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 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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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.
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.
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
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Categories: Tax Planning
Jan 10, 2022
Written by: Brian Morcombe, Partner & Indirect Tax Practice Leader, BDO Canada – 2021
On July 1, 2021, new rules came into force that will significantly impact non-resident vendors and online platform operators. Specifically, the changes require certain non-resident vendors and operators of online platforms to register for, collect, and remit goods and services tax (GST)/harmonized sales tax (HST) on:
- sales of digital products and services provided to Canadian customers;
- goods supplied through fulfillment warehouses located in Canada and made by non-resident vendors directly through websites; and
- supplies made via short-term accommodation platforms.
Here’s what you need to know about Canada’s new digital sales taxes.
Supplies of digital property and services
What are the new rules?
Non-resident vendors supplying digital property and services to consumers in Canada are required to register for and collect GST/HST on these taxable supplies to Canadian consumers. An example is Netflix which, prior to July 2021, may not have been viewed as carrying on business in Canada and was not required to register for GST/HST. Under the new rules, Netflix is required to register to collect tax from customers in Canada that are not registered for GST/HST, putting Netflix on equal footing with Canadian resident streaming service vendors already required to collect tax from customers.
A consumer includes persons not registered for GST/HST (persons registered for GST/HST are not considered consumers for the purposes of the new rules). Operators of third-party distribution platforms making these types of supplies are also required to register. A simplified registration and remittance framework is available to these registrants that are not otherwise carrying on business in Canada.
The new requirements apply to non-resident vendors and distribution platform operators whose revenue from taxable supplies of property and/or services exceed, or are expected to exceed, C$30,000 over a 12-month period.
Can ITCs be claimed?
A condition of the simplified framework is that non-resident vendors and distribution platform operators using the simplified registration framework are not able to claim input tax credits (ITCs) to recover any GST/HST paid on expenses they incur related to their Canadian sales.
Goods supplied through fulfillment warehouses and through websites
What are the new rules?
Distribution platform operators are required to register to collect and remit GST/HST under the general regime (as opposed to the simplified framework discussed above) on sales of goods located in warehouses in Canada if the sales are made through that platform by non-registered vendors. Non-resident vendors using Canadian fulfillment warehouses to sell in Canada without the use of a distribution platform are also required to register for and collect GST/HST under the general regime. Fulfillment businesses in Canada are required to notify the Canada Revenue Agency of their activities and maintain certain records related to non-resident clients.
Lastly, non-resident vendors that make sales to consumers in Canada using their own website are generally also required to register for GST/HST under the general regime. GST/HST registration and collection is required where qualifying supplies, including those made through distribution platforms by non-registered third-party vendors to purchasers in Canada that are not registered for the GST/HST, exceed or are expected to exceed C$30,000 in a 12-month period.
Can ITCs be claimed?
Vendors that are registered under the general regime, as opposed to the simplified framework, will generally be eligible to claim ITCs in respect of GST/HST incurred in the course of their commercial activities.
Short-term accommodation platforms
What are the new rules?
GST/HST applies to all supplies of short-term accommodation (generally a residential complex or unit supplied for periods of less than 30 days and for more than C$20/day) supplied in Canada through an accommodation platform, such as Airbnb. If the property owner is registered for GST/HST, the owner continues to be responsible for collecting and remitting the GST/HST from its guests. If the property owner is not registered for GST/HST, the accommodation platform operator must collect and remit the GST/HST on that property owner’s supplies of accommodation to consumers.
Can ITCs be claimed?
Non-resident accommodation platform operators that are not considered to be carrying on business in Canada and are making supplies to consumers (as opposed to GST/HST registered persons) use the simplified registration framework, resulting in no entitlement for ITCs. Accommodation platform operators that are resident in Canada are required to register under the general regime and are able to claim ITCs where all conditions are met.
What about provincial sales tax (PST)?
If all of this sounds familiar, it should. Quebec introduced digital sales tax provisions aimed at non-residents of Canada that are not registered for GST/HST and Quebec sales tax (QST), defined as foreign specified suppliers, as well as specified digital platform operators on Jan. 1, 2019, requiring them to become registered for QST. Beginning Sept. 1, 2019, this QST registration requirement was broadened to include residents and non-residents that are registered for GST/HST but not registered for QST (i.e., Canadian specified suppliers).
Impacted vendors are required to register for QST under the simplified framework where sales exceed C$30,000 to individual consumers in Quebec in the preceding 12 months and relate to intangibles (like software and digitized products) and services. Canadian specified suppliers are required to collect QST on goods as well as intangibles and services. Like the new GST/HST simplified framework, Quebec restricted input tax refunds on vendors using its simplified framework.
Effective Jan. 1, 2020, Saskatchewan introduced rules targeting non-residents making e-commerce sales to purchasers in the province. Online marketplace facilitators and online accommodation platforms are now required to register and collect PST on electronic distribution services that are delivered, streamed, or accessed through an electronic distribution platform (e.g., website, internet, portal, or gateway) and online accommodation services that are delivered or accessed through an online accommodation platform, respectively.
British Columbia expanded its PST registration requirements to include Canadian sellers of goods, along with Canadian and foreign sellers of software and telecommunication services. These new provisions come into force on April 1, 2021.
Lastly, Manitoba recently released legislation taxing certain digital sales of goods and services effective Dec. 1, 2021. The following vendors will be caught in the new rules and will be required to register for, collect and remit Manitoba retail sales tax (RST):
- online marketplaces on the sale of taxable goods sold by third parties via their online platforms;
- online accommodation platforms on the booking of taxable accommodations in Manitoba; and
- audio and video streaming service providers on the sale of streaming services (by virtue of being included as telecommunication services).
Given the different approaches taken by the federal government and each of the provinces when taxing digital property and services, vendors and platform operators will need to gain a strong understanding of the requirements in each jurisdiction to prevent costly errors. If you need assistance navigating these rules, please contact your WVC advisor
Dec 30, 2021
Hybrid work arrangements significantly impact municipal income tax withholding requirements and raise other municipal tax issues.
With the start of the new year just around the corner, the “pre-pandemic” law for Ohio municipal income tax withholding will soon return.
Applicable to periods beginning on or after 1/1/2022, if an employee works a hybrid schedule by spending some days working at home and other days working at the office, employers will once again be required to withhold municipal tax based on where the employee’s work is actually performed. For many employers, this may trigger withholding for employees’ home municipalities that the employer may never have been required to do before. Additionally troubling is the requirement for businesses to allocate such wages, and potentially apportion some gross receipts (sales) as well, to these home municipalities for purposes of the net profits (income) tax, subjecting the company to income tax reporting in each of their employees’ home municipalities.
As we recommended in our July blog, to ease the complexities of tracking actual work locations for Ohio municipal withholding requirements in 2022, employers could consider having employees sign formalized, hybrid work agreements. Such agreements provide consistency, structure, and ease of record keeping. In exchange for permitting hybrid work schedules, employers might consider requiring employees to report true-up differences between actual and forecasted work on their personal municipal income tax returns and to provide proof of payment (in case the employer is audited). Noting that the hybrid work agreement will be helpful but cannot cover all municipal activity, employers could also aim to develop ways within their internal system to most easily track multi-location work performed by employees throughout the year. Employers could consider contacting municipalities to gain pre-approval of estimated or hybrid withholding approaches or enter into withholding agreement(s) with the municipalities. Consultation with legal counsel related to any employment arrangements should also be considered due to the complexity of labor laws.
If we can assist you regarding your specific facts and circumstances and in making decisions about municipal income tax compliance or if you have any questions, please contact your William Vaughan Company advisor.
Categories: Tax Compliance
Jul 09, 2021
On June 30, Governor Mike DeWine signed into law Ohio’s 2022-23 budget. One of the key items in the law was the clarification of a municipal income tax withholding dilemma that has been ongoing since virtually the beginning of the COVID-19 pandemic. While this clarification means good news for many employees, it may also be a massive headache for employers.
The Good News
Earlier this year, we penned a blog outlining how a temporary “Pandemic” law change intended to ease municipal income tax withholding burdens on employers was, in fact, having unintended negative consequences on remote workers. Many were left paying taxes to municipalities they did not live in and did not physically work in either, due to stay-at-home orders.
The 2022-23 budget bill extends the temporary law noted above through December 31, 2021, and clarifies that it applies only to employer withholding requirements and not to the actual liability an employee has to a given city. This means, for 2021 only, employees can request a tax refund for any days they neither lived nor physically performed work in a municipality. It is important to note an employee may still owe tax to the municipality in which they live.
The Bad News
Yes, the temporary law is extended to the end of 2021, but that means, beginning in 2022 “pre-pandemic” law will be back in place.
While the ever-expanding world of technology was leading us down a road where remote work would become the norm, the COVID-19 pandemic put us in a Lamborghini and sped us there in a matter of a year. Employers have realized their workforce can get work done remotely, and employees are becoming accustomed to more time with their families and much less time commuting while continuing to be productive in their work. Remote work is here to stay, and absent any future, permanent law changes, the reversion in 2022 back to pre-pandemic rules has the potential to be a huge problem for two reasons.
- First, pre-pandemic law included a 20-day municipal withholding rule, only requiring employers to withhold if an employee physically worked in a municipality for more than 20 days. Unfortunately, this rule will not align very well with a remote work environment. Even if a business is modestly flexible, allowing employees to work remotely just two days a month, this would trip the 20-day rule, requiring withholding from wages for every municipality within which their employees reside.
- Second, although many employers offer courtesy withholding so may already be withholding taxes for those cities, tripping this 20-day rule will now require those wages to be allocated to that municipality for purposes of the net profits (income) tax, subjecting the company to Income tax in each of those municipalities.
To ease into the 2022 transition, employers could consider formalizing hybrid work arrangements and creating an internal system to easily track days worked remotely.
We will be keeping our eyes peeled for any future legislation that may alter municipal tax rules for 2022 and beyond. If you have any questions in the meantime, please contact your William Vaughan Company advisor.
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