Dec 27, 2022
The IRS has recently issued proposed regulations relating to the foreign tax credit covering:
- Guidance on the reattribution asset rule for purposes of allocating and apportioning foreign taxes
- The cost recovery requirement
- The attribution rule for withholding tax on royalty payments
Reattribution Asset Rule
The 2022 foreign tax credit final regulations provide rules for allocating and apportioning foreign income tax arising from a disregarded payment. Foreign gross income included by reason of the receipt of a disregarded payment has no corresponding U.S. item because Federal income tax law does not give effect to the payment as a receipt of gross income. The new proposed rules therefore characterize the disregarded payment under Federal income tax law for purposes of assigning this foreign gross income to the statutory and residual groupings.
These rules treat the portion of a disregarded payment, if any, that causes U.S. gross income of the payor taxable unit to be reattributed as a “reattribution payment” under either the rules for gross income attributable to a foreign branch in the case of a taxpayer that is an individual or domestic corporation; or the rules for gross income attributable to a tested unit in the case of a taxpayer that is a foreign corporation. The excess of a disregarded payment over the portion that is a reattribution payment is treated either as a contribution from one taxable unit to another taxable unit owned by the first taxable unit, or as a remittance of a taxable unit’s current and accumulated earnings.
Cost Recovery Requirement
Under the cost recovery requirement, the base of a foreign tax permits the recovery of significant costs and expenses attributable, under reasonable principles, to the gross receipts included in the tax base. The proposed regulations provide additional guidance with respect to whether the test is met in certain cases where foreign tax law contains a disallowance or other limitation on the recovery of a particular cost or expense that may not reflect a specific principle underlying a particular disallowance in the Code. The proposed regulations also provide that the relevant foreign tax law need only permit recovery of substantially all significant cost or expense, based on the terms of the foreign law. A safe harbor is provided for applying the requirement.
Attribution Requirement for Royalty Payments
The attribution requirement allows a credit for foreign tax only if the country imposing the tax has a sufficient nexus to the taxpayer’s activities or investment in capital. Under the source-based attribution requirement, a foreign tax imposed on the nonresident’s income on the basis of source meets the attribution requirement only if the foreign tax sourcing rules are reasonably similar to the U.S. sourcing rules. With respect to royalties, foreign tax law must source royalties based on the place of use of, or the right to use, the intangible property, consistent with how the Code sources royalty income.
The proposed regulations provide an exception (the single-country exception) to the source-based attribution requirement if a taxpayer can substantiate that the payment on which the royalty withholding tax is imposed was made pursuant to an agreement that limits the right to use intangible property to the jurisdiction imposing the tested foreign tax. The exception applies only when the taxpayer has a written license agreement that meets certain requirements.
The proposed regulations also modify the separate levy rule to provide that a withholding tax that is imposed on a royalty payment made to a nonresident pursuant to a single-country license is treated as a separate levy from a withholding tax that is imposed on other royalty payments made to such nonresident and from any other withholding taxes imposed on other nonresidents.
William Vaughan Company will continue to monitor proposed changes on foreign reporting. For immediate questions or concerns, please contact our team of experienced tax professionals.
Categories: Tax Compliance
Dec 14, 2022
Starting with the 2021 tax year, the state of Ohio began offering dollar-for-dollar tax credits to individuals who donate to an Ohio-certified scholarship granting organization, or SGO. Defined by the state, SGOs are organizations exempt from federal taxation under section 501(c)(3) of the Internal Revenue Code, that prioritize awarding academic scholarships for low-income students to attend primary and secondary schools (K-12), and that receive certification from the Office of the Ohio Attorney General.
Individuals that donate to an SGO can expect to receive a tax credit equal to 100 percent of their contribution (up to $750,) while married couples could receive up to a $1,500 credit. In addition to claiming the state tax credit, eligible charitable contributions can also be claimed on federal income tax returns if the taxpayer opts to itemize their deductions.
Currently, there are 25 certified SGOs in the state of Ohio, all of which are listed on the Ohio Attorney General’s website.
“This is a very easy credit for Ohio taxpayers to take advantage of,” says William Vaughan Company Tax Partner, Sandi Towns. “Those who have donated to Ohio-certified SGOs in 2022 need simply include their proof of donation letter(s) with other tax documents given to their accountants.”
Says Towns, “William Vaughan Company’s tax team will continue to monitor this and other tax credit updates, however I urge anyone wishing to take advantage of these credits to contact their accountant in order to determine which credits make the most sense for their specific tax and financial situation.”
Sandi Towns, CPA/PFS, CFP®
Categories: Tax Planning
Oct 17, 2022
The Inflation Reduction Act of 2022 (2022 IRA) was passed to incentivize investment in clean energy and promote the reduction of carbon emissions. A large share of the incentives come in the form of tax credits, which in some cases are extensions or expansions of current credits, such as those for electric vehicles or residential energy upgrades.
Of the tax provisions introduced by the 2022 IRA, one of the most significant to businesses has been the expansion of the Energy Efficient Commercial Buildings Deduction (§179D), which increases the maximum deduction and updates the eligibility requirements for a property’s reduction of energy costs, in addition to other changes.
Under the expanded provision, a deduction is allowed for all or part of the cost of certain energy-savings improvements made to domestic, commercial buildings placed in service as part of the building’s:
- interior lighting systems
- heating, cooling, ventilation (HVAC), and hot water systems
- building envelope
The tax deduction benefits both commercial building owners and lessees along with designers of government-owned buildings. Additionally, the provision states that installation of energy-efficient property may occur as a result of new construction, or through the improvement of an existing commercial or government building.
Efficiency standard: To qualify for the deduction, newly updated eligibility requirements call for energy-efficient property to reduce associated energy costs by 25% or more (decreased from 50% or more) in comparison to a reference building that meets the latest efficiency standards.
Applicable amount: The applicable dollar value of the deduction is $0.50 per square foot, an increase of $0.02 for each percentage point above 25% that a building’s total annual energy cost savings are increased. However the amount cannot be greater than $1/ square foot, and the maximum amount of the deduction in any tax year cannot exceed $1/ square foot minus the total deductions taken over the previous three years (or during a four-year period in cases where the deduction is allowable for someone other than the taxpayer). The applicable dollar value will be adjusted for inflation for tax years beginning after 2022.
An increased dollar value is available for projects that satisfy prevailing wage and apprenticeship requirements for the duration of the construction.
Alternative deduction for energy-efficient retrofit property. Under the 2022 Inflation Act, taxpayers may elect to take an alternative deduction for a qualified retrofit of any eligible property. However, instead of a reduction in total annual energy power costs, the deduction is based on the reduction of energy usage intensity.
For more information on how you may be able to take advantage of this deduction or any other tax relief provisions under the 2022 Inflation Act, contact William Vaughan Company’s team of trusted tax professionals.
Connect with us.
Categories: Tax Planning
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.
Connect With Us.
Mike Hanf, CPA, CGMA
Categories: Tax Planning
Jul 16, 2021
As we are heading into the second half of 2021, individuals are now starting to receive their advance Child Tax Credits payments as a result of President Biden’s American Rescue Plan. The law, signed in March, increases the overall child tax credit, expands it to include children turning 17 this year, and adds another annual $600 benefit per child under six years old. While the advance payment on the credit may be a welcomed windfall, there are some important aspects of this tax credit individuals should be aware of when receiving these payments.
Individuals with dependent children started receiving monthly payments on July 15th which are estimated to total half of the amount of their estimated 2021 Child Tax Credit. The other half of the Child Tax Credit will be received when the 2021 Tax Return is filed in 2022. Individuals are required to reconcile the payments received on their 2021 Tax Return so they should keep track of the payments received throughout the year and include that information with their tax documents.
If an individual receives more than what is due to them, they will be required to pay back the difference. This differs from the stimulus payments, where individuals were allowed to keep the additional funds. This primarily applies to those with a dramatic increase in income during 2021. An example of this scenario:
- If your income level qualified you to receive additional Child Tax Credits in 2020, and your new income level in 2021 does not, you will have to pay back the money received in regards to the additional Child Tax Credit you no longer qualify for.
Increase in Tax Due
The advance child tax credit received will be in lieu of claiming the tax credit on the 2021 income tax return. Since half of this credit will be received by the time the 2021 income tax return will be due, the amount of the child tax credit will be halved on the 2021 Return. This means that there will be fewer credits to offset against the tax due, which may cause a higher-than-normal tax due, or decrease the potential refund some are used to receiving. This holds especially true for those with a dramatic increase in income for 2021.
Opting Out of Advanced Payments
If taxpayers do not wish to receive the advanced payments of the Child Tax Credit, they can elect out of them. Typical reasons for opting out of the advanced payment are as follows:
- An individual normally has a balance due to the IRS after filing their taxes
- An individual doesn’t claim a dependent every year due to shared custody arrangements
- An individual’s dependent(s) is(are) aging out of the range of the credit
- An individual prefers having a large tax refund
Anyone wishing to elect out of the advanced payments, you may do so by clicking this link and following the instructions provided.
Changing Bank Account Information
If taxpayers would like to learn how to change/update their banking or direct deposit information, click here.
New IRS Portal
The IRS is currently developing a portal in which a user can enter updated information impacting the amount of payment an individual will receive. A user can do all of the following in this portal:
- Update marital status
- Enter in children born in 2021
- Re-enrollment into the Child Tax Credit if you were previously unenrolled
- Adjust your income for the calculation of the Child Tax Credit
As previously stated, this portal is still in development but the IRS is looking to release this portal in the coming months. Reach out to your WVC professional for questions on your specific situation.
Connect With Us.
wvco.com | 419.891.1040
Categories: Tax Planning
- Audit & Accounting
- Construction & Real Estate
- Cost Accounting
- Estate Planning
- Fraud & Forensics
- Healthcare & Dentistry
- IT & Risk Services
- Manufacturing & Distribution
- Other Resources
- Restaurant & Hospitality
- Risk Services
- Tax Compliance
- Tax Planning