On-Demand: Federal Tax Update for Individuals & Businesses
- Jan 25, 2022
Join EisnerAmper to learn about the recent key tax developments impacting individuals and businesses, including the Infrastructure Investment and Jobs Act as well as the Build Back Better Plan.
Tom Cardinale:Thanks Bella, and welcome everyone. Thank you for joining today. Pandemic or not, taxes are always a priority for businesses and individuals. So today, Ben and I are happy to provide this update on the tax landscape for both 2021 and upcoming in this year in '22.
We'll not only be talking about existing tax law, but we're going to be talking about expired provisions which don't get talked about a lot when we go over taxes, but there's a lot of expired tax provisions to be aware of on both the personal side and business side, go through some proposals, some that are considered probably dead of the water at this point, others that are likely to be revived or put in a smaller legislative package.
So we're going to try to cover as many topics as we can. These are more high level refreshers, more than an in depth discussion of each tax topic. And I would also say to what Bella mentioned before about questions, Ben and I are going to do our absolute best to answer as many questions as possible. We had over 2,000 people signed up today, so we're going to do our best, but we are happy to answer questions after the presentation by email.
So with that, I'd like to pass it along to my colleague Ben who's first going to take us through the personal tax provisions and then I will take over and discuss the business provisions. Ben?
Benjamin Aspir:Thanks Tom. So like Tom mentioned the first half of today's session, it's going to be a high level overview of the individual attacks changes. As you see on your screen, there were four major pieces of legislation that were passed within the last two years, and there's a fifth that we'll talk about that's still in proposal form.
There's been a lot to track, some provisions have expired, some are still in effect. Some are in proposal form. The CARES Act, the Coronavirus, Aid Relief and Economic Security Act passed at the beginning of the COVID-19 pandemic. It was the largest stimulus package ever passed in the United States. It included the enactment of the Paycheck Protection Program, the PPP program, forgivable loans for eligible businesses.
It created the employer retention tax credit which Tom will cover a little bit later. It also included stimulus payments and there were a lot of tax provisions as well. The second large piece of 900 billion package passed at the very end of 2020. PPP forgiveness was not income, the expenses related to PPP loans or deduct the tax deductible as well. It also expanded and extended the employer retention credit it.
And then the last two, the American Rescue Plan Act which was passed in the early part of '21, in March 11th, '21, we'll talk about in greater detail today. And the fourth one, the Infrastructure Investment Jobs Act, which was lighter on the tax side that passed at the end of, towards the end of last year, it had some tax provisions which I'll cover shortly. And obviously with the name, a lot of the funding went towards the country's infrastructure.
And the Build Back Better Act, we'll probably say a dozen times today it's still in proposal form. There were lots of versions that were going back and forth. Eventually it passed the house of representatives, but it's been stagnant in the Senate. There will likely be even from some of the proposals today, it will likely change, but we thought when Tom and I were discussing on how much should we cover in the Build Back Better Act, we decided it was important for our participants to be aware of the key proposals though it may not be exactly the same from what we discussed today.
It will likely be in some different iteration of that. So at least our participants will be aware of any potential changes that may come. So just starting off with individual tax provisions, tax brackets of 2021, as you'll see, the lowest tax bracket is at 10% and the highest tax track bracket is 37%, that so far has not changed any proposals and likely would not change for 2021. Since the Build Back Better Act hasn't passed yet, or if it will pass in a different form.
And if you notice at the bottom, if you look, the 37% tax rate does not kick in until 523,000 for a taxpayer filing a single and for a taxpayer filing as married filing jointly, it kicks in to $628,000. And that's commonly referred to as the marriage penalty and the tax code where if you look at the other tax brackets, if you compare the single and the marriage filing joint brackets, it doubles because there's two people filing a tax return.
So whereas that inequity is highlighted in the 37% bracket where if it were doubled, the 37% rate should be kicking in at a million dollars instead, it's kicking in at $628,000. The standard deduction was significantly increased as part of the Tax Custom Jobs Act that was passed the major tax overhaul that was passed at the end of 2017, coupling that with the state and local tax cap of limiting the deduction for real estate taxes and income taxes and sales taxes to $10,000 per year, between that and the significant increase that itemized of the standard deduction, that led to a significant increase in taxpayers claiming the standard deduction.
So for 2021, the standard deduction for single is 12,550. A slightly increased for 2022 to 12,950, and then it's double unlike the tax brackets, it is very interesting. The tax code picks and chooses, which provisions to double and which ones to not necessarily be equitable for tax payers married filing jointly. So you'll see for married filing jointly it's 25,100. So the taxpayers that have deduction under that are better off taking the standard deduction for 2022 is 25,900.
So like I mentioned earlier, there were many tax relief provisions to help stimulate the economy, prevent the recession in the United States, pass as part of the CARES Act, the Consolidated Appropriations Act, the ARPA. So some of them have already expired, the excess business loss limitation that was suspended for 2020 and retroactively from when it was enacted in 2018. So essentially when the CARES Act passed, it suspended this excess business loss limitation from 2018 all the way through 2020.
So what this limitation was when it was an accident in 2018, it dis allowed if a taxpayer had an excess loss. So if they had a loss of more than $500,000, if they filed jointly over their business income, their pass-through income. If they had other income, interest, dividends, any other non-business income, they could offset that up to $500,000. Prior to that, it was unlimited. You could offset assuming you had basis, passive loss rules, but the CARES Act suspended that rule, there was no $500,000 limit.
So that has been restated for 2021 when the loss limitation was suspended through the CARES Act it provided a lot of individual taxpayers, you're able to go back and amend their 18 and 19 personal tax returns to claim refunds when they were - If they had loss limitations. So just remember for 2021, this excess loss limitation is back into effect.
Required minimum distributions, those were suspended as well. That's if a tax payer is 72, turns 72 in a year, based on an IRS calculation, they have to take a required minimum to distribution that was suspended for 2020. For 2021, taxpayers had to have taken required minimum distributions, or there's pretty significant penalties if they don't take an RMD from their retirement plan. Keep in mind that Roth IRAs are not required to have RMDs, but Roth 401(k)s are still required to take an RMD.
A potential planning technique is to convert your Roth 401(k) into a Roth IRA because once your retirement plan is in a Roth IRA, RMDs are not required. The intention of RMDs is to prevent taxpayers from not taking any distributions because if the rule wasn't in effect, taxpayers wouldn't take any distributions out of the retirement account and then it would just accumulate to the heirs and it wouldn't be taxed during the taxpayer's lifetime.
There was also as part of the CARES Act and this was only for 2020, it allowed, they significantly expanded hardship withdrawals from retirement accounts. It allowed up to $100,000 of hardship withdrawal. So if a person had some financial hardship due to COVID-19, they were able to take out without penalty, not tax free, without penalty up to a $100,000 dollars from their retirement account and they have to repay it over years from the time of the distribution. So just keep in mind, if you had one of those hardship withdrawals, it was penalty free, but it was not tax free and it has to be repaid over three years from the data distribution.
And lastly, there was also an exclusion from unemployment benefits for certain tax payers part of the CARES Act because generally, when a taxpayer receives unemployment benefits it is taxable at the federal level, state level taxes, it varies. So that was suspended up to $10,000 of unemployment income was not taxable at the federal level for certain taxpayers. For 2021, for anyone that received unemployment compensation, that is not taxable again.
So like I mentioned earlier, the ARPA, the American Rescue Plan Act passed in March 2021, there were some key tax provisions. One of them was Student Loan Forgiveness. So generally, if someone receives what we call a tax professionals cancellation of debt, if you have a credit card that you settle with the bank and they agree to forgive a certain amount of the debt or the entire debt, they wipe it out.
That's considered, generally there are exceptions, but generally, that is considered taxable income to the taxpayer. So a similar principle applies to student loan debt. If the lender for whatever reason, if it was worked out, they partially or fully forgive student loan debt, subject to certain exceptions, that would be taxable. If $50,000 loan let's say was forgiven and the taxpayer was relieved from the debt, that's technically taxable income to the taxpayer cancellation of debt.
So the ARPA passed a law for 2021 through 2025. If the student loan is forgiven, that would be excluded from federal taxable income. Remember we always say, "Make sure you check on the state tax treatment." If someone has exclusion from federal income. Next, for employees, this was only for 2021. There was a temporary increase of the Dependent Care Flexible Spending Plan, FSAs for dependent care. If you have a child in daycare or you could use it also for day camp, bootcamp and you can use it up to pre-K, you can use those expenses.
You could set aside from your paycheck pre-tax, prior to the APA was $5,000 for 2020 only. They increased that limit. You were able to set us side up to $10,500 pre-tax so it's not subject to federal tax. And it's actually exempt from social security and Medicare tax as well. So that limit is going to go back down to $5,000 for 2022. The one year extension of the excess business losses for individuals like I mentioned earlier, that $500,000 limit of excess losses for individual taxpayers.
The ARPA, this actually didn't get a lot of press. The ARPA actually extended this $500,000 limit an extra year. It was set the sunset after 2025. So now, it's extended through 2026, this $500,000 limitation for marriage filing jointly. And lastly, the individual recovery rebates that was the third round of stimulus. Many taxpayers received direct deposits or checks in the mail as a result of stimulus checks. If you have not received one, and you think you may have been entitled to one, when you file your 2021 1040, the IRS will be releasing a reconciliation worksheet that will determine whether you were eligible or not.
And if you were, it's a fully refundable tax credit, dollar for dollar if you're eligible that you'll get, which you can elect to either refund or apply to your 2022 estimated taxes. The ARPA significantly expanded the Child Tax Credit. It increased it from the $2,000 limit to $3,000 per child and $3,600 per child under age six, and it also extended the age under the old rules. The age 16 or under extended to age of 17. So 17 are under, you could take claim if you're within a certain income limits up to $3,000, the phase out if you're over $400,000 married filing jointly, or over 200,000 married filing single.
There is a phase out, it slowly phases out. So that's the same pre-ARPA and post-ARPA. And these rules are only effective for 2021, 2022 reverts back to the old rules. Pre-ARPA, it was only partially refundable. So if you had no tax liability, it was only partially refundable whereas under the ARPA for 2021, it is fully refundable. There were advanced payments, so what happened starting July 1st 2021, the IRS, the treasury was sending advanced checks. It was basically in advance on the Child Tax Credit.
Based on your 2020 1040, they were sending taxpayers there, and it basically in advance on the child tax credit. So it's important when filing your 2021 1040 with tax season actually just starting this week. The IRS allowing certain tax forms ready to be filed, that needs to be reconciled. If you already received advances from the treasury, make sure to include that on your personal tax return. You may be doing additional child tax credit.
The dependent care credit, that was also significantly increased from 3,000 to $8,000 for 2021, more than double. The increased phase out, the increased credit of $8,000 phases out when you adjusted gross income exceeds $125,000, and there are additional phase outs of the Child Dependent Care Credit if your adjusted gross income is over $400,000. This is also for 2021 only is a fully refundable tax credit whereas years prior to 2021 and years after '21 is not refundable. This is extremely a lucrative tax credit if a taxpayer is eligible.
The Infrastructure Act like I mentioned at the beginning of my presentation had very limited tax provisions, the Employer Retention Credit. Tom will go a little more depth when he speaks shortly, it repealed the fourth quarter retention tax credit for 2021, except for certain recovery startups. It's important to note that the other quarters for the employer retention credit. So the first quarter of 20 through the third quarter of 2021 are still if a business is eligible, they can still go back and amend their payroll tax forms to claim potential credit.
Another noteworthy piece tax provision in the infrastructure act was Crypto Asset Reporting with the rise in popularity, although it hasn't been doing great lately, but the rise in popularity of cryptocurrency, your Bitcoins, your Ether, Solana, all those crypto assets, it certainly got the attention of the IRS. And they're concerned about taxation evasion. Effective 1/1/2023, individuals and firms acting as digital asset brokers must report transaction information to the IRS.
The language in the act and the Infrastructure Act was fairly vague and the crypto community and tax professionals are concerned that the vague language is going to capture a lot of people that probably were not intended to be caught in this law. Certainly, crypto miners, people that set up to mine cryptocurrency, they may get caught in this law which probably was the spirit of the law was to really put the burden on the brokers of cryptocurrency and not everyday cryptocurrency miners.
Additionally, they instituted, and this is a similar rule to cash, the cash reporting. It's an anti-money laundering provision. It requires businesses to report any cryptocurrency payments worth more than $10,000 because currently even prior to the Infrastructure Act, if someone walks into a car dealership with $11,000 of cash and purchases a car, the IRS has to report that they received $11,000 of cash. So the same rule essentially applies to cryptocurrency.
If I go to the buy a house with Bitcoin, they would have to report as if it was a cash payment. When preparing your 2021 1040, there's still the same question. They ask you it's front and center on the form. And the IRS really is trying to get on top of people reporting their cryptocurrency, and other gains. They ask you at any time. During 21, did you receive cell exchange or otherwise dispose of any financial interest in any virtual currency? Make sure to fill that out if you received as. If you were gifted cryptocurrency, if you received it as services, if you sold any, if you simply purchased cryptocurrency, you didn't do anything with it, you simply just purchased it, you could answer no.
There was actually some confusion when the question first showed up on the 1040. So make sure you're aware of that.
Just some miscellaneous expiring provisions. The credit if you do energy efficient home improvements for any energy efficient windows, doors, insulation that's expiring up to 2021, mortgage insurance premiums deduction. If you purchase a home and put down less than a 20% down payment, generally mortgage insurance premiums are required. So that is no longer deductible after 2021 and the charitable deduction as part of the COVID relief, they allowed a charitable deduction up to a hundred percent of adjusted gross income that's gone after 2021, that's going to go back down to 60%.
Lifetime gift tax exemption, that increased from 11.7 million to 12.06 million for 2021. The annual gift tax exemption per person increase from $15,000 to $16,000 for 2021. You could see the tax brackets here for states and trust. The top rate 37% kicks in very early at over $13,000. There was also an extension, Hurricane Ida from this past year. Many states were going through relief from filing. They didn't have to file.
If you lived in the entire state of Louisiana, Mississippi, or certain counties in Connecticut, New York, New Jersey, and Pennsylvania, it extended the filing deadline for estimated taxes for the third and fourth quarter for personal taxes. And also for the 1040 which was due October 15th. If you live in one of those, if you were affected by Hurricane Ida and you live in one of those areas, you now have until February 15th file you 2021 1040. Moving-
Bella Brickle:Poll #1
Benjamin Aspir:The correct answer is true, 68% got it right. Required Minimum Distributions were back into effect for 2021. Before I turn it over to time, I'm going to briefly go over some of the key individual tax provisions of the Build Back Better Act that's still in the proposed form. Well the progress on passing the Build Back Better Act has slowed down within the Senate. There was a proposed surcharge in high income owners, individual estates, and trust, the 5% surcharge.
If someone has adjusted gross income in excess of $10 million and an additional 3% surcharge if they had adjusted gross income in excess of 25 million. So if someone had adjusted gross income in excess of 25 million, they'd have an 8% surcharge with the states and a trust, 5% surcharge. If they had AGI in excess of $200,000, an additional 3% surcharge and excess of $500,000. So if a state or trust had adjusted gross income in excess of half a million, they would be subject to an 8% an additional surcharge, and in the proposal, it would've been in an effect for 2022 and beyond.
This provision is important. This would basically, if it were to be put into effect, it would subject income that's not subject to already subject to self-employment tax. That would be subject to a 3.8 net of investment income tax. If they have over $400,000 of taxable income or $500,000 after married filing jointly. This would significant reduce any benefit from S corporations since S corp income is now exempt from S corp income received by shareholders is exempt from FICA and Medicare tax.
In the proposed form, it would've gone into effect after December 31st 2021. Another key proposal in the Build Back Better Act, it would eliminate for the qualifiable business stock exclusion. It would eliminate the 75% and 100% gain exclusion rates for anyone that has adjusted the gross income equal or exceeding $400,000, the amount that's not excluded also. So if you only have a 50% exclusion rate, the amount not excluded under Section 1202 would be taxed at 28% plus the 3.8% in net investment income tax.
Most importantly, in the proposal, it would apply to sales or exchanges of qualified small business stock sold after September 13th 2021 subject to a certain buying the contract exception. This is important because someone could have bought the stock in 2012, and it's essentially a retroactive tax on qualified small business stock. So we'll keep an eye on this to see if it changes or if it passes into law at some point.
And the last note worth at your proposal, it would make permanent the excess business loss deduction which I mentioned earlier, it would actually make it permanent beyond 2026 and then you carry forward of it any excess losses would no longer be considered a Net Operating Loss and would be subject to the excess business loss limitations and the proposal and the BBBA, that would've gone into effect retroactively as of 2021. And then just summing it all up before we go to the second polling question.
So originally, they proposed the top five lines, they proposed increasing the top tax rate to 39.6%, that was out, that didn't make get into the BBBA. They proposed increasing the capital gains and qualified dividends rates from 2020 5% rate that's out. They proposed a billionaire tax that's out, that didn't end up in the BBBA. They proposed reducing the 50% reduction in the unified credit for states trust that's out and the limit on the 199A, 20% qualified business income deduction that didn't make it in.
Like I mentioned, what made it in in the proposal was the Qualified Small Business Stock gain exclusion making the limit on excess business losses permanent, the abandonment of partnership interest wouldn't be treated as an loss or treat as capital. And they would expand the scope of the investment income tax, high income individual, and trusts 5 to 3% surcharge that made it in increasing the state and local tax deduction. Tom's going to talk about state and local tax deduction work around, that made it in and wash sales rules for digital assets, they want implement that. And with that, I'll turn it over for the second polling question.
Bella Brickle:Poll #2
Benjamin Aspir:The correct answer is false. The Build Back Better Act is still in proposal form, 87% got it right. I'm going to turn it over to Tom to cover the business tax side of today's presentation.
Tom Cardinale:Thank you Ben. Okay, so let's now turn it over to the business side. And just as what are the hot topics that business owners are concerned with in the tax side. One is C corps. What's the corporate tax landscape going to look like. Is Congress ever going to leave it alone? It seems like every week we get a new corporate tax proposal, either on domestic businesses or multinational expiring in new business provisions.
That's a big item of my talking points in '21 and '22, the Build Back Better proposed changes as you've heard a couple weeks ago, the bill in its entirety is pretty much dead in the water, but it has been revived in respect that they are planning on making smaller bifurcated bills that address pretty much the same provisions and see which ones of those would pass. Probably the biggest item being talked about, and it's been of a hybrid business/individual tax matter, but the pass-through entity tax election to circumvent the very restrictive $10,000 SALT cap, we're going to go through that and some of the processes and of the pitfalls you should be aware of.
It's not something you should just jump right into. You've got to think about it and especially look at what the state rules are. Then I'm going to touch on one or two slides on tax exit strategies with Congress playing around with tax rates, business owners are concerned, what should be my exit strategy, how do I effectuate this in the most tax savvy way? And so I'll go over a couple considerations people are thinking about.
So on the corporate tax landscape, I put together this chart just to show you how all over the map it's been for C corps and what the statutory tax rate has been. The Tax Cuts and Jobs Act passed at the end of '17, made a flat rate of 21%. And then since then, there's just been a lot of proposals. Build Back Better version one was proposing 26 and a half percent, that got shot down very quickly. Version two of the Build Back Better Bill keeps the 21% rate, but applies a new 15% minimum tax on multinational businesses that are using the tax code to artificially reduce their taxable income.
We'll go over that in a minute, and the infrastructure bill in its initial talks had a 28% rate. Joe Manchin said he was not going to vote for that so they left it alone in order for the Infrastructure Bill to pass. So right now we're at 21% for 21 and 22, likely 22. Section 163(j) covers the interest deduction limitation which is a very, very restrictive limit, especially on highly leveraged businesses, low margin businesses, manufacturing sector.
Tom Cardinale:The Tax Cuts & Jobs Act changes to a 30% of tax bases EBITDA limit. So if you have a million dollars of tax bases EBITDA, 300,000 was your limited interest expense deduction. The CARES Act in an effort to make it a little easier on businesses, struggling through the pandemic. They increased that EBITDA threshold to 50%. However, it was only for two years. So in tax year '21 is we're doing compliance for this year and in the future, it's right back to that 30% EBITDA limit.
Now, this provision's going to get a lot more talk because of the expected fed funds rate increases that all economists are expecting this year. Some are saying as little as two, some are saying as much as five, who knows where we end up, but this provision is going to be much more meaningful for businesses. But note that this does not apply to what's considered small businesses in the tax, in the IRS's eyes. And that's generally 25 million of gross receipts on an average three year, prior year, three year period.
So it's only on larger businesses this applies. R&D Expenses which is government Section 174, 2021 is the last year to fully deduct R&D expenses for tax purposes. Starting few weeks ago, you must capitalize your R&D cost for tax purposes pursuant to this is from the Tax Cuts & Jobs Act. For US sourced R&D cost, you need to capitalize it over five years. And if it's non-US sourced, if it's being outsourced to another, foreign country, you have to capitalize that over 15 years.
So in the end, businesses are still getting that deduction, but it's always a lot better to get it all upfront instead of capitalizing over time. The Build Back Better Act which of course versus not passed, it did propose the furthest capitalized treatment for four years. So it's just a kicking the can provision, doesn't really do much, but so we'll see if this gets revived in one of a smaller bill, but as of now, it is going to be capitalized for R&D. You need to consider that for your book to tax rec and your tax provision reporting. Okay, we're going to go to our third polling question. So Bella, take it away.
Bella Brickle:Poll #3
Tom Cardinale:I'll try to take an opportunity to answer a couple questions here. I've got a question from Mike. So if $10 million EBITDA and $3.5 million interest only 3 million deductible for tax. Yes, the EBITDA is measure off tax EBITDA. Meaning, you look at your tax depreciation and amortization, not your book, and I'm assuming that's a more than 25 million grocery seats taxpayer than you would be right at a three and a half million interest, three million would be deductible 500,000 would carry forward. It's not like you lose it forever.
Okay. Good job everyone. The answer is 21%, 76% of you got it right, very good. So bonus depreciation, we always love bonus depreciation. It's a favorable provision that Congress likes because they could sell it as a tax cut, but in the end, it's just a timing difference. So bonus depreciation allows a 100% write-off of qualified business property, get the immediate write off instead of capitalizing it over time. So we are now officially in the last year of 100% bonus when this was written in the Tax Cuts & Jobs Act, it was written as a sunset slow phase out all the way down to 20% through 26.
So, as you're planning CapEx with businesses, this is the last year to get that full 100% write-off. And then starting next year, we're going down to 80%. In recent legislation, this provision has really not been touched. So I would say this timetable looks pretty certain at this point. Bonus depreciation as a reminder generally, doesn't apply if you're over a 20 year class life which is measured by publication, I believe 1446 and the tax lives for business property can go upwards of a 39 year for commercial building, it would not apply to that, but if you're doing interior improvements to an existing building, we call that qualified leasehold improvements, that's recently be given a 15-year statutory line item in the code.
Tom Cardinale:So because that 15 year is under the 20 threshold, you could get that 100% write-off on interior improvements and related party acquisitions obviously would not get it. The Business Meals Deduction as a way to, again, try to bring some relief mostly to the hospitality industry during the pandemic. The Consolidated Appropriations Act inserted a temporary provision for two years, that allows Business Meals to be fully 100% deductible for both 2021 and '22, and that's a fixed two year calendar period.
If you're a fiscal year, you need to separate and start tracking your meals entertainment right from January 1st last year through the end of this year. And as long as you go through the statutory criteria, it has a business purpose which means you just got to talk about business at some point in the business event or the meal event, track your receipts, write down in a log or other documentation who attended. And you'd be able to get a 100% deduction.
If you are providing meals to your employees, especially if they're working late at your business, that before this provision went in was only 50% deductible. So that is now 100% through the end of 2022, but note that this does not cover entertainment. Entertainment is still 100% not deductible, that was put through in the Tax Cuts & Jobs Act. Corporate Net Operating Losses, the Tax Cuts & Jobs Act repealed, NOL carryback claims, these are extremely popular as a tax practitioner in our firm, we do a tons of these for businesses.
If you have a Net Operating Loss and you had an income year years ago, you want to carry back that NOL and get a nice refund, get that tax recovery. So the Tax Cuts & Jobs Act, this was a pretty harsh provision that eliminated all carryback claims for losses after 2017. Then came the CARES Act which was this a really good provision. This gave millions upon millions of dollars to businesses. It allowed NOLs to be carried back for a three-year period for tax years 18 through 20, an option to carry back the loss up to five tax years.
So we've been doing a ton of these. The 80% limitation was also removed from it on NOLs. So it presented some very lucrative refunds. So what do we do for tax year 21 and beyond unfortunately, no new legislation is passed. So we're right back to the Tax Cuts & Jobs Act, no carryback allowed at this point going forward, but because of the popularity of this provision, if there does become or enacted a new round of business relief in the tax world, I wouldn't be surprised if they consider putting this back in.
The Payroll Tax Deferral, this is going back to March of '20, when the pandemic was just starting and the CARES Act was passed. One of the provisions allowed a deferral option for businesses to defer the employer portion of FICA and defer that for up to two years where you would pay it in two installments. 50% at the end of 2021 which was just a few weeks ago, the other 50% installment due at the end of this year. The reason I made this a slide, not only to remind of the dates of the installments, but that the IRS is really coming down hard on businesses not paying those 50% installments on time.
So if one installment is late, the entire amount of the tax deferral could be subject to a 10% penalty, not just that one payment. And on top of that, the IRS could accelerate the payment on the second installment, and then they could even jump to 15%. Did not cover interest, just penalty. So if you're a business out there that is on this deferral method, just be sure you're paying this installment on time, you paid your '21 in your upcoming '22.
The Employer Retention Credit, this outside of the PPP loan became a very popular option for businesses to get up to a $7,000 credit per employee under the Employer Retention Credit. At the time, you can only take one or the other, you can't get both the PPP loan and the credit. The CARES Act extended to payroll periods through 12/31/21 initially, but unfortunately the Infrastructure Act spoiled the party a little bit, and they cut out one full quarter of qualified wages to obtain this credit, it shortened the qualifying period to September 30.
So for those hoping to get the credit in Q4, the Infrastructure Act I think is more of a revenue razor to get this passed. It's not applicable anymore. The only exception is that if you're considered a recovery startup business, so you only formed a couple years ago and you have less than one million of receipts, then you could still get qualified treatment for that retention credit. And just as a backdrop, you get the retention credit. If you had a shutdown due to the pandemic, a government shutdown, or if you had like a 50% reduction in revenue, that 50% reduction in revenue changed to 20% and that allowed more people, more businesses to be qualified in this.
So if you haven't considered this, you can amend your 941 return so you still have time. So it's something to look at with your advisor. PPP loan forgiveness, a lot of taxpayers have taken advantage of the loan from the government. And if they qualified, it would be forgiven as a tax-free grant. And so it would be non-taxable. So the consolidated appropriations act allows not only the tax forgiveness of the PPP loan, but allows the deductions that businesses are using from the funds.
Initially, the Iris came right out and said, "Look, we're giving you a federal loan, maybe non-taxable, but there's no way in hell we're going to allow you also to get a business deduction from those PPP loan funds." So the IRS basically got squashed from this provision. So businesses were happy saying, "Look, businesses are hurting, let's give them the double benefit, both the tax free treatment, non-taxability of the PPP loan forgiveness, and the deductibility of the expenses."
However, always check your state tax implications. I only put a few examples in here. There's about seven or eight states that do, tax the PPP loan. So you want to check that, I put a few states in here, California, Florida, and North Carolina, Virginia, either tax a portion of it. Some of it depends on the size of your business, or it could just be a portion of the forgiveness. Good, now we're going to look at current business tax proposals. What should business owners be planning about, what could be coming?
So we talked about Build Back Better. It's now as a whole a dead bill. However, there's been talk that, "Okay, well, we're just going to rewrite it in three or four smaller bills that may have an easier chance of passing. So we feel it's still prudent to bring these up of what could be coming down the pike." The one I touched on earlier about a 15% corporate tax on adjusted financial statement income, that's only for businesses in excess of $1 billion. Okay? So they're going after a very, very small portion.
Some people have called this the Amazon proposal because Amazon hasn't paid domestic taxes in a long time. I think it's because their first 15 years they had Net Operating Losses that they're using up. But now they want to tax at least your gap income as a minimum, but you could still apply prior your NOLs. For public companies, a new 1% excise tax on buybacks based on the fair market value of your buyback. That's a proposal that impacts public companies, 550 billion. And this is again just the way the Build Back Better was written. 550 billion in cleaner, renewable energy credits for new manufacturing and production companies.
And as I touched on before, it extends the R&D expense force capitalization and only starts it and waits until it makes it until 2025. So R&D expenses would still be fully deductible through 25 before going to the five year capitalized write-off. And then just touching on international. If for those of business out there that have international operations, or especially what we call a CFC, a Controlled Foreign Corporation, you could be subject to these provisions, global in intangible low tax income, the guilty provisions which could tax about 50% of that Controlled Foreign Corporation outside of some adjustments you make to that.
You are allowed a 50% deduction on that, and the proposal changed it to 28 and a half from 50. And alternatively, if you're a domestic business with exports, foreign sourced exports and deemed foreign source income, you are allowed a deduction of 37 and a half percent of that deemed foreign derived intangible income that was going to be reduced to 21.88. The BEAT tax, this only applies to majorly big businesses, 500 million or higher on global revenue.
The BEAT tax if you have significant intercompany transactions, you could be subject to this at a 10% tax rate, and it was proposed to increase that up to 18%. Okay, we're going ahead to our final polling question. So Bella, please take it away.
Bella Brickle:Poll #4
Tom Cardinale:Okay. You actually got two questions with pretty much the same topic. How do you treat PPP loan forgiveness on an S corp? It is really not just S corp, it would be any business. If you have a loan, PPP loan, it would be sitting on your balance sheet initially as a loan. And then if you were given qualified forgiveness from the government, you would just reclass that liability down to income. So, at a minimum it's book income, you need to put it to your profit and loss statement as book income, but then when you get to your S corp return, it would just be a tax adjustment taking it out because it would be non-taxable. So it's not something you would see in your internal financial statements. It would only be on the tax return you would make that adjustment.
Wow. People are actually listening to me, that's great. 91.5%. That's great. And some of you, I'm not going to mention age in this, but some of you probably know where the other three answers come from. I'll let you play around with those, but this came from last year, it was a very popular question. Very good. Okay, so one of the biggest things that reverberated in the tax world in the last year or two is after the $10,000 SALT limitation on your personal return as an itemized deduction, especially people in higher tax states were like, "You've got to be kidding me. There's got to be some work around to this."
Sure enough there were, little by little, states came out and said, "Well, why don't we do this? Why don't we allow businesses to make an election to pay a tax at the entity level even though it's a pass-through return?" Pay a tax year, they would pay the tax - The individual shareholder or member would pay the tax again through a K one on their personal return, but then they would get a tax credit to what was paid at the pass-through entity tax level.
So you're paying it twice, getting a credit back once, net you're only paying the tax once. So you're not double taxed, but what that does is it gives you unlimited federal deduction on your state tax by paying that business entity tax at the state level. So it's a complete workaround and I mentioned, it also allows the state credit. Some states don't offer that credit, but at the same time, they'll say, "Well, if you elected a pass-through entity tax at your state level, we're also not going to tax that income." So they just came right out and said, "We're not going to tax that income because in the end, it just nets to zero."
When you think about it net of a credit, so they just didn't want the hassle to work through it. So there's just a few examples at the bottom. And I'm going to show you a slide of other states that have it in the New Jersey BAIT which has been big talk lately because the governor Murphy just signed a revision to that up to a 10.9% rate would kick in on the business pass. It was written as over 5 million, but now at that 10.9% rate kicks in at 1 million.
So it hits it pretty quickly. New York at 10.9 also, California taxes at a flat rate of 9.3%. So you need to think about graduated rates because some of these states are going to overcharge you a bit on this rate, but they're basically saying, "Hey, the individual is going to get a nice federal benefit. Why don't we charge a little bit of a premium so we get a piece of the action?" So you've got to think about that as you go through.
So these items, if you're going to consider an election at the business entity level for a particular state, note these is that one, deadlines are extremely strict. When we think of tax elections, we normally think file it by the extended due date of the return, that's how it works for most tax elections, but not for PTE elections. Normally they want it early. New York for example wanted their 2021 election before the end of '21. They wrote the bill I think in August of '21, they say get us the election by October 15th, within weeks, we barely had time to read articles about it.
For '22, and this is not for every state, but I've seen a lot of March 15th '22 due dates for the 2022 tax year. They're very strict on that. So if you are going to consider it, make sure you meet that deadline for your business. Every state is a little different. You may need to do an application, you may just need to register online, file a signed election. So just make sure you don't miss that. When it came to partnerships and LLCs electing this, people were talking about, "Well, how does guaranteed payments work? Is that a deduction or not?"
So some states include the guaranteed payments in the PTE income computation, others do not. So you need to think about that because guaranteed payment as you know is income to the individual receiving it. But at the partnership level, they may not allow that deduction. So you're going to be paying a lot more PTE tax. Another question that comes up is how do you calculate a resident credit for tax paid other states? This is before the PTE even came in, right?
So that's largely unresolved, and then for states that don't offer credit and they don't tax the income from the PTE, would they exclude the PTE income? Would that be an outside basis adjustment? So this is a partnership basis issue and it's still largely unresolved. So here's the states with workarounds. You can see it's adding up and it seems to be changing every week, one or two seem to be popping up pretty quickly. So I don't know how many, it's about 20 states on here that have some sort of SALT cap work around.
So if you see your state in here, make sure you take a look at that. Finally, we're going to end off just with a couple slides on business exit strategies. What are companies thinking about as they can ponder selling a business of what's going to be the best tax savings on selling their business. The one we always get day in, day out is should I move? Should I move to Florida? Should I move to Nevada? Should I move to a non-tax state before I consider selling my business?
So Florida, Texas, Nevada is still top picks, they have no personal income tax, you want to be careful though with residency audits. Residency audits are extremely strict. When you move out of a state, it's a big deal to that home state. And they're going to go after you and make sure you really did move and you met all of the tests that you really did move out of state and it could be pretty burdensome, but add in a new player that's propped up in the last year or two.
Puerto Rico, they're really trying to attract high net worth individuals to move there and they passed some extremely lucrative tax benefits. If you become a resident there, yes, you do need to move there. 4% corporate rate, 0% capital gains rate, and this is generally on appreciation after you establish bona fide residency. Don't think if you got a built in gain, you just move to Puerto Rico, you get the whole thing at zero. No, it doesn't work that way.
Sourced interest and dividends as a Puerto Rico resident 0%, but these rates are not permanent forever, but it's still lasting a while. It's going to last to 2035. One of the best parts is you get to keep your US citizenship if you consider a move. Meaning, there's no exit tax. If you renounce your citizenship, you move to another foreign country, you normally have to pay an exit tax on your appreciation of your assets. You wouldn't have that here.
So if this is something you want to consider, look at form 8898, that's the IRS form, changing residency and what the various tests are, and there is numerous tests that you have to go through including the minimum 183 day tests that you're there, but the there's a lot of other things you need to consider. And finally, tax exit strategies with more lawmaker proposals, everyone hears about, well, we got to raise the capital gains rate, it's been 20% for several years, there's proposals to raise it to 37% or ordinary treatment. Is it time to sell now?
So one consideration that we offer is that if you're worried about future tax hikes and you're selling your business, you may want to opt out of installment sale treatment. So if you're for sure, or especially if let's say Build Back Better says, "Okay, we're passing this capital gains rate, for 2023, we'll be 37%." If you sell your business in '22, you want to be sure you pay that gain upfront at the fixed 20%. But if your buyer says, "Well, we're only going to give you 10% cash upfront, 90% in installments." You might have a cash crunch, right? So you've got to negotiate that to make sure you have enough cash to pay the taxes upfront when opting out.
And then if you consider a move to Puerto Rico or Florida, non-tax state or Texas, you want to be careful how you structure. You could either have an asset sale or a stock sale. A stock sale would normally be the way to go if you move out of state because that's just going to follow your state of domicile. If you sell your business assets, then you're going to have a lot of those business assets linked to wherever you're or business is located.
So a gain could be substantially a portion to those state you moved out of, and it'll still be tax there. So even moving may not really save you any taxes or maybe very little, but the buyer will usually want an asset sale. So it's going to be a negotiation sticking point. Why do they want an asset sale? So they can get a step up in the basis of the assets and write it off. But in stock sale, they don't get no write-off, it's just frozen tax basis until they sell the stock, and then you have to think of ordinary asset gains.
When you have an asset deal, some of your assets may be subject to ordinary rates, not capital gains rates. So it's usually more beneficial for a seller to consider a stock sale, especially if you move to a non-tax state and a buyer to want an asset sale, something to be mindful of. Okay, with that, sorry for going a few minutes over, but that concludes our presentation and I'll pass it back to Bella, just for some housekeeping items. Thank you all for joining today.
Transcribed by Rev.com
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