With Tax Legislation In Flux, Staying On Top Of New Developments Will Be Key In 2022
February 08, 2022
By Stanley Barsky
Whether it comes to inflation adjustments, pass-through entity taxes, or estate and gift tax rules, tax law is in transition. Both individual taxpayers and owners of businesses will need to keep a keen eye on the headlines as they make tax planning decisions—and discuss the latest developments with their accountants—to stay on top of their obligations and avoid overpayments.
That’s not to mention the impact IRS understanding could have on tax filings. The IRS is facing a large backlog of paper filings from 2021, including a reported 6.2 million unprocessed tax forms. Beginning in the summer, it will require taxpayers wishing to access certain tools and applications to provide a selfie to a third-party company to verify their identity.
Still unknown is the impact of groups such as Patriotic Millionaires, whose members are millionaires and billionaires from around the world. In an open letter timed to coincide with the originally planned opening of the World Economic Forum, the group called for permanent wealth taxes on the rich to address income inequality. Among the 102 signers were Disney heiress Abigail Disney and venture capitalist Nick Hanauer, an early investor in Amazon.
“As millionaires, we know that the current tax system is not fair,” the group wrote. “Most of us can say that, while the world has gone through an immense amount of suffering in the last two years, we have actually seen our wealth rise during the pandemic, yet few if any of us can honestly say we pay our fair share of taxes.”
For insight into some of the most important developments on the fast-changing tax landscape, Crain’s Content Studio spoke with Joe Bublé, partner at Citrin Cooperman Advisors LLC; Stan Barsky, leader of the National Tax Group at EisnerAmper; and Pamela A. Mosiello, managing director at CBIZ Marks Paneth.
Here are some of the highlights:
CRAIN’S: How will inflation impact personal income taxes?
JOE BUBLÉ: Inflation is often referred to as a hidden tax. As inflation increases, it causes the average taxpayer’s income to grow in tandem until taxpayers are moved into a higher tax bracket with no adjustment to their spending power. Consequently, more than 60 code sections provide for annual inflation adjustments in an attempt to prevent this. The IRS recently announced the adjustments for 2022, which include increased federal income tax brackets, standard deductions, 401(k) limits, lifetime estate and gift tax exemptions, and annual gift exclusions. To the extent that these adjustments lag behind the actual inflation rate and other code sections that are not inflation-adjusted, the inflation tax is a reality.
CRAIN’S: What are the key tax inflation adjustments for tax year 2022 that business owners need to consider?
JOE BUBLÉ: The qualified business income deduction threshold and phase-in amounts have been increased for 2022 as follows: e threshold amount is now $340,100 for married couples filing jointly, $170,050 for married individuals filing separately, and $170,050 for all others. The phase-in range amount is $440,100 for married couples filing jointly, $220,050 for married individuals filing separately, and $220,050 for all others. Average annual gross receipts can’t exceed an average of $27 million for the three-year period ending with the 2022 tax year under an increased threshold for businesses that use the cash method of accounting. The gross receipts test also applies to several other business provisions. For taxable years beginning in 2022, the threshold amount for excess business losses has been increased. A taxpayer’s excess business loss is the amount over $270,000 ($540,000 for joint returns).
CRAIN’S: What are the new tax reporting requirements for cryptocurrency?
STAN BARSKY: Under the 2021 Infrastructure Investments and Jobs Act, certain provisions of the Internal Revenue Code 1986, as amended, were revised to address digital assets. Specifically, Sections 6045 (addressing certain tax returns and statements required to be filed by brokers) and 6050I (addressing the reporting of certain cash transactions) were expanded to apply to digital assets such as cryptocurrency. The application to digital assets is scheduled for returns required to be filed, and statements required to be furnished, after Dec. 31, 2023.
PAMELA MOSIELLO: With the cryptocurrency market rising in intense popularity among investors in the past 10 years, it was only a matter of time before the IRS would take measures to ensure tax reporting compliance. Some upcoming crypto reporting may be treated similarly to traditional reporting, including using Form 1099B (Proceeds from Broker), since it is used among traditional brokers. Also, digital assets valued over $10,000 will be considered as “cash” received. This must be
reported, which will disclose identifying information on the transaction including who sent the “cash.” Although these reporting requirements will not officially come into play until 2023, it does not relieve you of your obligations to report cryptocurrency gains-losses in 2021 and 2022.
JOE BUBLÉ: For 2021, the IRS is asking for specific reporting of the sale, exchange or other disposition of all virtual currency assets, including receipts of additional amounts resulting from mining or hard forks. The Infrastructure Investment and Jobs Act further expands such reporting by requiring brokers to document transactions in digital currency beginning in 2023. Businesses must also disclose the receipt of payments in digital assets over $10,000 starting in 2023.
CRAIN’S: How does the lack of broad changes to the estate and gift tax rules affect planning discussions with clients now and in the future?
PAMELA MOSIELLO: With President Joe Biden’s tax proposal stalled in the Senate, clients should still be proactive in estate-giving planning in 2022, even during a time of uncertainty. They should focus on reviewing current estate plans and related legal documents for accuracy as well as fine-tuning lifetime gifting strategies.
Remember, even if Congress takes no action, the expanded lifetime exemption amounts are still scheduled to be reduced in half in 2026. With that in mind, the IRS has already released the updated annual gift exclusion of $16,000 as well as the lifetime exemption amount of $12.06 million for 2022 (both adjusted for inflation). e time to plan is now to take advantage of the opportunities while they are still available.
JOE BUBLÉ: Estate planning and business succession planning should always be addressed to assist clients in helping them achieve their goals and objectives. The lack of largescale changes provides additional time and opportunity, resulting in a “call to action” to continue or begin the planning process. A good starting point would be to review the client’s current plan to see if it still fits the client’s needs.
CRAIN’S: Based on recent developments, the Build Back Better Act legislation appears to be at risk. What impact does this have on closely held businesses?
STAN BARSKY: One of the more impactful provisions in the Build Back Better Act, in the context of closely held businesses, is the proposal to drastically reduce the federal income tax benefits associated with qualified small-business stock under Section 1202. If enacted, the revision would increase the amount of gain subject to tax in connection with the sale of equity interests in certain C corporations. A reduction in Section 1202 tax benefits could make the C corporation structure less appealing to founders of new closely held businesses and could cause owners of existing C corporations to analyze the potential benefits of electing S status.
JOE BUBLÉ: This may be a sigh of relief for those still trying to navigate the multiple tax law changes since late 2017, which has created uncertainty and confusion for many closely held business owners. With all of the tax proposals being discussed, people have spent an inordinate amount of time analyzing tax changes that have not been passed.
CRAIN’S: What state and local tax developments should business owners be aware of concerning the federal income tax deductions available for state and local taxes paid by pass-through entities?
STAN BARSKY: Business owners need to recognize the sheer volume and complexity of the various rules that could be relevant to maximizing the intended federal income tax benefits associated with the passthrough entity tax elections. This includes both substantive rules that affect the amount of the state tax liability of the entity as well as procedural requirements to make the election and pay the taxes to the state. The analysis becomes particularly complex if the entity does business in more than one state or has owners who are residents of different states. The best approach is to confer with your tax advisers and make sure that they are considering the optimal approach for the entity and the owners.
PAMELA MOSIELLO: The passthrough entity tax was ultimately the state’s response to the 2017 Tax Cuts and Jobs Act’s provision capping the state and local tax deduction at $10,000. PTET allows individual owners to take the entity-level state and local tax as a business deduction on the federal tax return, circumventing the $10,000 SALT cap. In 2022 business owners should be aware of the potential for double taxation on nonresident partners-shareholders of pass-through entities. Importantly, not all states recognize entity-level tax as a tax paid by the individual for resident income tax credit purposes. This may result in higher tax rates on the SALT level. It is important to measure these potential pitfalls to decide whether electing into the PTET makes sense.
JOE BUBLÉ: Business owners should watch out for changes to the PTET landscape. States that previously enacted such a tax regime are considering legislative changes (for example, New Jersey), while we are hoping for revisions to the laws or further guidance on troublesome issues in other states (for example, California). In addition, a number of states have PTET effective dates starting in 2022 and there is a possibility of more states coming on board in the future. This is not a static environment; therefore, it should be closely monitored.
CRAIN’S: With the proliferation of Pass-Through Entity Taxes, are there any caveats to be aware of where a taxpayer may not want to be subject to the PTET of certain states?
STAN BARSKY: IRS Notice 2020-75 has raised many questions that will hopefully be addressed in future guidance. In the meantime, owners of pass-through entities should carefully consider the impact of any state election to avail themselves of the benefits of the notice. For example, some states subject all the income allocated to a resident owner to the tax, while other states subject only that portion of the income that is sourced to the state. Not only could that have a big impact on cash ow, but also the federal income tax treatment of any subsequent refund or credit is uncertain under
PAMELA MOSIELLO: It is important to bear in mind that every state operates based on its versions of legislation and may have different views on PTE tax taken as an out-of-state credit. For instance, the state of Virginia has recently ruled that resident individuals are not entitled to take the out-of-state entity level PTE taxes as a credit on state resident tax returns. Depending on the total impact, this creates a scenario in which electing into the PTE tax may not make sense, since electing in will result in a loss of tax credits and higher tax rates on the Virginia resident individual income tax level.
CRAIN’S: With all of the uncertainty surrounding tax proposals that may or may not be enacted, what should people be doing?
STAN BARSKY: There have been several detailed tax legislative proposals recently, potentially impacting a wide range of important tax rules, such as income tax rates, international tax provisions, new corporate minimum taxes, new taxes on stock buybacks, limitation of the tax benefits available in connection with qualified small-business stock, certain restrictions on the individual retirement accounts and others. The multitude of the various tax proposals—coupled with uncertainty about which, if any, will be enacted—means that it is very important to keep monitoring the legislative proposals as they continue to develop. Staying on top of the latest proposals (and working closely with your tax adviser) is a must if you want to analyze their potential impact on your business and personal tax planning.
PAMELA MOSIELLO: Regardless of the uncertainty surrounding the tax proposals, certain tax planning moves will always make sense. Roth IRA conversions are a good move at this time since it is safe to say that tax rates are not expected to decrease in the foreseeable future. Deferring state tax payments into 2022 may be another good strategy since there is a potential for the SALT cap to increase, leaving room for more deductibility of those taxes as an itemized deduction. Bunching charitable contributions would also serve as a good planning move, especially if anticipating a large upswing in 2022 income. The key is to always be proactive in your tax planning, even in times of pending tax legislation.
CRAIN’S: How have you seen the pandemic and working from home affect the IRS’s ability to process returns and correspondence that is still sent through the Postal Service?
PAMELA MOSIELLO: The pandemic and its impact on the world was an unprecedented event. Its impact on the IRS was no different. In March 2020 the IRS closed its processing and service facilities for weeks. Once reopened, its facilities operated at limited capacity for the health and safety of its employees. As a result, there has been a tremendous backlog of paper-filed tax returns and correspondence. Many tax returns remain backlogged at the IRS facilities due to the IRS’s inability to process balance-due, paper-filed returns promptly.