Bonus Depreciation Phase-Out
May 24, 2022
Properly qualifying assets for bonus depreciation can have a significant impact on a business’s bottom line. If an asset qualifies as long-term business property under tax rules, bonus depreciation may allow a business owner to deduct the entire cost of that asset in the year of acquisition.
This will be the last year for 100% bonus depreciation as enacted by Tax Cuts and Jobs Act (TCJA). Starting in 2023, bonus depreciation is scheduled to drop to 80% and will continue to drop by 20% each year thereafter until finally there will be no bonus depreciation starting in 2027.
Prior to the enacting of bonus depreciation, the premier tool for businesses to expense asset purchases was Section 179. Section 179 is still scheduled to be fully available and the current amount of Section 179 deduction allowed is $1,080,000 and the phase-out of the deduction starts once you place eligible assets into service of $2,700,000 and no Section 179 deduction is allowed after $3,780,000 of assets placed in service for that year. Unlike bonus depreciation, Section 179 deductions are only allowed to the extent of taxable income.
Although tax incentives like Section 179 and bonus depreciation can be beneficial, these provisions should only be used in situations that make long-term financial sense for your operation. It is important to always consider your tax circumstances and cash-flow requirements when using these tools. Connect with your William Vaughan Company advisor with additional questions.
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Categories: Tax Compliance, Tax Planning
Strategic Financial Moves to Consider During A Market Downturn
May 19, 2022
The natural ebbs and flows of market volatility can make even the best investors a bit nervous at times. However, smart investors also recognize the opportunities presented by a downturn. These include specific financial strategies to be leveraged for a long-term benefit. Here are several financial moves one should consider during a market lull:
Roth IRA Conversions
During normal market conditions, Roth IRA conversions typically initiate a sizable tax event. However, during a market dip, Roth IRA conversions are a prime opportunity to move funds from a traditional taxable IRA to a tax-free Roth IRA all while saving money.
To achieve the benefits of a Roth IRA conversion, investors convert funds from their traditional IRA to a Roth IRA. While the conversion will trigger a taxable event, it’s based on the contributions and earnings. The larger your pre-tax balance, the more you will owe. During market volatility, financial experts recommend making this move as “it is like getting the Roth IRA on sale” and when the market ultimately recovers, that growth is captured, tax-free, inside of the Roth IRA.
If you don’t have a traditional IRA, this can also be achieved through what some call a “backdoor Roth IRA,” an unofficial means for high-income individuals to create a tax-free Roth IRA.
Remember, the earnings limits for Roth individual retirement account contributions are capped at $144,000 modified adjusted gross income for single investors and $214,000 for married couples filing together in 2022.
To achieve the benefits of a “backdoor” Roth IRA conversion, investors make what’s known as non-deductible contribution to a pre-tax IRA before converting the funds to a Roth IRA, kickstarting tax-free growth.
Gift & Estate Planning
A market downturn is also a great opportunity for individuals seeking to minimize estate taxes and gift assets to others. This is because the value of the securities will be lower, resulting in a lower gift tax amount and all subsequent appreciation will be excluded from your estate – a win-win!
Tax-Loss Harvesting
Tax-loss harvesting is another key strategy to consider during a down market. It involves selling investments that have lost value and replace them with similar investments to ultimately offset your capital gains with capital losses. In doing so, investors reduce their tax liability while better positioning their portfolio. This can be done up to $3,000 a year. The average investor can leverage this strategy and it doesn’t involve much but an assessment of your investments and their performance. A couple of items to note when considering this option is:
- It applies only to investments held in taxable accounts – so it does not include 401(k)s, 403(b), IRAs or 529s because the growth in these tax-sheltered accounts in not taxed by the IRS
- This is not a beneficial strategy for those in lower tax brackets – the idea is to reduce your tax liability and traditionally, those individuals in the higher tax bracket have a greater liability and therefore, a greater savings.
- The deadline for taking advantage of this approach is the end of the calendar year – December 31.
Finally, the information provided above is for general information only and should not be considered an individualized recommendation or personalized investment advice. The investment strategies mentioned here may not be suitable for everyone. We recommend connecting with your financial and tax advisors to discuss the best plan of action for your personal situation.
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Categories: Estate Planning, Tax Planning
New R&E Expenditure Changes Under IRC Section 174 to Begin in 2022
Jan 26, 2022
As 2022 begins, so does the amendment to the Internal Revenue Code (IRC) Section 174, originally introduced by 2017 tax reform legislation, the Tax and Jobs Act (TCJA.)
That amendment requires both US-Based and non US-Based research and experimental expenditures (R&E) for tax years starting after December 31st, 2021 be capitalized and amortized over a period of five or 15 years, respectively.
Previous to the TCJA amendment, taxpayers could elect to either capitalize and amortize R&E expenditures over a period of at least 60 months, or deduct the expenditures in the year paid or incurred, (taxpayers could also choose to make an election under Section 59(e) to amortize expenditures over 10 years.) Under the new legislation, amortization begins at the midpoint of the taxable year in which expenses are paid or incurred, which could create a significant year-one impact.
For example, if a taxpayer incurs $5 million of R&E expenditures in 2022, the taxpayer will now be entitled to amortization expense of $500,000 in 2022. We arrived at this calculated by dividing $5 million by five years, then cutting the annual amortization amount in half. Prior to the TCJA, the taxpayer would have immediately expensed all $5 million on its 2022 tax return, assuming it did not make an election under Section 174(b) or Section 59(e) to capitalize the amounts.
Additionally, software development costs have been added as R&E expenditures under Section 174(c)(3) and, therefore, are also subject to the same mandatory amortization period of five or 15 years. Previously, under Rev. Proc. 2000-50 options existed for taxpayers to either expense software development costs as they incurred, amortize over 36 months from the date the software was placed in service, or amortize over not less than 60 months from the date the development was completed.
Immediate Considerations
Under the new Section 174 requirements, taxpayers should ensure that all R&E expenditures are properly identified, as some may be able to leverage from existing systems/tracking to identify R&E. Taxpayers that have existing systems in place to calculate the research credit will likely be able to use such computations as a helpful starting point for determining R&E expenditures. By definition, any costs included in the research credit calculation would then need to be recovered under the five-year amortization period.
Taxpayers currently not identifying any R&E expenditures should consider the steps necessary to assess the amount of their expenditures that are subject to Section 174. Under some circumstances, it may be wise to begin separating out R&E expenditure amounts to their own trial balance accounts, e.g. to have a separate “trial balance account” for R&E expenditure wages versus non-R&E wages. Determining which costs should be included in the relevant R&E expenditure trial balance accounts will likely involve interviews with the taxpayer’s operation and financial accounting personnel, as well as the development of allocation methodologies that determine which expenses (e.g., rent) relate to both R&E expenditure and non-R&E expenditure activities.
Additional Effects of Section 174 Amendment
It should be noted that under Section 174, the types of expenses eligible for duction are generally broader than those expenses eligible for credit under Section 41. For example, Section 41 allows supplies, wages and contract research, while Section 174 can include items such as utilities, depreciation, attorneys’ fees and other expenditures related to the development or improvement of a product.
Key Take-Aways
The implemented changes of Section 174 may bring some potentially favorable tax developments for those previously employing the capitalization of R&E expenditures. With the new amendment allowing for amortization of R&E expenditures at the midpoint of the fiscal year they were incurred, certain taxpayers may be able to recoup those costs sooner.
It should also be noted that the language in the TCJA indicates that the Section 174 amendment should be treated as a “change in method of accounting” and applies on a cut-off basis beginning for tax year 2022. Any costs incurred before 2022 will remain as-is and fall under the previous rules mentioned above. It is still unknown if taxpayers that previously expensed their R&E expenditures will have to file an “Application for Change in Method of Accounting (Form 3115).”
The IRS is expected to release guidance on how taxpayers should comply with the new rule for the 2022 tax year, presuming the start-date of the provision is not again postponed by Congress. Because of this and other areas of uncertainly surrounding the new amendment, taxpayers should continue to monitor IRS and Treasury updates, or consult with their William Vaughan advisor before filing any 2022 tax returns in order to ensure compliance with the latest regulations.
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Robert Bradshaw, CPA
Tax Partner
bob.bradshaw@wvco.com | 419.891.1040
Categories: Tax Planning
Employee Retention Tax Credit – Updates & Reminders
Nov 15, 2021
Don’t leave ERTC money on the table!
The Employee Retention Tax Credit (ERTC) is a provision established under the CARES Act which has been enhanced by additional legislation and could provide an immense amount of capital to employers. Unfortunately, statistics are showing the credit is being underutilized. The good news is with year-end planning on the horizon, now is the perfect time to leverage the ERTC.
What is the ERTC?
This is a refundable tax credit employers can claim against certain employment taxes, equal to a percentage of qualified wages and health insurance premiums paid after March 12, 2020, and before September 30, 2021.
For 2020, the credit is 50% of qualified payments, up to $10,000 per employee. Simply put, an eligible business has the potential to request refunds of up to $5,000 per employee for the year.
For 2021, the credit increases to 70% of qualified payments, up to $10,000 per employee per quarter. The credit was intended to run through December 31, 2021, but the passing of the recent Infrastructure Bill put an end to it after September 30. Nevertheless, the credit is still fair game for the first three quarters of 2021. With a maximum credit of $7,000 per employee, per quarter, a business eligible for all three quarters of 2021, could receive refunds of $21,000 per employee. Without question, the ERTC can provide much-needed dollars for eligible employers.
How do I know if my business is eligible?
For most businesses, eligibility is determined by meeting one of two tests; with a third test available for quarters 3 and 4 of 2021, which will be outlined later.
- TEST #1 – A measure of decline in gross receipts. If an employer experiences a significant decline in gross receipts for any calendar quarter, as compared to the same calendar quarter in 2019, they will be eligible for the credit in that quarter. For 2020, this is defined as gross receipts that are less than 50% of gross receipts for the same quarter in 2019, and for 2021, this is gross receipts being less than 80% of gross receipts for the same quarter in 2019.
- TEST #2 – A full or partial suspension of operations. If an employer was subject to any full or partial suspension of operations because of government orders related to COVID-19 they could be eligible. These orders could be Federal, State, county, and/or municipality. Even if your business was deemed essential and was not directly affected by such orders, there still could be avenues to be eligible for the credit.
- TEST #3 – Under a third test, if a business can meet the definition of a recovery startup business, they can claim the credits for the 3rd and 4th quarters of 2021 only (not exceeding $50,000 per quarter). A recovery startup business is any employer that began a trade or business after February 15, 2020, and has average annual gross receipts of less than $1,000,000.
What are some important details to keep in mind?
- First, gross receipts are determined based on the method used for the employer’s tax return. Meaning, if your business uses the cash method for tax purposes, then gross receipts for Test #1 should be calculated using the cash method, even if your financial statements use the accrual method. This could be beneficial for businesses, especially during times when the pandemic was hitting the hardest and collections slowed.
- Another important item to keep in mind is that, for this credit, employers are considered either small or large. For 2020, a small employer is one that, based on 2019 counts, averaged 100 or fewer full-time employees. For 2021, this number increases to an average of 500 or fewer full-time employees, still based on 2019 counts. If a business is above these amounts, they are considered large. Small employer status is more advantageous because it allows qualified wages to include all wages paid. If a business is considered a large employer, qualified wages are limited to wages paid to an employee only for the time that employee was not providing services. For example, if your business is a large employer and operations were partially suspended, but all your employees continued working during that time, your business may not be able to claim any credits on the wages paid during that suspension period. For this purpose, a full-time employee is an employee that, in 2019, averaged at least 30 hours per week or 130 hours per month. As an example, an employer in 2019 who had 5 employees that worked 25 hours per week and 5 employees that worked 30 hours a week, would only be considered to have 5 full-time employees. Early on, a common misconception was that full-time employees were equal to full-time equivalents, which may have caused some businesses to think they were large employers, when in fact that may not be the case.
- Finally, there are several different paths a business could take to qualify for the ERTC based on a full or partial suspension of operations due to governmental orders. As previously mentioned, even if your business was not directly affected by the orders, there still could be ways to qualify for the credit. We encourage you not to overlook this test as it could be very beneficial to revisit.
What are my next steps?
With year-end planning season looming, your William Vaughan Company advisor will surely be discussing this topic with you in the coming weeks. If you are not currently a client, but this topic has piqued your interest and you would like us to look at how this credit might benefit your business, please do not hesitate to reach out to us. As mentioned, the credit has been generally underutilized, so we would love to help your business realize the greatest benefits it can.
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Mike Hanf, CPA, CGMA
ERTC Lead
mike.hanf@wvco.com
Categories: Tax Planning
Timely Estate Planning Strategies: Part Three
Nov 01, 2021
Charitable Gift Planning Opportunities
In the third installment to our Timely Estate Planning Strategies Series, we outline how traditional income and estate planning may incorporate an individual’s desire to fulfill philanthropic goals. Giving can be done both while living (receiving current income tax deductions) and through one’s will at the time of death (garnering estate tax deductions). However, given the current ‘perfect storm’ we outlined in the first blog of the series, there is no better time to address your giving strategies.
The estate tax exclusion is currently $ 11.7 million per individual which means persons with an estate less than this will NOT benefit from charitable bequests in their wills. The emphasis for these individuals should be obtaining current income tax deductions while fulfilling their charitable intent. Individuals with taxable estates greater than $ 11.7 million can receive a double tax benefit by making lifetime charitable gifts. The donation is deductible for income tax purposes when the gift is made; the property along with any future appreciation is removed from the taxable estate.
Several opportunities to benefit from current charitable gifts are available. It is important to note, total itemized deductions including charitable deductions must exceed the standard deduction to receive a current income tax benefit. Some of your options include:
- Bunching contributions into one year to make sure you exceed the standard deduction.
- Contributing to Donor-Advised Funds (DAFs). A large contribution to the fund in year one provides the income tax deduction. After which, amounts can be paid from the fund to charities over a designated number of future years.
- Donating to Charitable Remainder Trusts. The remainder interest in a given property is donated to charity, obtaining a current income tax deduction, and retaining an annuity (income) interest in the property during the donor’s lifetime. Or the reverse of this,
- Giving to Charitable Lead Trusts. This provides a charity an annual distribution while the remainder interest passes to a Trust beneficiary in the future.
- Making Qualified Charitable Distributions (QCDs). Taxpayers over the age of 70 1/2 contribute directly from their IRA to a specified charity. The distribution is not taxable and no charitable deduction is taken. Structured properly, this can convert required minimum distributions into nontaxable withdrawals from the retirement account.
Your WVC advisor would love to meet with you and your estate planning team to see how charitable transactions could help you meet your philanthropic goals in a tax-efficient manner.
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wvco.com | 419.891.1040
Categories: Estate Planning