Financial Services Year-End Tax Planning Webcast Series: Parts I, II & III

January 11, 2022

By Philip Bekmessian and Matthew Talia

Financial services firms have to take into account new legislation when it comes to year-end tax planning. EisnerAmper provided a three-part webcast series Financial Services Year-End Tax Planning to help firms address the issue.  

Panelists included:

  • Irina Kimelfeld, a tax partner in our Financial Services Group
  • Denisse Moderski, a senior manager in our State & Local Tax Group, EisnerAmper
  • Stephanie Hines, a partner from our Personal Wealth Advisors Group
  • Miri Forster, a partner in our Tax Controversy Group
  • Jay Bakst, a partner from our International Tax Group

Infrastructure Investment and Jobs Act

On November 15, 2021, the “Infrastructure Investment and Jobs Act,” often referred to as the “infrastructure bill,” was signed into law. The new legislation includes two key reporting requirements related to cryptocurrency and other “digital assets.”

The Act amends IRC Sec. 6045 to expand the definition of a “broker” to include “any person who is responsible for regularly providing service effectuating transfers of digital assets on behalf of another person.” The Act requires brokers to submit information reports to the IRS and customers beginning on January 1, 2023. The newly enacted requirement will place a heavy administrative burden on those deemed to be brokers.

The Act also amends IRC Sec. 6050I to expand the definition of “cash” to include “digital assets.” This effectively requires any person or entity engaged in a trade or business, who receives digital assets greater than $10,000 to now report the transaction or related transactions to the IRS.

SALT Cap Workarounds

In 2017, the Tax Cuts and Jobs Act placed a $10,000 limitation on state and local tax (SALT) deductions for individuals. In response, nearly 20 states have enacted a pass-through entity tax, which is an entity level tax paid by pass-through entities on behalf of their partners/shareholders/members. Since the tax is paid and deducted at the entity level, the $10,000 limitation on individuals does not limit the amount of the allowable deduction. Pass-through entity taxes have become a hot topic for individuals that reside in high tax jurisdictions such as California, New Jersey, and New York as a result of the federal tax deduction and allowable credit. The deduction at the entity level allows for a reduction in the income that flows through to the partner/member/shareholder; and the credit is an offset on the tax at the individual level based on the partner's/member's/shareholder's distributive share of taxes paid by the entity on his/her behalf. Each state provides its own set of requirements related to eligibility, revocability, election timing, applicable income, etc. For example, some states do not allow for a credit, but for a reduction in the income reported on the K-1 based on the amount of tax that is paid by the entity. States that require a reduction of income are Arkansas, Colorado, Georgia, Louisiana, North Carolina, South Carolina, and Wisconsin. A detailed analysis is required to determine the applicability and benefits to a partnership/taxpayer on a state-by-state basis.

Increased IRS Enforcement

The IRS released its Fiscal Year 2022 “Focus Guide” which outlines its strategic goals for the year. Large partnership tax compliance is at the top of the list via the Large Partnership Compliance Pilot Program. Complex multi-tiered partnerships will be selected for examination and analyzed using data analytics to identify subchapter K and operational issues. Increased focus will also be placed on compliance with Puerto Rico Act 22, and taxpayers improperly excluding income from U.S. taxation, or errantly reporting U.S.-source income as Puerto Rico-source income. Additionally, the IRS will be taking a deeper look into financial services entities engaged is a U.S. trade or business. The goal is for the IRS to better understand the structures used by the financial services industry and determine whether foreign investors are subject to U.S. tax on effectively connected income if they are invested in entities that are involved in lending or are considered dealers in stocks or securities.

Build Back Better Plan

It must be noted that the highly discussed “Build Back Better” (BBB) bill did not pass by year-end, as was widely expected. The bill is expected to be revisited by the legislature in early 2022. Taxpayers should be aware of some of the proposed provisions below, as they may serve as a framework for future legislation. 

This bill would have modified the wash sale rules to apply to losses claimed with respect to digital assets. Additionally, the bill would have added digital assets that are marketable securities for purposes of analyzing if a constructive sale had taken place. As digital assets are currently classified as property by the IRS, these rules have not been applicable historically.

The exclusion allowed under IRC Sec. 1202 (Qualified Small Business Stock) on qualifying gains would be reduced from 100% to 50% for taxpayers with an adjusted gross income equal to or exceeding $400,000, inclusive of grantor trusts (estates and non-grantor trusts are not eligible for this exclusion). This would be particularly impactful to venture capital and small business investors who were able to exclude large capital gains (subject to certain limitations) entirely.

A tax surcharge on taxpayers exceeding $10,000,000 (single or married filing jointly [MFJ])/$5,000,000 (married filing separately [MFS]) of modified adjusted gross income was proposed, as well as an additional surcharge equal to 3% on taxpayers with a modified adjusted gross income of $25,000,000 (single or MFJ)/$12,500,000 (MFS). The bill would also expand the net investment income tax (NIIT) to business income that is not subject to self-employment/FICA, greatly broadening the scope of the NIIT. These surcharges would also have been applicable to trusts and estates.

A minimum corporate tax of 15% was proposed on the book income of large corporations, defined as having more than $1 billion in profits annually over a three-year time frame. Additionally, the excess business loss limitation enacted under IRC Sec. 461(l) was proposed to be made permanent, as well as require annual limitation testing instead of converting the disallowed loss to an NOL in the following year.

Notably, the much talked about SALT deduction will remain at $10,000 for the 2021 tax year, while the BBB proposed an increase to $80,000.

Schedule K-2 and Schedule K-3 Reporting

In June 2021, the IRS released the final versions of Schedule K-2 and Schedule K-3, adding an additional layer of complexity to the reporting of items with international tax relevance.

Schedule K-2, Partners’ Distributive Share Items – International, is an extension of Schedule K (Form 1065). Schedule K-2 is used to report the items of international tax relevance from partnership operations.

Schedule K-3, Partner's Share of Income, Deductions, Credits, etc. — International, is an extension of Schedule K-1 (Form 1065). Schedule K-3 is used to report each partner’s share of the items included on Schedule K-2; this information must be included in each partner’s tax or information returns.

In September 2021, the IRS released Notice 2021-39, which provides transition relief for taxable years that begin in 2021 with respect to Schedules K-2 and K-3. Penalty relief is provided for partnerships that establish to the satisfaction of the IRS that they made a “good-faith effort” to comply with the new reporting requirements.

The webinars can be viewed here:

Financial Services Year-End Tax Planning On Demand Part 1 (eisneramper.com)

Financial Services Year-End Tax Planning 2 (eisneramper.com)

Financial Services Year-End Tax Planning Part III (eisneramper.com)

About Matthew Talia

Matthew Talia is a Senior Tax Manager and a member of the Financial Services Group and specializes in tax consulting, planning, compliance, structuring, and transaction analysis for the financial services industry.

About Philip Bekmessian

Philip Bekmessian provides services to a broad range of asset management clients, including hedge funds, private equity funds, fund of funds, management companies and family offices.

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