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HEATHER DOERING 7/22/22 HEATHER DOERING 7/22/22

Businesses: Act Now to Make the Most Out of Bonus Depreciation

The Tax Cuts and Jobs Act (TCJA) significantly boosted the potential value of bonus depreciation for taxpayers — but only for a limited duration. The amount of first-year depreciation available as a so-called bonus will begin to drop from 100% after 2022, and businesses should plan accordingly.

Bonus depreciation in a nutshell

Bonus depreciation has been available in varying amounts for some time. Immediately prior to the passage of the TCJA, for example, taxpayers generally could claim a depreciation deduction for 50% of the purchase price of qualified property in the first year — as opposed to deducting smaller amounts over the useful life of the property under the modified accelerated cost recovery system (MACRS).

The TCJA expanded the deduction to 100% in the year qualified property is placed in service through 2022, with the amount dropping each subsequent year by 20%, until bonus depreciation sunsets in 2027, unless Congress acts to extend it. Special rules apply to property with longer recovery periods.

Businesses can take advantage of the deduction by purchasing, among other things, property with a useful life of 20 years or less. That includes computer systems, software, certain vehicles, machinery, equipment and office furniture.

Both new and used property can qualify. Used property generally qualifies if it wasn’t:

Used by the taxpayer or a predecessor before acquiring it,
Acquired from a related party, and
Acquired as part of a tax-free transaction.

Qualified improvement property (generally, interior improvements to nonresidential property, excluding elevators, escalators, interior structural framework and building expansion) also qualify for bonus depreciation. A drafting error in the TCJA indicated otherwise, but the CARES Act, enacted in 2020, retroactively made such property eligible for bonus depreciation. Taxpayers that placed qualified improvement property in service in 2018, 2019 or 2020 may, generally, now claim any related deductions not claimed then — subject to certain restrictions.

Buildings themselves aren’t eligible for bonus depreciation, with their useful life of 27.5 (residential) or 39 (commercial) years — but cost segregation studies can help businesses identify components that might be. These studies identify parts of real property that are actually tangible personal property. Such property has shorter depreciation recovery periods and therefore qualifies for bonus depreciation in the year placed in service.

The placed-in-service requirement is particularly critical for those wishing to claim 100% bonus depreciation before the maximum deduction amount falls to 80% in 2023. With the continuing shipping delays and shortages in labor, materials and supplies, taxpayers should place their orders promptly to increase the odds of being able to deploy qualifying property in their businesses before year-end.

Note, too, that bonus depreciation is automatically applied by the IRS unless a taxpayer opts out. Elections apply to all qualified property in the same class of property that is placed in service in the same tax year (for example, all five-year MACRS property).

Bonus depreciation vs. Section 179 expensing

Taxpayers sometimes confuse bonus depreciation with Sec. 179 expensing. The two tax breaks are similar, but distinct.

Like bonus deprecation, Sec. 179 allows a taxpayer to deduct 100% of the purchase price of new and used eligible assets. Eligible assets include software, computer and office equipment, certain vehicles and machinery, as well as qualified improvement property.

But Sec. 179 is subject to some limits that don’t apply to bonus depreciation. For example, the maximum allowable deduction for 2022 is $1.08 million.

In addition, the deduction is intended to benefit small- and medium-sized businesses so it begins phasing out on a dollar-for-dollar basis when qualifying property purchases exceed $2.7 million. In other words, the deduction isn’t available if the cost of Sec. 179 property placed in service this year is $3.78 million or more.

The Sec. 179 deduction also is limited by the amount of a business’s taxable income; applying the deduction can’t create a loss for the business. Any cost not deductible in the first year can be carried over to the next year for an unlimited number of years. Such carried-over costs must be deducted according to age — for example, costs carried over from 2019 must be deducted before those carried over from 2020.

Alternatively, the business can claim the excess as bonus depreciation in the first year. For example, say you purchase machinery that costs $20,000 but, exclusive of that amount, have only $15,000 in income for the year it’s placed in service. Presuming you’re otherwise eligible, you can deduct $15,000 under Sec. 179 and the remaining $5,000 as bonus depreciation.

Also in contrast to bonus depreciation, the Sec. 179 deduction isn’t automatic. You must claim it on a property-by-property basis.

Some caveats

At first glance, bonus depreciation can seem like a no-brainer. However, it’s not necessarily advisable in every situation.

For example, taxpayers who claim the qualified business income (QBI) deduction for pass-through businesses could find that bonus depreciation backfires. The amount of your QBI deduction is limited by your taxable income, and bonus depreciation will reduce this income. Like bonus depreciation, the QBI deduction is scheduled to expire in 2026, so you might want to maximize it before then.

The QBI deduction isn’t the only tax break that depends on taxable income. Increasing your depreciation deduction also could affect the value of expiring net operating losses and charitable contribution and credit carryforwards.

And deduction acceleration strategies always should take into account tax bracket expectations going forward. The value of any deduction is higher when you’re subject to higher tax rates. Newer businesses that currently have relatively low incomes might prefer to spread out depreciation, for example. With bonus depreciation, though, you’ll also need to account for the coming declines in the maximum deduction amounts.

Buy now, decide later

If you plan on purchasing bonus depreciation qualifying property, it may be wise to do so and place it in service before year end to maximize your options. We can help you chart the most advantageous course of action based on your specific circumstances and the upcoming changes in tax law.

HEATHER DOERING 7/15/22 HEATHER DOERING 7/15/22

Take a balanced approach to retirement and estate planning using a split annuity

If you’re approaching retirement or have already retired, one of the biggest challenges is balancing the need to maintain your standard of living with your desire to preserve as much wealth as possible for your loved ones. This balance can be difficult to achieve, especially when retirement can last decades. One strategy to consider is the split annuity, which creates a current income stream while preserving wealth for the future.

ABCs of an annuity

An annuity is a tax-advantaged investment contract, usually with an insurance company or other financial services provider. You pay either a lump sum or annual premiums, and in exchange, the provider makes periodic payments to you for a term of years or for life.

For purposes of the split annuity strategy discussed below, we’ll focus on “fixed” annuities, which generally provide a guaranteed minimum rate of return. Other types of annuities include “variable” and “equity-indexed,” which may offer greater upside potential but also involve greater risk.

Annuities can be immediate or deferred. As the names suggest, with an immediate annuity, payouts begin right away, while a deferred annuity is designed to begin payouts at a specified date in the future.

From a tax perspective, annuity earnings are tax-deferred — that is, they grow tax-free until they’re paid out or withdrawn. A portion of each payment is subject to ordinary income tax, and a portion is treated as a tax-free return of principal (premiums). The ability to accumulate earnings on a tax-deferred basis allows deferred annuities to grow more quickly than comparable taxable accounts, which helps make up for their usually modest interest rates.

Annuities offer some flexibility to withdraw or reallocate the funds should your circumstances change. But keep in mind that — depending on how much you withdraw and when — you may be subject to surrender or early withdrawal charges.

Split annuity strategy

A split annuity may sound like a single product, but in fact, it simply refers to two (or more) annuities, usually funded with a single investment. In a typical split annuity strategy, you use a portion of the funds to purchase an immediate annuity that makes fixed payments to you for a specified term (10 years, for example). The remaining funds are applied to a deferred annuity that begins paying out at the end of the initial annuity period.

Ideally, at the end of the immediate annuity term, the deferred annuity will have accumulated enough earnings so that its value is equal to your original investment. In other words, if the split annuity is designed properly, you’ll enjoy a fixed income stream for a term of years while preserving your principal.

At the end of the term, you can reevaluate your options. For example, you might start receiving payments from the deferred annuity, withdraw some or all its cash value, or reinvest the funds in another split annuity or another investment vehicle.

If you’re interested in learning more about a split annuity, please contact us. We’d be pleased to help you determine if this strategy is right for your situation.

HEATHER DOERING 6/21/22 HEATHER DOERING 6/21/22

4 estate planning documents your college-aged child should have

Does your college-aged child have a basic estate plan? In more cases than not, the answer is “no.” The good news is that the summer months are the perfect time to enlist the help of an estate planning advisor to create a plan, as your child will be available to sign the documents before heading to school in the fall.

Here are the four critical estate planning documents college-bound students should have:

Will. Although your child is still in his or her upper teens or early twenties, he or she isn’t too young to have a will drawn up. The will specifies the disposition of his or her assets and can tie up other loose ends of the estate.
Health care power of attorney. With a health care power of attorney, your child appoints someone to act as his or her proxy or surrogate for health care decisions. Typically, a parent is designated as the attorney-in-fact for this purpose.
HIPAA authorization. To accompany the health care power of attorney, Health Insurance Portability and Accountability Act (HIPAA) authorization gives health care providers the ability to share information about your child’s medical condition with you and your spouse. Absent a HIPAA authorization, making health care decisions could be more difficult.
Financial power of attorney. This legal document enables you and your spouse to conduct financial activities on your child’s behalf. A “durable” power of attorney, which is the most common form, continues in the event that your child becomes incapacitated.

If you and your child are ready to create a basic estate plan, please don’t hesitate to contact us. We’d be pleased to help give your family the peace of mind that comes with having an estate plan.

HEATHER DOERING 6/21/22 HEATHER DOERING 6/21/22

Yes, Employers Can Still Claim the Employee Retention Credit Via an Amended Tax Return

According to the IRS, employers can still claim the employee retention credit (ERC) by filing amended employment tax returns, even though the coronavirus (COVID-19) pandemic-era tax credit aimed at helping employers and employees during the health crisis expired last year.

ERC begins.

The ERC is a provision from the Coronavirus Aid, Relief, and Economic Security Act (CARES; P.L. 116-136) Act that allowed for a tax credit against certain employment taxes for eligible employers that paid qualified wages, including certain health plan expenses, to certain employees. This began on March 12, 2020 and was initially to end at the end of 2020 (see Payroll Guide ¶20,905 ).

ERC amended and extended.

The ERC was extended until June 30, 2021 by the Consolidated Appropriations Act (CAA; P.L. 116-260) and further extended through the end of 2021 by the American Rescue Plan Act of 2021 (ARPA; P.L. 117-2).

Early ERC termination.

However, the Infrastructure Investment and Jobs Act (Infrastructure Act; P.L. 117-58) retroactively terminated the ERC for most employers, beginning on October 1, 2021. Recovery startup businesses were the only employers allowed to claim the credit through the end of 2021. A recovery startup business is any employer that began operations after February 15, 2020 subject to certain average annual gross receipts requirements.

Reporting and claiming the ERC.

Generally, eligible employers claimed the ERC by reporting their total qualified wages and the related health insurance costs for each quarter on their Forms 941 (Employer's Quarterly Federal Tax Return).

Revised employment tax forms.

In order to account for COVID-19 tax credits like the ERC, the IRS had to revise Form 941 (and other forms in the 941 series) several times. The IRS also revised Form 941-X (Adjusted Employer's Quarterly Federal Tax Return or Claim for Refund).

Using a adjusted return to claim the ERC.

The current version of the Form 941-X has multiple line numbers for making corrections and amendments regarding the ERC. These adjustments are reported on Form 941-X as follows:

1. Line 18a is for the nonrefundable portion of the ERC,

2. Line 26a is for the refundable portion of the ERC,

3. Line 30 is for the qualified wages of the ERC,

4. Line 31a is for qualified health plan expenses for the ERC,

5. Line 31b is a checkbox indicating if the employer is eligible for the ERC in the third or fourth quarter of 2021 solely because the employer is a recovery startup business, and

6. Line 33a is for the qualified wages paid from March 13, 2020 through March 31, 2020 for the ERC.

Worksheets for adjusting the ERC.

There are also two worksheets in Form 941-X instructions that related to the ERC. Worksheet 2 is the adjusted ERC for wages paid after March 12, 2020 and before July 1, 2021. Worksheet 4 is the adjusted ERC for wages paid after June 30, 2021 and before January 1, 2022 (October 1, 2021 for most employers, except startup recovery businesses).

Period of limitations for amended employment tax returns.

According to the Form 941-X instructions, employers may correct overreported taxes on a previously filed Form 941 if the Form 941-X is filed within three years of the date Form 941 was filed or two years from the date you paid the tax reported on Form 941, whichever is later.

The instructions also say that employers may correct underreported taxes on a previously filed Form 941 if the Form 941-X is filed three years of the date the Form 941 was filed.

The IRS refers to these time frames as a "period of limitations." And, for purposes of the period of limitations, Forms 941 for a calendar year are considered filed on April 15 of the succeeding year if filed before that date.

Employers can still claim the ERC.

Through an IRS media relations correspondence, Thomson Reuters has confirmed that employers can still claim the ERC, even if the employer never claimed the credit during the time period the ERC was available.

This is because the window of opportunity to amend employment tax overpayments has not yet expired with relation to the period of time the ERC was available. So, if an employer currently discovers that it was eligible for the ERC when the credit was available, the employer would file a Form 941-X to report the overpayment in employment taxes and ultimately claim the ERC after its termination date.

Qualifying credit tool still available. Thomson Reuters developed an Employee Retention Credit Eligiblity Tool that helps employers determine if they qualify for the employment tax credit. The Tool is free and is still active for employers to use and to see if they may qualify for this credit.

Reach out to your FMD Advisor to determine whether you qualify.

Ashleigh Laabs 4/27/22 Ashleigh Laabs 4/27/22

No parking: Unused compensation reductions can’t go to health FSA

Among the many lasting effects of the pandemic is that some businesses are allowing employees to continue working from home — even now that the most acute phases of the public health crisis seem to be over in some places. This decision is raising some interesting questions about fringe benefits.

For example, in IRS Information Letter 2022-0002, the tax agency recently answered an inquiry involving a qualified transportation plan participant whose employer now lets him work from home permanently. To avoid losing dollars he’d previously set aside for parking, the participant asked whether he could transfer unused compensation reductions to his health Flexible Spending Account (FSA), which his employer offered through its qualified cafeteria plan.

No cash refunds

The letter explains that, under an employer’s qualified transportation plan, unused compensation reduction amounts can be carried over to subsequent plan periods and used for future commuting expenses. Caveat: employees can’t receive benefits that exceed the maximum excludable amount in any month.

However, cash refunds aren’t permitted — even to employees whose compensation reduction amounts exceed their need for qualified transportation fringe benefits. Furthermore, the U.S. Code prohibits cafeteria plans from offering qualified transportation fringe benefits. And IRS rules don’t allow unused compensation reduction amounts under a qualified transportation plan to be transferred to a health FSA offered though a cafeteria plan.

The letter also notes that COVID-19-related relief for FSAs gives employers the discretion to amend their cafeteria plans to permit midyear health FSA election changes for plan years ending in 2021.

Note: IRS Information Letters provide general statements of well-defined law without applying them to a specific set of facts. They’re provided by the IRS in response to requests for general information by taxpayers or members of Congress.

Limited flexibility

The qualified transportation rules for fringe benefits have largely proven themselves flexible enough to handle most situations arising from the pandemic.

Many companies permit benefit election changes at least monthly, and plans can allow current participants to carry over unused balances indefinitely. Compensation reductions set aside for one qualified transportation benefit, such as parking, can even be used for a different transportation benefit, such as public transit — again, so long as the plan permits it, and the maximum monthly benefit isn’t exceeded.

However, as the inquisitive participant in the IRS information letter learned, the flexibility of fringe benefit rules has its limits. Because some financial loss could occur due to changing circumstances, businesses should clearly articulate this risk to employees when offering compensation reduction elections.

Complexities to consider

The right fringe benefits can help your business attract and retain good employees. But, as you can see, there are many complexities to consider. Let us help you weigh the risks vs. advantages of any fringe benefits you’re currently offering or considering.

Ashleigh Laabs 4/27/22 Ashleigh Laabs 4/27/22

Understanding the terms of health care directives

Estate planning experts usually cite the need to include advance health care directives in a comprehensive estate plan. But there may be different legal names given to those directives, depending on one’s jurisdiction.

In any event, regardless of what they’re called in the state where you reside, it’s important to create these documents and keep your family in the loop. Let’s take a closer look at a few health care directives.

Health care power of attorney

Comparable to a durable power of attorney that gives an “agent” authority to handle your financial affairs if you’re incapacitated, a health care power of attorney (or medical power of attorney) enables another person to make health care decisions for you. This is also called a health care proxy in some states.

Choosing an agent is critical. You probably can’t anticipate every situation that might arise — virtually no one can — in which it’s likely that someone will have to make decisions concerning your health. Therefore, the agent should be a person who knows you well and understands your general outlook. Frequently, this is a family member, close friend or trusted professional. Remember to designate a successor in the event your first choice is unable to do the job.

Living wills

A living will is a legal document that establishes criteria for prolonging or ending medical treatment. It indicates the types of medical treatment you want, or do not want, in the event you suffer from a terminal illness or are incapacitated.

This document doesn’t take effect unless you’re incapacitated. Typically, a physician must certify that you’re suffering from a terminal illness or that you’re permanently unconscious. Address common end-of-life decisions in your living will. This may require consultations with a physician.

The requirements for living wills vary from state to state. Have an attorney who’s experienced in these matters prepare your living will based on the prevailing laws.

DNRs and DNIs

Despite the common perception, it’s not a legal requirement for you to have an advance directive or living will on file to implement a “do not resuscitate” (DNR) or “do not intubate” (DNI) order. To establish a DNR or DNI order, discuss your preferences with your physician and have him or her prepare the paperwork. The order is then placed in your medical file.

Putting directives into action

Advance directives must be put in writing. Each state has different forms and requirements for creating these legal documents. Depending on where you live, you may need to have certain forms signed by a witness or notarized. If you’re unsure of the requirements or the process, contact an attorney for assistance.

Review your advance directives with your physician and your health care agent to be sure you’ve accurately filled out the forms. Then let all the interested parties — including your attorney, physician, power of attorney agent and family members — know where the documents are located and how to access them.

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FMD’s estate planning team will work with you and your legal and financial advisers to design plans that align with your goals and objectives. When it comes to estate planning and wealth preservation, every one of our clients receives the quality of service and personal attention that are the hallmarks of FMD. To learn more about how we can help address your estate planning and wealth preservation needs, contact us today.

Ashleigh Laabs 4/27/22 Ashleigh Laabs 4/27/22

Businesses looking for outside investors need a sturdy pitch deck

Is your business ready to seek funding from outside investors? Perhaps you’re a start-up that needs money to launch as robustly as possible. Or maybe your company has been operating for a while and you want to pivot in a new direction or just take it to the next level.

Whatever the case may be, seeking outside investment isn’t as cut and dried as applying for a commercial loan. You need to wow investors with your vision, financials and business plan.

To do so, many businesses today put together a “pitch deck.” This is a digital presentation that provides a succinct, compelling description of the company, its solution to a market need, and the benefits of the investment opportunity. Here are some useful guidelines:

Keep it brief, between 10 to 12 short slides. You want to make a positive impression and whet investors’ interest without taking up too much of their time. You can follow up with additional details later.

Be concise but comprehensive. State your company’s mission (why it exists), vision (where it wants to go) and value proposition (what your product or service does for customers). Also declare upfront how much money you’d like to raise.

Identify the problem you’re solving. Explain the gap in the market that you’re addressing. Discuss it realistically and with minimal jargon, so investors can quickly grasp the challenge and intuitively agree with you.

Describe your target market. Include the market’s size, composition and forecasted growth. Resist the temptation to define the market as “everyone,” because this tends to come across as unrealistic.

Outline your business plan. That is, how will your business make money? What will you charge customers for your solution? Are you a premium provider or is this a budget-minded product or service?

Summarize your marketing and sales plans. Describe the marketing tactics you’ll employ to garner attention and interact with your customer base. Then identify your optimal sales channels and methods. If you already have a strong social media following, note that as well.

Sell your leadership team. Who are you and your fellow owners/executives? What are your educational and business backgrounds? Perhaps above everything else, investors will demand that a trustworthy crew is steering the ship.

Provide a snapshot of your financials, both past and future. But don’t just copy and paste your financial statements onto a few slides. Use aesthetically pleasing charts, graphs and other visuals to show historical results (if available), as well as forecasted sales and income for the next several years. Your profit projections should realistically flow from historical performance or at least appear feasible given expected economic and market conditions.

Identify your competitors. What other companies are addressing the problem that your product or service solves? Differentiate yourself from those businesses and explain why customers will choose your solution over theirs.

Describe how you’ll use the funds. Show investors how their investment will allow you to fulfill your stated business objectives. Be as specific as possible about where the money will go.

Ask for help. As you undertake the steps above — and before you meet with investors — contact our firm. We can help you develop a pitch deck with accurate, pertinent financial data that will capture investors’ interest and help you get the funding your business needs.

Ashleigh Laabs 4/27/22 Ashleigh Laabs 4/27/22

Opening up to SLAT opportunities

Estate tax planning can become complicated when multiple parties are involved. For example, you may be concerned about providing assets to a surviving spouse of a second marriage, while also providing for your children from your first marriage. Of course, you also want to take advantage of favorable estate tax provisions in the law.

Fortunately, there’s a relatively simple way to meet your objectives with few dire tax consequences. It’s commonly called a spousal lifetime access trust (SLAT).

A SLAT in action

Essentially, a SLAT is an irrevocable trust established by a grantor spouse for the benefit of the other spouse — called the beneficiary spouse — plus other family members, such as children and grandchildren. The beneficiary spouse is granted limited access to the trust’s funds. As a result, the assets generally are protected from the reach of the beneficiary spouse’s creditors. This ensures that the remainder beneficiaries — namely, the children and grandchildren — will have a nest egg to rely on.

According to the SLAT terms, lifetime distributions are made to the beneficiary spouse to meet his or her needs. Preferably, if other funds are available to the beneficiary spouse outside of the trust, those funds are used first instead of making regular distributions to the spouse. Otherwise, distributions from the SLAT to the beneficiary spouse will reduce the trust’s effectiveness over time.

Favorable tax provisions

One of the primary attractions of a SLAT is that it’s designed to minimize federal tax liabilities. First, the transfer of assets is treated as a taxable gift, but it can be sheltered from gift tax by a combination of the annual gift tax exclusion ($16,000 for 2022) and the gift and estate tax exemption ($12.06 million for 2022). However, be aware that use of the exemption during the grantor spouse’s lifetime reduces the available estate tax shelter at death.

Second, assets transferred by the grantor spouse to a SLAT are removed from his or her taxable estate. Thus, estate taxes aren’t a concern, thereby allowing the remaining estate tax exemption to be used for other assets.

Third, a SLAT is considered to be a “grantor trust” for income tax purposes. In other words, when a grantor spouse establishes a SLAT for the benefit of the beneficiary spouse, the trust’s taxable income is reported on the grantor’s personal tax return, but the trust entity pays zero tax. This may be advantageous because the assets can compound inside the trust without any income tax erosion. On the death of the grantor spouse, the trust is required to pay income tax.

Other planning considerations

As mentioned above, the transfer of assets to a SLAT is a gift, so the grantor must file a federal gift tax return. Finally, don’t forget that a SLAT is an irrevocable trust. Thus, once the grantor spouse transfers assets to the trust, he or she can’t get them back.

If you’re considering using a SLAT, contact us for additional details.

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Ashleigh Laabs 4/27/22 Ashleigh Laabs 4/27/22

Congress eyes further retirement savings enhancements

In 2019, the bipartisan Setting Every Community Up for Retirement Enhancement Act (SECURE Act) — the first significant legislation related to retirement savings since 2006 — became law. Now Congress appears ready to build on that law to further increase Americans’ retirement security.

The U.S. House of Representatives passed the Securing a Strong Retirement Act by a 414-5 vote. Also known as SECURE 2.0, the bill contains numerous provisions that — if enacted — would affect both individuals and employers, including in the following areas.

Catch-up contributions

Currently, qualified individuals age 50 or older can make catch-up contributions, on top of the standard contribution limits, to certain retirement accounts — an extra $6,500 for 401(k) plan accounts and $3,000 for SIMPLE plans. Beginning in 2024, SECURE 2.0 would boost those figures for individuals age 62 to 64 to $10,000 for 401(k)s and $5,000 for SIMPLE plans (indexed for inflation). In addition, the $1,000 annual catch-up for IRAs, which hasn’t changed in years, would be indexed going forward.

The bill also would change the taxation of catch-up contributions, reducing the upfront tax savings for those who max out their annual contributions. Such contributions would be treated as post-tax Roth contributions starting in 2023. Under existing law, you can choose whether to make catch-up contributions on a pre- or post-tax basis. SECURE 2.0 would also allow you to determine whether your employer’s matching contributions should be treated as pre- or post-tax. Currently, these contributions can be pre-tax only.

RMDs

The SECURE Act eased the rules for required minimum distributions (RMDs) from traditional IRAs and other qualified plans. It generally raised the age at which you must begin to take your RMDs — and pay taxes on them — from 70½ to 72.

SECURE 2.0 would increase the age over the course of a decade. As of 2023, RMDs wouldn’t be mandated until age 73, going up to age 74 in 2030 and age 75 in 2033. This would give you more time to grow your retirement savings tax-free, bearing in mind that delayed RMDs may translate to larger withdrawal requirements down the road.

The bill would relax the penalty for failing to take full RMDs, too. Currently, the failure results in a 50% excise tax of the amount that should have been withdrawn. SECURE 2.0 would reduce the tax to 25% beginning in 2023. If corrected in a “timely” manner, the penalty would further drop to 10%.

QCDs

Some taxpayers use qualified charitable distributions (QCDs) to satisfy both their RMD requirements and their philanthropic inclinations. With a QCD, you can distribute up to $100,000 per year directly to a 501(c)(3) charity after age 70½. You can’t claim a charitable deduction for this donation, but the distribution is removed from taxable income.

The bill would make this option more attractive. It would annually index the $100,000 limit for inflation. It also would allow you to make a one-time QCD transfer of up to $50,000 through a charitable gift annuity or charitable remainder trust (as opposed to directly to the charity). Both provisions would take effect in the taxable year following enactment of the law.

Automatic enrollment

The House bill would require employers to automatically enroll all newly eligible employees in their 401(k) plans at a deduction rate of at least 3% (but no more than 10%) of the employee’s pay, increasing it by 1% each year until the employee is contributing 10%. Employees could opt out or change their contribution rates.

Annuities

Annuities can help reduce the risk that retirees run out of money during their lifetimes. The SECURE Act encouraged reluctant employers to offer annuities by immunizing them from breach of fiduciary duty liability if they choose an annuity provider that meets certain requirements.

But an actuarial test in the regulations for RMDs has interfered with the availability of annuities. For example, the test commonly prohibits annuities with guaranteed annual increases of only 1% to 2%, return of premium death benefits and period-certain guarantees. Without such guarantees, though, many individuals are hesitant to choose an annuity option in a defined contribution plan or IRA. SECURE 2.0 would specify that these guarantees are allowed. The changes would take effect upon enactment of the law.

Matching contributions on student loan payments

SECURE 2.0 recognizes that many employees are unable to contribute to their retirement accounts because of student loan payment responsibilities. Such employees miss out on matching contributions from their employers.

The bill would allow employers to contribute to certain retirement plans for employees who are making qualified student loan payments. If enacted, this would take effect for contributions made for plan years beginning after 2022.

Part-time employee eligibility

The SECURE Act generally requires employers to allow part-time employees who work at least 500 hours for three consecutive years to participate in their 401(k) plans. Under SECURE 2.0, part-time employees would need to work at least 500 hours for only two consecutive years to be eligible for their employer’s 401(k) plan. The provision would be effective for plan years beginning after 2022.

Small business tax credits

SECURE 2.0 would create or enhance some tax credits for small businesses for tax years after 2022. For example, the SECURE Act increased the potential amount of the credit for retirement plan startup costs by capping it at $5,000 (up from $500). The three-year credit currently is available for 50% of “qualified startup costs” for employers with no more than 100 employees.

The new bill hikes the credit to 100% of qualified costs for employers with up to 50 employees. It provides an additional credit, too, except for defined benefit plans. The additional amount generally is a percentage of the amount the employer contributes on behalf of employees, up to $1,000 per employee. The full additional credit is limited to employers with 50 or fewer employees, gradually phasing out for employers with 51 to 100 employees.

Next steps

While the odds for passage of some form of retirement savings reform seem high in light of the bipartisan support for the SECURE Act and the new House bill, it remains to be seen what form it’ll take. The Senate is working its own bill, and the two would need to be reconciled before it reaches President Biden’s desk. The final legislation could add to, revise or remove the provisions described above. We’ll keep you up to date.

Ashleigh Laabs 4/19/22 Ashleigh Laabs 4/19/22

Careful planning required for beneficiaries to borrow from a trust

Intrafamily loans allow you to provide financial assistance to loved ones — often at favorable terms — while potentially reducing gift and estate taxes. But what about families that lack the liquid assets to make such loans? Are there other options if they have a trust?

One lesser-known possibility is for trust beneficiaries to borrow money from a trust. This strategy requires careful planning, however, because the trustee must consider his or her fiduciary duty to the trust and its other beneficiaries in approving and structuring such a loan.

Benefits of intrafamily loans

An intrafamily loan can be a great way to help out your children or other family members financially while also transferring significant amounts of wealth, free of gift and estate tax. Why not simply make an outright gift? Actually, a gift is the better option, so long as your unused exemption is enough to cover it and you don’t need the funds or the interest income. But if transfer taxes are an issue or you’re not prepared to part with the money just yet, a loan can be an attractive alternative.

Generally, to pass muster with the IRS, the interest rate on an intrafamily loan must be at least the applicable federal rate for the month in which the loan is made. Otherwise, the IRS may view the loan as a disguised distribution, which can result in a variety of unpleasant tax complications. The loan should also be documented by a promissory note and otherwise treated as an arm’s-length transaction.

Trust loans vs. distributions

If an intrafamily loan isn’t an option, it may be possible for a trust beneficiary to obtain a loan from the trust. You might wonder why a beneficiary would borrow from the trust rather than take a distribution. There are several situations in which a loan may be necessary or desirable, including:

The trust’s terms place conditions on distributions that aren’t currently satisfied,
The borrower seeks an amount that exceeds limits on distributions imposed by the trust (an income-only trust, for example),
The trust has multiple beneficiaries and the borrower seeks an amount that would be unfair to other beneficiaries if taken as a distribution, or
A loan is preferable for tax planning purposes.

Be sure to check whether trust loans are permissible. Many trust instruments explicitly authorize loans.

Handle with care

There’s a critical difference between intrafamily loans and trust loans: The trustee has a fiduciary duty to manage the trust in a prudent and impartial manner. If you lend money to family members from your personal assets, you’re generally permitted to structure the transaction as you see fit.

However, a trustee considering a loan request must act in the best interests of the trust and all of its beneficiaries. So, for example, a trustee who approves a loan to a current beneficiary who’s a bad credit risk is likely breaching his or her fiduciary duty to the remainder beneficiaries.

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Ashleigh Laabs 4/19/22 Ashleigh Laabs 4/19/22

What estate planning strategies are available for non-U.S. citizens?

Are you, or is your spouse, a non-U.S. citizen? If so, several traditional estate planning techniques won’t be available to you. However, if you’re a U.S. resident, but not a citizen, the IRS will treat you similarly to a U.S. citizen.

If you’re considered a resident, you’re subject to federal gift and estate taxes on your worldwide assets, but you also enjoy the benefits of the $12.06 million federal gift and estate tax exemption and the $16,000 per recipient annual exclusion in 2022. And you can double the annual exclusion to $32,000 through gift-splitting with your spouse, so long as your spouse is a U.S. citizen or resident. Special rules apply to the marital deduction, however.

Understanding residency

Residency is a complicated subject. IRS regulations define a U.S. resident for federal estate tax purposes as someone who had his or her domicile in the United States at the time of death. A person acquires a domicile in a place by living there, even briefly, with a present intention of making that place a permanent home.

Whether you have your domicile in the United States depends on an analysis of several factors, including the relative time you spend in the United States and abroad, the locations and relative values of your residences and business interests, visa status, community ties, and the location of family members.

Estate tax law for nonresident aliens

If you’re a nonresident alien — that is, if you’re neither a U.S. citizen nor a U.S. resident — there’s good news and bad news in regard to estate tax law. The good news is that you’re subject to U.S. gift and estate taxes only on property that’s “situated” in the United States. Also, you can take advantage of the $16,000 annual exclusion (although you can’t split gifts with your spouse).

The bad news is that your estate tax exemption drops from $12.06 million to a miniscule $60,000, so substantial U.S. property holdings can result in a big estate tax bill. Taxable property includes U.S. real estate as well as tangible personal property (such as cars, boats and artwork) located in the United States.

Determining the location of intangible property — such as stocks, bonds, partnership interests or other equity or debt interests — is more complicated. For example, if a nonresident alien makes a gift of stock in a U.S. corporation, the gift is exempt from U.S. gift tax. But a bequest of that same stock at death is subject to estate tax. On the other hand, a gift of cash on deposit in a U.S. bank is subject to gift tax, while a bequest of the same cash would be exempt from estate tax.

We can help you determine which property is situated in the United States and explore strategies for minimizing your tax exposure.

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Ashleigh Laabs 4/19/22 Ashleigh Laabs 4/19/22

Power up your trust with Crummey powers

The unified gift and estate tax exemption is set at an inflation-adjusted $12.06 million for 2022, up from $11.7 million for 2021. This means that for many families, estate tax liability isn’t a factor. However, for others, the annual gift tax exclusion continues to be an important estate planning strategy — especially since future tax law changes could lower the gift and estate tax exemption. For this reason, using a Crummey trust in your estate plan remains an important estate planning strategy. Here’s why.

Using the annual exclusion

Under the annual gift tax exclusion, you can give gifts to each recipient, valued up to a specific limit, without incurring any gift tax. The limit for 2022 is $16,000 per recipient. (This amount is indexed for inflation, but only in $1,000 increments.)

Therefore, if you have, for example, three adult children and seven grandchildren, you can give each one $16,000 this year, for a total of $160,000, and pay zero gift tax. The exclusion is per donor, meaning that for a married couple the amount is doubled.

If you give outright gifts, however, you run the risk that the money or property could be squandered, especially if the recipient is young or irresponsible. Alternatively, you can transfer assets to a trust and name a child as a beneficiary. With this setup, the designated trustee manages the assets until the child reaches a specified age.

But there’s a catch. To qualify for the annual exclusion, a gift must be a transfer of a “present interest.” This is defined as an unrestricted right to the immediate use, possession or enjoyment of the property or the income from it. Without certain provisions in the trust language, a gift to the trust doesn’t qualify as a gift of a present interest. Instead, it’s treated as a gift of a “future interest” that’s not eligible for the annual gift tax exclusion.

Giving Crummey powers to a trust

This is where a Crummey trust can come to the rescue. It satisfies the rules for gifts of a present interest without requiring the trustee to distribute the assets to the beneficiary.

Typically, periodic contributions of assets to the trust are coordinated with an immediate power giving the beneficiary the right to withdraw the contribution for a limited time. However, the expectation of the donor is that the power won’t be exercised. (The trust document cannot expressly provide this.)

As a result, the beneficiary’s limited withdrawal right allows the gift to the trust to be treated as a gift of a present interest. Thus, it qualifies for the annual gift tax exclusion. Note that it’s the existence of the legal power — not the exercise of it — that determines the tax outcome.

Avoiding pitfalls

To pass muster with the IRS, the beneficiary must be given actual notice of the withdrawal right, along with a reasonable period to exercise it. Generally, at least 30 days is required. Contact us with additional questions regarding the use of a Crummey trust.

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Ashleigh Laabs 3/25/22 Ashleigh Laabs 3/25/22

ERISA and EAPs: What’s the deal?

In recent years, more and more businesses have increased efforts to support the well-being of their employees. This means not only providing health care benefits, but also offering other initiatives designed to help workers cope with challenges such as substance dependence, financial planning, legal woes and mental health issues.

Among the options usually considered is an employee assistance program (EAP). These programs typically offer a set of benefits intended to address circumstances and challenges that might adversely affect employees’ ability to work. Benefits may include short-term mental health or substance abuse counseling or referral services, as well as financial counseling and legal services.

When considering an EAP, many business owners eventually ask a common question: Will the program be subject to the Employee Retirement Income Security Act (ERISA)?

Medical care

The answer depends on how the EAP is structured and what benefits it provides. Generally, an arrangement is an ERISA welfare benefit plan if it’s a plan, fund or program established or maintained by an employer to provide ERISA-listed benefits, which include medical services.

Indeed, the category of ERISA-listed benefits most likely to be provided by an EAP is medical care or benefits. Mental health counseling — whether for substance abuse, stress or other issues — is considered medical care. Accordingly, an EAP providing mental health counseling will probably be subject to ERISA. On the other hand, an EAP that provides only referrals and general information, and isn’t staffed by trained counselors, likely isn’t an ERISA plan.

Even if an EAP primarily uses referrals, it could still be considered to provide medical benefits if the individuals handling initial phone consultations and making the referrals are trained in an applicable field, such as psychology or social work. If the EAP provides any benefit subject to ERISA, then the entire EAP must comply with the law — even if it also provides non-ERISA benefits.

Beyond ERISA

When considering an EAP, you should first determine whether it will be subject to ERISA. The law’s provisions address critical compliance matters such as:

Creating a plan document and Summary Plan Description,
Performing fiduciary duties,
Following claims procedures, and
Filing IRS Form 5500.

However, an EAP that’s considered a group health plan will also be subject to the Consolidated Omnibus Budget Reconciliation Act (commonly known as “COBRA”) and certain other group health plan mandates, including mental health parity.

Another point to keep in mind: EAPs that receive medical information from participants — even if they only make referrals and don’t provide medical care — must comply with privacy and security rules under the Health Insurance Portability and Accountability Act (HIPAA).

An EAP might not be subject to other group health plan requirements. One that meets specified criteria can be defined as an “excepted benefit” not subject to HIPAA portability and certain Affordable Care Act requirements.

A worthy idea

The idea of offering your employees an EAP is well worth considering. This is particularly true now that businesses are under increased pressure to retain their workers. We can help you assess the costs, advantages and risks of one of these programs.

Ashleigh Laabs 3/25/22 Ashleigh Laabs 3/25/22

360-degree feedback helps business owners see the big picture

Business owners are regularly urged to “see the big picture.” In many cases, this imperative applies to a pricing adjustment or some other strategic planning idea. However, seeing the big picture also matters when it comes to managing the performance of your staff.

Perhaps the best way to get a fully rounded perspective on how all your employees are performing is through a 360-degree feedback program. Under such an initiative, feedback is gathered from not only supervisors rating employees, but also from employees rating supervisors and employees rating each other. Sometimes even customers or vendors are asked to contribute.

Designing a survey

As you might have guessed, a critical element of a 360-degree feedback program is the written survey that you distribute to participants when gathering feedback. You can inadvertently sabotage the entire effort early on if this survey is poorly written or difficult to complete.

For starters, keep it as brief as possible. Generally, a participant should be able to fill out the survey in about 15 to 20 minutes. Ask concise questions that have a clear point. Be sure the language is unbiased; avoid words such as “excellent” or “always.” Ensure the questions and performance criteria are job-related and not personal in nature.

If using a rating scale, offer seven to 10 points that ask to what extent the person being rated exhibits a given behavior, rather than how often. It’s a good idea to use a dual-rating scale that includes both quantitative and qualitative performance questions.

Another good question is: To what extent should the person exhibit the behavior described, given his or her job role? By comparing the answers, you basically perform a gap analysis that helps interpret the results and reduces a rater’s bias to score consistently high or low.

Encouraging buy-in

To optimize the statistical validity of 360-degree feedback results, you need the largest sample size possible. Tell feedback providers how you’ll analyze their input, assuring them that their time will be well spent.

Also, emphasize the importance of being objective and avoiding invalid observations that might arise from their own prejudices. Ask providers to comment only on aspects of the subject employee’s performance that they’ve been able to observe.

Even with anonymous feedback, you should require some accountability. Incorporate a mechanism that would enable someone other than the subject of the evaluation — for instance, a senior HR manager — to address any abuse of the program. And, of course, ensure that subjects of the feedback process can work with their supervisors to act on the input they receive.

Taking it slowly

If a 360-degree feedback program sounds like something that could genuinely help your business, don’t rush into it. Discuss the idea with your leadership team and take the time to design a program with strong odds of success. Finally, bear in mind that you’ll likely have to fine-tune the program in years ahead to get the most useful data.

Ashleigh Laabs 3/25/22 Ashleigh Laabs 3/25/22

A beneficiary designation or joint title can override your will

Inattention to beneficiary designations and jointly titled assets can quickly unravel your estate plan. Suppose, for example, that your will provides for all of your property to be divided equally among your three children. But what if your IRA, which names the oldest child as beneficiary, accounts for half of the estate? In that case, the oldest child will inherit half of your estate plus a one-third share of the remaining assets — hardly equal.

The same goes for jointly owned property. When you die, the surviving owner takes title to the property regardless of the terms of your will. Unfortunately, many people don’t realize that their wills don’t control the disposition of nonprobate assets.

What are nonprobate assets?

Nonprobate assets generally are transferred automatically at death according to a beneficiary designation or contract. So they override your will. They include life insurance policies, retirement plans and IRAs, as well as joint bank or brokerage accounts. Even savings bonds come with beneficiary forms.

To ensure that your estate plan reflects your wishes, review beneficiary designations and property titles regularly, particularly after significant life events such as a marriage or divorce, the birth of a child, or the death of a loved one.

What about POD and TOD designations?

Payable-on-death (POD) and transfer-on-death (TOD) designations provide a simple and inexpensive way to transfer assets outside of probate. POD designations can be used for bank accounts and certificates of deposit. TOD designations can be used for stocks, bonds, brokerage accounts and, in many states, even real estate.

Setting one up is as easy as providing a signed POD or TOD beneficiary designation form. When you die, your beneficiaries just need to present a certified copy of the death certificate and their identification to the bank or brokerage, and the money or securities are theirs.

However, just like other beneficiary designations, POD and TOD designations can backfire if they’re not carefully coordinated with the rest of your estate plan. Too often, people designate an account as POD or TOD as an afterthought, without considering whether it may conflict with their wills, trusts or other estate planning documents.

Another potential problem with POD and TOD designations is that, if you use them for most of your assets, the assets left in your estate may be insufficient to pay debts, taxes or other expenses. Your executor would then have to initiate a proceeding to bring assets back into the estate.

Whether you have large retirement accounts or life insurance policies, hold joint accounts or use POD or TOD designations as part of your estate plan, we can review the rest of your plan to identify potential conflicts.

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Ashleigh Laabs 3/22/22 Ashleigh Laabs 3/22/22

Defined-value gifts: Plan carefully to avoid unpleasant tax surprises

For 2022, the federal gift and estate tax exemption has reached its highest level ever. In fact, you can transfer up to $12.06 million by gift or bequest without triggering federal transfer taxes. This is a limited time offer, however, as the exemption amount is scheduled to drop to $5 million (adjusted for inflation) in 2026. (However, Congress could pass legislation to reduce it even sooner or to extend it longer.)

Many are considering making substantial gifts to the younger generation to take advantage of the current exemption while it lasts. Often, these gifts consist of hard-to-value assets — such as interests in a closely held business or family limited partnership (FLP) — which can be risky. A defined-value gift may help you avoid unexpected tax liabilities.

Hedging your bets

Simply put, a defined-value gift is a gift of assets that are valued at a specific dollar amount rather than a certain number of stock shares or FLP units or a specified percentage of a business entity.

Structured properly, a defined-value gift ensures that the gift won’t trigger an assessment of gift taxes down the road. The key to this strategy is that the defined-value language in the transfer document is drafted as a “formula” clause rather than an invalid “savings” clause.

A formula clause transfers a fixed dollar amount, subject to adjustment in the number of shares or units necessary to equal that dollar amount (based on a final determination of the value of those shares or units for federal gift and estate tax purposes). A savings clause, in contrast, provides for a portion of the gift to be returned to the donor if that portion is ultimately determined to be taxable.

Language matters

For a defined-value gift to be effective, it’s critical to use precise language in the transfer documents. In one recent case, the U.S. Tax Court rejected an intended defined-value gift of FLP interests and upheld the IRS’s assessment of gift taxes based on percentage interests. The documents called for the transfer of FLP interests with a defined fair market value “as determined by a qualified appraiser” within a specified time after the transfer.

The court found that the transfer documents failed to achieve a defined-value gift, because fair market value was determined by a qualified appraiser. The documents didn’t provide for an adjustment in the number of FLP units if their value “is finally determined for federal gift tax purposes to exceed the amount described.”

Seek professional advice

If you plan to make substantial gifts of interests in a closely held business, FLP or other hard-to-value asset, a defined-value gift can help you avoid unwanted gift tax consequences. Turn to us before taking action because to be effective, the transfer documents must contain specific language that provides for adjustment of the number of shares or units to convey the desired value. We’d be pleased to help.

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Ashleigh Laabs 3/9/22 Ashleigh Laabs 3/9/22

Business owners, lean into sales staff retention

Although there have been some positive signs for the U.S. economy thus far in 2022, many businesses are still reeling from last year’s “Great Resignation.” This trend of a historic number of workers voluntarily leaving their jobs, combined with the difficulty of hiring new employees, didn’t spare sales teams. However, one could say that the Great Resignation only threw gasoline on an existing fire.

Historically, sales departments have always trended toward higher turnover rates. Maybe you’ve grown accustomed to salespeople coming and going, and you believe there’s not much you can do about it. Or can you? By leaning into sales staff retention a little harder, you could avoid the worst of today’s uncomfortably tight job market and hang on to your top sellers.

Improve hiring and onboarding

Retention efforts shouldn’t begin with those already on the payroll; it should start during hiring and ramp up when onboarding. A rushed, confusing or cold approach to hiring can get things off on a bad foot. In such cases, new hires tend to enter the workplace cautiously or skeptically, with their eyes on the exit sign rather than the “upper floors” of a company.

Onboarding is also immensely important. Many salespeople can tell horror stories of being shown to a cubicle with nothing but a telephone on the desk and told to “Get to it.” Today, with so many people working remotely, a new sales hire might not even get that much attention. Welcome new employees warmly, provide ample training, and perhaps give them a mentor to help them get comfortable with your business and its culture.

Reward loyalty

Even when hiring and onboarding go well, most employees will still consider a competitor’s offer if the price is right. So, to improve your chances of retaining top sales producers and their customers, consider financial incentives.

Offering retention bonuses and rewards for maintaining and increasing sales — in addition to existing compensation plans — can help. Make such incentives easy to understand and clearly achievable. Although interim bonus programs might be expensive in the near term, they can stabilize sales and prevent sharp declines. When successful, a bonus program will help you generate more long-term revenue to offset the immediate costs.

Encourage ideas

Because they work in the trenches, salespeople often have good ideas for capitalizing on your company’s strengths and shoring up its weaknesses. Look into forming a sales leadership team to evaluate the potential benefits and risks of strategic objectives. The team should include two to four top sellers who are taken off their regular responsibilities and tasked with retaining customers and maintaining sales momentum during strategic planning efforts.

The sales leadership team can also serve as a clearinghouse for customer concerns and competitor strategies. It could help with communications to clear up confusion over current or upcoming product or service offerings. And it might be able to contribute to the development of new products or services based on customer feedback and demand.

Buck the trend

Sales departments in many industries will likely continue to have relatively high turnover rates, but that doesn’t mean your business can’t buck the trend. Give your salespeople a little more attention and input, and you could retain the staff needed to maintain and improve your company’s competitive edge.

Ashleigh Laabs 3/7/22 Ashleigh Laabs 3/7/22

Clarity counts when it comes to estate planning documents

Precise language is critical in wills, trusts and other estate planning documents. A lack of clarity may be an invitation to litigation. An example of this is the dispute that arose after Tom Petty’s death, between his widow and his two daughters from a previous marriage. (The two parties have since resolved their differences and dismissed all litigation matters.)

Interpreting “equal participation”

Details of the musician’s estate plan aren’t entirely clear. But it appears that his trust appointed his widow as a “directing trustee,” while providing that she and his daughters were entitled to “participate equally” in the management of his extensive music catalog and other assets. Unfortunately, the trust failed to spell out the meaning of “equal participation,” resulting in litigation between Petty’s widow and daughters over control of his assets.

There are several plausible interpretations of “equal participation.” One interpretation is that each of the three women has an equal vote, giving the daughters the ability to rule by majority.

Another interpretation is that each has an opportunity to participate in the decision-making process, but Petty’s widow has the final say as the directing trustee. Yet another possibility is that Petty intended for the women to make decisions by unanimous consent.

Determining intent

If the two parties hadn’t settled their differences out of court, it would have been up to the court to provide an answer based on evidence of Petty’s intent. But the time, expense and emotional strain of litigation may have been avoided by including language in the trust that made that intent clear.

If you’re planning your estate, the Petty case illustrates the importance of using unambiguous language to ensure that your wishes are carried out. And if you anticipate that one or more of your beneficiaries will perceive your plan as unfair, sit down with them to explain your reasoning. This discussion can go a long way toward avoiding future disputes.

Review and revise to make your intent crystal clear

If your estate plan has already been drafted and you have concerns regarding the language used, contact your attorney. He or she can review your documents to determine if more precise wording is necessary to make your intentions crystal clear for your family after your death.

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Ashleigh Laabs 3/2/22 Ashleigh Laabs 3/2/22

The IRS again eases Schedules K-2 and K-3 filing requirements for 2021

The IRS has announced additional relief for pass-through entities required to file two new tax forms — Schedules K-2 and K-3 — for the 2021 tax year. Certain domestic partnerships and S corporations won’t be required to file the schedules, which are intended to make it easier for partners and shareholders to find information related to “items of international tax relevance” that they need to file their own returns.

In 2021, the IRS released guidance providing penalty relief for filers who made “good faith efforts” to adopt the new schedules. The IRS has indicated that its latest, more sweeping move comes in response to continued concern and feedback from the tax community and other stakeholders.

A tough tax season for the IRS

The announcement of additional relief comes as IRS Commissioner Charles Rettig has acknowledged that the agency faces “enormous challenges” this tax season. For example, millions of taxpayers are still waiting for prior years’ returns to be processed.

To address such issues, he says, the IRS has taken “extraordinary measures,” including mandatory overtime for IRS employees, the creation and assignment of “surge teams,” and the temporary suspension of the mailing of certain automated compliance notices to taxpayers. In addition, the partial suspension of the Schedules K-2 and K-3 filing requirements might ease the burden for both affected taxpayers and the IRS.

K-2 and K-3 filing requirements

Provisions of the Tax Cuts and Jobs Act, which was enacted in 2017, require taxpayers to provide significantly more information to calculate their U.S. tax liability for items of international tax relevance. The Schedule K-2 reports such items, and the Schedule K-3 reports a partner’s distributive share of those items. These schedules replace portions of Schedule K and numerous unformatted statements attached to earlier versions of Schedule K-1.

Schedules K-2 and K-3 generally must be filed with a partnership’s Form 1065, “U.S. Return of Partnership Income,” or an S corporation’s Form 1120-S, “U.S. Income Tax Return for an S Corporation.” Previously, partners and S corporation shareholders could obtain the information that’s included on the schedules through various statements or schedules the respective entity opted to provide, if any. The new schedules require more detailed and complete reporting than the entities may have provided in the past.

In January of 2022, the IRS surprised many in the tax community when it posted changes to the instructions for the schedules. Under the revised instructions, an entity may need to report information on the schedules even if it had no foreign partners, foreign source income, assets generating such income, or foreign taxes paid or accrued.

For example, if a partner claims a credit for foreign taxes paid, the partner might need certain information from the partnership to file his or her own tax return. Although some narrow exceptions apply, this change substantially expanded the pool of taxpayers required to file the schedules.

Good faith exception

IRS Notice 2021-39 exempted affected taxpayers from penalties for the 2021 tax year if they made a good faith effort to comply with the filing requirements for Schedules K-2 and K-3. When determining whether a filer has established such an effort, the IRS considers, among other things:

The extent to which the filer has made changes to its systems, processes and procedures for collecting and processing the information required to file the schedules,
The extent the filer has obtained information from partners, shareholders or a controlled foreign partnership or, if not obtained, applied reasonable assumptions, and
The steps taken by the filer to modify the partnership or S corporation agreement or governing instrument to facilitate the sharing of information with partners and shareholders that’s relevant to determining whether and how to file the schedules.

The IRS won’t impose the relevant penalties for any incorrect or incomplete reporting on the schedules if it determines the taxpayer exercised the requisite good faith efforts.

Latest exception

Under the latest guidance, announced in early February, partnerships and S corporations need not file the schedules if they satisfy all of the following requirements:

For the 2021 tax year:
- The direct partners in the domestic partnership aren’t foreign partnerships, corporations, individuals, estates or trusts, and
- The domestic partnership or S corporation has no foreign activity, including 1) foreign taxes paid or accrued, or 2) ownership of assets that generate, have generated or may reasonably be expected to generate foreign-source income.
For the 2020 tax year, the domestic partnership or S corporation didn’t provide its partners or shareholders — nor did they request — information regarding any foreign transactions.
The domestic partnership or S corporation has no knowledge that partners or shareholders are requesting such information for the 2021 tax year.

Entities that meet these criteria generally aren’t required to file Schedules K-2 and K-3. But there’s an important caveat. If such a partnership or S corporation is notified by a partner or shareholder that it needs all or part of the information included on Schedule K-3 to complete its tax return, the entity must provide that information.

Moreover, if the partner or shareholder notifies the entity of this need before the entity files its own return, the entity no longer satisfies the criteria for the exception. As a result, it must provide Schedule K-3 to the partner or shareholder and file the schedules with the IRS.

Temporary reprieves

The IRS guidance on the exceptions to the Schedules K-2 and K-3 filing requirement explicitly refers to 2021 tax year filings. In the absence of additional or updated guidance, partnerships and S corporations should expect and prepare to file the schedules for current and future tax years. We can help ensure you have the necessary information on hand.

Ashleigh Laabs 3/2/22 Ashleigh Laabs 3/2/22

5 ways to control your business insurance costs

Common sense dictates that every company, no matter how small, should carry various forms of business insurance. But that doesn’t mean you should pay unnecessarily high premiums just to retain the coverage you need. Here are five ways to better control your insurance costs without sacrificing the quality of your policies:

1. Review coverage periodically. Make sure existing policies reflect your current circumstances. For example, if you’ve sold or sunset some equipment, remove it from your schedule of current assets. If you’ve reduced the number of workers on your payroll, adjust workers’ compensation estimates accordingly. (We’ll address this further below.) On the other hand, if you’ve added equipment, vehicles or staff, see that they’re appropriately covered.

2. Shop around. Spend some time and effort to compare coverage and costs of various insurers. Investigate whether you qualify for any discounts that you’re not getting. To facilitate the process, you might want to engage an insurance specialist in your industry. The right expert can help you weigh the total, true costs of various policies and advise you without a vested interest in selling you a particular product.

3. Actively manage workers’ compensation coverage. In some industries, such as construction and manufacturing, workers’ comp is a major focus. In others, business owners might pay little attention to it if accidents rarely occur. Be sure that you keep up with the costs of this coverage and make regular adjustments as the nature of work changes.

Workers’ compensation insurers assign risk classification codes to employees based on their duties, responsibilities, and level of exposure to the risk of injury or illness. Higher risk means higher premiums so, at least annually, check that you’re classifying employees accurately. For example, if an employee who now works from home is still classified as someone who travels regularly or works in a higher risk location, your premiums may be needlessly inflated.

4. Consider higher deductibles. If you’re comfortable assuming some additional risk, and your cash flow is strong enough, calculate whether you can save on premiums by raising the deductibles on certain policies. It could be worth paying a higher deductible so long as the premium savings is enough to cover a claim or two if they do occur.

5. Prioritize safety. Keeping employees safe is a worthy goal in and of itself, of course. But emphasizing the importance of safety to managers, supervisors, employees and any independent contractors you might have on-site can also positively affect your company’s insurance costs. After all, the premiums you pay are based in part on your claims history. There are various steps that every business should take to avoid injuries and illness:

Provide safety training to new hires,
Conduct drills and refresher training for current employees,
Issue personal protective equipment, as appropriate, and
Strictly enforce safe work practices with no exceptions.

By keeping your employees safe, and promoting wellness in every respect, you’ll not only decrease the likelihood of costly insurance claims, but you’ll also likely contribute to higher morale and more robust productivity. We can help you measure and assess your insurance costs so you can make the right adjustments without incurring unnecessary risk.

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