '21 measured claim, you'll have up to 2025 assuming this pending bill does not get passed past.

So that brings us to the ERC. The IRS has essentially declared war on the ERC. There's been several IRS releases. Notice releases on putting a moratorium on new claims. They will not process any more claims. There's over 1 million claims currently in the hopper that are unprocessed and that's as of December, so it could be well over a million at this point. An estimated 20,000 letters were issued by the IRS to suspected businesses of filing an improper ERC claim and I believe they targeted mostly new businesses or ones that either lacked any employees or just an amount of qualified employees. And the processing and qualification review time has been increased to six months from three months. That's just the starter. Then at the end of December, right around the holidays when no one was looking at IRS updates, they came out with a voluntary disclosure program as a way to try to alleviate the backlog of all of these unprocessed claims. They offered this to taxpayers that they believe may be filed an erroneous claim or overestimated the amount of the claim.

You could file this voluntary disclosure to where you get to keep 20% of the ERC claim tax-free and not subject to audit either, plus any interest earned on that 20% and you must, and the company must return 80%. So that's a big give back to give 80% of your cashout claim. But if you believe that it was filed erroneously, they're giving you this out. You do have to cooperate with the IRS in this voluntary disclosure, namely coming forth, disclosing any parties or promoters of the claim that assisted you. There's been a lot of brand-new companies or boutique ERC companies popping up out of everywhere and this is all they do and it's very lucrative to them to get a fixed contingent fee on an ERC claim and they'll of course have signed indemnifications from any audit exposure from the company. So, you must tell the IRS who these parties are and the claims must be filed by March 22nd. That is not a lot of time at all, but it is available.

And now in terms of the TRAFWA, this is where we're getting, this is probably answering a good five questions about timing of ERC claims that we've been receiving. So, this pending TRAFWA bill actually says the ERC program will end tomorrow. The likelihood this bill is going to pass and become law tomorrow is next to zero. So, I think this was just the IRS banging the table saying please put in as early of an end date as possible because we can't handle all of these claims. So, this is not happening. So the default date, the next default date of when you have to file your claim is April 15th of '24. So you still have a few months to file 2020 claims and you have an extra year if it's a 2021 measured claim. So not to worry, there's a lot of people scurrying to get a claim filed by tomorrow, but it's unlikely that limit to hit.

The statute of limitations in this bill is increased to six years. I said from five, but there's a few claims that also are subject to the standard three-year. And this is not a surprise at all only because of the amount of erroneous claims the IRS believes have been filed. So they're going to the six-year method, which normally goes by a material understatement. And on top of that, they need time to process these claims. The question we've been getting a lot as well, is it's six years from the date you file the claim or six years when you've got the cash? That is actually not a certainty right now, but we believe it's going to be based on when the claim is received, which gives the IRS a little extra time to audit or challenge the claim and plus some of these claims are so delayed it wouldn't make sense that they would go by the filing date. So, we're waiting for clearance on that.

ERC promoters that assisted or advised on erroneous claims, this was a big addition, they are subject to a penalty on the higher of $200,000 or 75% of the gross revenue they got from performing the ERC claims services. They're really going after these promoters, especially ones that were fictitious or just being extra aggressive on filing claims, millions of dollars of claims. Paid preparer penalties were also increased, but not very much. Only from 500 to 1,000 and ERC claims are now listed in proposed to be included in listed transactions which have normally been focused on offshore tax havens or certain transactions that have been deemed to be illegal or tax avoidance. So, ERC is now in that. So even if you have a good claim out there, starting next year you'd have to file basically a disclosure statement. I forget the form number, but it's considered a listed transaction. You're telling the IRS we filed this claim basically.

Moving on to our next polling question. The ERC Voluntary Disclosure Program allows a taxpayer that believes that they filed an erroneous claim to keep how much of the ERC claim tax-free? So, testing everyone on who's been listening. So, 20% all the way to near 100%. We'll give everyone a few minutes on that or a few seconds. A couple questions on the ERC. Did the moratorium end on December 31? Not to my knowledge, it is still in effect. When does $1,000 1099 require- I believe that is for 2023, but I need to double check that and will get back to you. So, it was the 174 was deferred. We don't capitalize on R&D. It's proposed. Remember we were talking about the act. It's proposed to be deferred for US purposes for another two or three years. But if that law does not pass, you still need to capitalize for US based R&D over five years and for foreign based over 15 years. Our answers, all right. 80% of you got it right, it is 20% you get the claim tax-free. Very good.

Moving on now back to the R&D costs or Section 174 costs that, like I said, without the proposed bill, still must be capitalized for US purposes, but there was a lot of confusion from the business community and the IRS came out with a release in 2023 through this notice of what is subject to capitalization. When you think of R&D expenses, you think of the main three, which would be wages, direct wages toward R&D, subcontractor costs, or supplies used in R&D. That's for the R&D credit. 174 R&D is much more expansive. It could include dozens of various GNA expenses that you normally wouldn't think of as R&D, but they are.

So in general the following costs would be included: direct labor and material costs, but it can also include equity compensation, pension costs, payroll taxes, and even vacation and holiday pay. It could be a certain percentage of a particular employee toward R&D. Facility costs, rent, utilities, insurance, repairs and maintenance, security and overhead costs. If some of you are familiar with 263A, which is inventory capitalization for tax purposes, you may have certain indirect costs that you capitalize for tax purposes on your inventory. It's a similar exercise to what you would do for Section 174. So if you have a dedicated area for say a laboratory or just doing testing and R&D, you could allocate the square footage for that space and include all of these costs and that would have to be capitalized over 5 years for US-based or 15 for foreign-based.

Nearly all software development costs, whether it's both customer use or internal use software are included, but there are some exceptions we're going to cover in a minute. Cost recovery, which is depreciation and amortization, patent costs and travel, even travel you would think travel would be no way be R&D related. But if you have an R&D engineer traveling from place to place to perform R&D activities, that would be included also. So software development, which is very common, has four main elements of what you include as 174. The planning, the designing, the building and the writing. So when you think of planning and you're sitting at a round table with your engineers going through potential ideas or an improvement of a product, that time allocated to that planning, whether it's wages and whatnot, would be included in 174. It's not when you're actually starting the R&D work. So the designing, the building, and the writing of the code would be the four.

Software upgrades and enhancements, all of that time allocated would be 174. Something that adds functionality and improves the efficiency or speed of the software would be includable. But if it's internal use you're developing, say a very sophisticated Excel macro program or other software code program to be used internally, you only include the cost up to the product completion or feasibility. And I'm going to explain why in a minute.

Then we talk about the exempt costs for 174. So, these are the items you don't need to include. It's already very expansive, but the IRS does give a little bit of leeway on what not to include in capitalized 174 costs. So if you have GNA service groups and expenses that indirectly support the R&D, your accounting group, your human resources, you don't need to allocate labor or W2 costs from those groups. Interest on the debt, if you're leveraging your R&D activities, any interest would not be allocated.

Anything related to website content creation or hosting costs are not includable. A lot of people think all website costs are includable in R&D for 174, but they are not. Severance payments, pretty rare item but they are not includable. And then internal use software after feasibility. So let's say you developed a product for your team, any kind of training costs, the maintenance, and the training could take weeks in itself, so that could be a big exemption. Maintenance, certain data conversion activities, you may have huge client databases that you now need to import into your new software. All of that time allocated would not be 174 and the installation. So, those are just a few examples of what not to include with 174.

Then moving on, this is just a miscellaneous area of federal tax adjustments to note for 2023. The small business exception, so we talked before about 163(j) interest, even 263A and cash method. All of these do not apply if you're considered a small taxpayer. And what is a small taxpayer for tax purposes? Well, that threshold was just increased drastically for 2023. Used to be an average of several years ago, used to be only a $5 million gross receipts business or less was a small business. Incomes tax reform, they increased it to $25 million. So it was a big and overdue catch up to what is considered a small business and then there's been one to two million dollar increases ever since. So we actually have a $2 million jump in 2023 to $29 million as the average and you go back to the prior three years. So if the prior three-year average is under 29 million, you don't need to do 263A inventory capitalization. You don't need to do the 163 interest limitation and you're not prevented from using the cash method if you're a C corp.

The business mileage rate 65.5 cents, I believe that was from 62.2. So it's a healthy 5% increase area. The Section 179 expense limit, now I talked about before the TRAFWA bill increases that to near 1.3 million, but if there is no tax act, it is 1.16. So, it's a weird number because this is another one indexed for inflation. Qualified transportation fringe benefit exclusions for per employee, it's up to 300 per month from 285. And the flexible spending account for medical employee pre-tax contributions, the annual limit is now 3,050. I believe it was 2,850 or 2,900 last year. All right, ended a few minutes early, so maybe take on a couple more questions. Does an entity providing services not products qualify for R&D deductions? It's not relegated to a product. It would depend on if you're meeting the main criteria of R&D. Is it something physiological, scientific? But primarily it applies to some sort of product, whether it's software or a fixed product.

Regarding Section 174, is this for 2023 or 2024? Well, as stated by law it started in '22. The capitalization requirement started for costs from January 1, 2022 and forward. So if the bill, it goes through the TRAFWA bill, then the five five-year capitalization requirement is removed for the next three years up through the end of '25. It's been well over 180 days since we filed the claim. Is the IRS processing any claims at this time? No, the answer is no. They have a moratorium. We don't know if that's going to be lifted or what they're going to do to catch up on claims yet. Like I said, they have over 1 million unprocessed claims at this time and they were just overburdened. They say they don't have the staffing to catch up on all of these claims, but that's kind of a wait and see right now.

Where does the timing for when the TRAFWA will be passed or not? I wish I knew the answer to that. There was a push to get this up for a House vote this week. As of this morning, I did not get any updates, but there is, like I said, massive bipartisan support for it. We're in an election year, there's been no major tax legislation passed. I think in '23 there was only 27 bills in total. I'm not just talking tax, but in total passed. So, it's very, very small. There's been no major legislation in a while, so I think the pressure will be on to get this passed because there is wide bipartisan support.

Benjamin Aspir:Hey Tom.

Thomas Cardinale:Yes.

Benjamin Aspir:We got several questions on timing of processing for the ERC claims. I just wanted to mention the IRS has said at a bare minimum it's 180 days, so a bare minimum of six months before they'll process it. And I would go out on a limb to say it's going to be significantly longer than that if you've recently filed a claim, even if it wasn't during the moratorium. So, just everyone should be aware of that.

Thomas Cardinale:All right, one more, we'll do one more on 174. What would happen to what had already been capitalized in '22? As I mentioned earlier, you may have an amended return issue. But the IRS, especially on something this significant, usually comes out with some relief procedures to where you could possibly do a change in accounting method, income tax accounting method, meaning you would file a 3115 with your current year return and do a catch-up adjustment to what the benefit would've been. So you'd file a 481a adjustment beneficial, but we don't know if they're going to come out with that. If they don't, then you need to weigh the prospects of doing an amended return, the cost of doing an amended versus... Because in the end R&D capitalization is a timing difference. All right, with that I'll hand it off to my team to do the closeup procedures and thank you everyone for joining.

Benjamin Aspir:Thank you everybody and we'll do our best to get back to any unanswered questions. There was a significant amount of engagement and questions and we'll do our best to get back to you after today's webcast. 

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