A situation where taxpayers often make tax mistakes, is when deciding if it is better to receive a home as a gift or as an inheritance. It is generally more advantageous tax-wise to inherit a home rather than to receive it as a gift before the owner’s death. This article will explore the various tax aspects related to gifting a home, including gift tax implications, basic considerations for the recipient, and potential capital gains tax implications. Here are the key points that highlight why inheriting a home is often the better option.

RECEIVED AS A GIFT

First, let’s explore the tax ramifications of receiving a home as a gift. Gifting a home to another person is a generous act that can have significant implications for both the giver (the donor) and the recipient (the donee), especially when it comes to taxes. Most gifts of this nature are between parents and children. Understanding the tax consequences of such a gift is crucial for anyone considering this option.  

Gift Tax Implications – When a homeowner decides to gift their home to another person (whether or not related), the first tax consideration is the federal gift tax. The Internal Revenue Service (IRS) requires individuals to file a gift tax return if they give a gift exceeding the annual exclusion amount, which is $18,000 per recipient for 2024. This amount is inflation-adjusted annually. When gifts exceed the annual exclusion amount, and a home is very likely to exceed this amount, it will necessitate the filing of a Form 709 gift tax return.

It’s worth mentioning that while a gift tax return may be required, actual gift tax may not be due thanks to the lifetime gift and estate tax exemption. For 2024, this exemption is $13.61 million per individual, meaning a person can gift up to this amount over their lifetime without incurring gift tax. The value of the home will count against this lifetime exemption.

Note: The lifetime exclusion was increased by the Tax Cuts and Jobs Act (TCJA) of 2017, which without Congressional intervention will expire after 2025, and the exclusion will be cut by about half.  

Basis Considerations for the Recipient – For tax purposes basis is the amount you subtract from the sales price (net of sales expenses) to determine the taxable profit. The tax basis of the gifted property is a critical concept for the recipient to understand. The basis of the property in the hands of the recipient is the same as it was in the hands of the donor. This is known as “carryover” or “transferred” basis.

For example, if a parent purchases a home for $200,000 and later gifts it to their child when its fair market value (FMV) is $500,000, the child’s basis in the home would still be $200,000, not the FMV at the time of the gift. If during the parent’s time of ownership, the parent had made improvements to the home of $50,000, the parent’s “adjusted basis” at the time of the gift would be $250,000, and that would become the starting basis for the child.

If a property’s fair market value (FMV) at the date of the gift is lower than the donor’s adjusted basis, then the property’s basis for determining a loss is its FMV on that date.  

This carryover basis can have significant implications if the recipient decides to sell the home. The capital gains tax will be calculated based on the difference between the sale price and the recipient’s basis. If the home has appreciated significantly since it was originally purchased by the donor, the recipient could face a substantial capital gains tax bill upon sale.

Home Sale Exclusion – Homeowners who sell their homes may qualify for a $250,000 ($500,000 for married couples if both qualify) home gain exclusion if they owned and used the residence for two of the prior five years counting back from the sale date. However, when a home is gifted that gain qualification does not automatically pass on to the gift recipient. To qualify for the exclusion the recipient would have to first meet the two of the prior five years qualifications. Thus, where the donor qualifies for home gain exclusion it may be best taxwise for the donor to sell the home, taking the gain exclusion and gift the cash proceeds net of any tax liability to the donee. 

Capital Gains Tax Implications – The capital gains tax implications for the recipient of a gifted home are directly tied to the basis of the property and the holding period of the donor. If the recipient sells the home, they will owe capital gains tax on the difference between the sale price and their basis in the home. Given the carryover basis rule, this could result in a significant tax liability if the property has appreciated since the donor originally purchased it. Capital gains are taxed at a more favorable rate if the property has been held for over a year. For gifts, the holding period is the sum of the time held by the donor and the donee, sometimes referred to as a tack-on holding period.

Special Considerations – In some cases, a homeowner may transfer the title of their home but retain the right to live in it for their lifetime, establishing a de facto life estate. In such situations, the home’s value is included in the decedent’s estate upon their death, and the beneficiary’s basis would be the FMV at the date of the decedent’s death, potentially offering a step-up in basis and significantly reducing capital gains tax implications, i.e., treated as if they inherited the property.

AS AN INHERITANCE

There are significant differences between receiving a property as a gift or by inheritance. 

Basis Adjustment – When you inherit a home, your basis in the property is generally “stepped up” to the fair market value (FMV) of the property at the date of the decedent’s death. However, occasionally this could result in a “step-down” in basis where a property has declined in value. Nevertheless, in this day and age, most real estate would have appreciated in value over the time the decedent owned it, and the increase in value will not be subject to capital gains tax if the property is sold shortly after inheriting it.

For example, if a home was purchased for $100,000 and is worth $300,000 at the time of the owner’s death, the inheritor’s basis would be $300,000. If the inheritor sells the home for $300,000, there would be no capital gains tax on the sale.

In addition, the holding period for inherited property is always considered long term, meaning inherited property gain will always be taxed at the more favorable long-term capital gains rates.

Note: The Biden administration’s 2025–2026 budget proposal would curtail the basis step-up for higher income taxpayers. 

In contrast, if a property is received as a gift before the owner’s death, the recipient’s basis in the property is the same as the giver’s basis. This means there is no step-up in basis, and the recipient could face significant capital gains tax if the property has appreciated in value, and they decide to sell it.

Using the same facts as in the example just above, if the home was gifted and had a basis of $100,000, and the recipient later sells the home for $300,000, they would potentially face capital gains tax on the $200,000 increase in value.

Depreciation Reset – For an inherited property that has been used for business or rental purposes, the accumulated depreciation is reset, allowing the new owner to start depreciation afresh on the inherited portion and since the inherited basis is FMV at the date of the decedent’s death, the prior depreciation is disregarded. This is not the case with gifted property, where the recipient takes over the giver’s depreciation schedule.

Given these points, while each situation is unique and other factors might influence the decision, from a tax perspective, inheriting a property is often more beneficial than receiving it as a gift. However, it’s important to consider the overall estate planning strategy and potential non-tax implications.

Please contact the tax experts Cray Kaiser at (630) 953-4900 for developing a strategy that is suitable for your specific circumstances. 

In the labyrinth of financial planning and tax-saving strategies, Health Savings Accounts (HSAs) emerge as a multifaceted tool that remains underutilized and often misunderstood. An HSA is not just a way to save for medical expenses; it’s also a powerful vehicle for retirement savings, offering unique tax advantages. This article delves into who qualifies for an HSA, the tax benefits it offers, and how it can serve as a supplemental retirement plan.

Qualifying for a Health Savings Account – At the heart of HSA eligibility is enrollment in a high-deductible health plan (HDHP). As of the latest guidelines, for the tax year 2024, an HDHP is defined as a plan with a minimum deductible of $1,600 for an individual or $3,200 for family coverage. The plan must also have a maximum limit on the out-of-pocket medical expenses that you must pay for covered expenses, which for 2024 is $8,050 for self-only coverage and $16,100 for family coverage. But having an HDHP is just the starting point. To qualify for an HSA, individuals must meet the following criteria:

• Coverage Under an HDHP: You must be covered under an HDHP on the first day of the month.
• No Other Health Coverage: You cannot be covered by any other health plan that is not an HDHP, with certain exceptions for specific types of insurance like dental, vision, and long-term care.
• No Medicare Benefits: You cannot be enrolled in Medicare. This rule applies to periods of retroactive Medicare coverage. So, if you delay applying for Medicare and later your enrollment is backdated, any contributions to your HSA made during the period of retroactive coverage are considered excess, are not tax deductible and are subject to penalty, if not withdrawn from the account.
• Not a Dependent: You cannot be claimed as a dependent on someone else’s tax return.
• Spouse’s Plan: Joint HSAs aren’t allowed; each spouse who is eligible and wants an HSA must open a separate HSA.

These criteria ensure that HSAs are accessible to those who are most likely to face high out-of-pocket medical expenses due to the nature of their health insurance plan, providing a tax-advantaged way to save for these costs.

It should also be noted that unlike IRAs, 401(k)s and other retirement plans, it is not necessary to have earned income to be eligible for an HSA.

Tax Benefits of Health Savings Accounts – HSAs offer an unparalleled triple tax advantage that sets them apart from other savings and investment accounts:

• Tax-Deductible Contributions: Contributions to an HSA are tax-deductible, reducing your taxable income for the year. This deduction applies whether you itemize deductions or take the standard deduction. Rather than being a tax deduction, HSA contributions made by your employer are just not included in your income.
• Tax-Free Growth: The funds in an HSA grow tax-free, meaning you don’t pay taxes on interest, dividends, or capital gains within the account.
• Tax-Free Withdrawals for Qualified Medical Expenses: Withdrawals from an HSA for qualified medical expenses are tax-free. This includes a wide range of costs, from doctor’s visits and prescriptions to dental and vision care, and even some over-the-counter medicine, whether or not prescribed.

The combination of these benefits makes HSAs a powerful tool for managing healthcare costs now and in the future.

HSAs as a Supplemental Retirement Plan – While HSAs are designed with healthcare savings in mind, their structure makes them an excellent supplement to traditional retirement accounts like IRAs and 401(k)s. Here’s how:

• No Required Minimum Distributions (RMDs): Unlike traditional retirement accounts, HSAs do not require you to start taking distributions at a certain age. This allows your account to continue growing tax-free indefinitely.
• Flexibility for Non-Medical Expenses After Age 65: Once you reach age 65, you can make withdrawals for non-medical expenses without facing the 20% penalty that would apply to nonqualified distributions at a younger age, though these withdrawals will be taxed as income. This feature provides flexibility in how you use your HSA funds in retirement.
• Continued Tax-Free Withdrawals for Medical Expenses: Regardless of age, withdrawals for qualified medical expenses remain tax-free. Considering healthcare costs often increase with age, having an HSA in retirement can provide significant financial relief.

To maximize the benefits of an HSA as a retirement tool, consider paying current medical expenses out-of-pocket if possible, allowing your HSA funds to grow over time. This strategy leverages the tax-free growth of the account, potentially resulting in a substantial nest egg for healthcare costs in retirement or additional income for other expenses.

Establishing and Contributing to an HSA – Opening an HSA is straightforward. Many financial institutions offer HSA accounts, and the process is like opening a checking or savings account. An individual can acquire a Health Savings Account (HSA) through various sources, including:

• Employers: Many employers offer HSAs as part of their benefits package, especially if they provide high-deductible health plans (HDHPs) to their employees. Enrolling through an employer might also come with the benefit of direct contributions from the employer to the HSA.
• Banks and Financial Institutions: Many banks, credit unions, and other financial institutions offer HSA accounts. Individuals can open an HSA directly with these institutions, like opening a checking or savings account.
• Insurance Companies: Some insurance companies that offer HDHPs also offer HSAs or have partnered with financial institutions to offer HSAs to their policyholders.
• HSA Administrators: Some companies  specialize in administering HSAs. These administrators often provide additional services, such as investment options for HSA funds, online account management, and educational resources about using HSAs effectively.

When choosing where to open an HSA, it’s important to consider factors such as fees, investment options, ease of access to funds (e.g., through debit cards or checks), and customer service.

Once established, you can make contributions up to the annual limit, which for 2024 is $4,150 for individual coverage and $8,300 for family coverage. Individuals aged 55 and older can make an additional catch-up contribution of $1,000.

What Happens If I Later Become Ineligible – If you have an HSA and then later become ineligible to contribute to it—perhaps because you’ve enrolled in Medicare, are no longer covered by a high-deductible health plan (HDHP), or for another reason—several key points come into play regarding the status and use of your HSA:

• Contributions Stop: Once you are no longer eligible, you cannot make new contributions to the HSA. For example, enrollment in Medicare makes you ineligible to contribute further to an HSA. However, the specific timing of when you must stop contributing can vary based on the reason for ineligibility. If you enroll in Medicare, contributions should stop the month you are enrolled.
• Funds Remain Available: The funds that are already in your HSA remain available for use. You can continue to use these funds tax-free for qualified medical expenses at any time. This includes expenses like copays, deductibles, and other medical expenses not covered by insurance, but not insurance premiums.
• After Death: Upon the death of the HSA owner, the account can be transferred to a surviving spouse tax-free and used as their own HSA. If the beneficiary is not the spouse, but is the beneficiary’s estate, the account value is included in the deceased’s final income tax return, subject to taxes. If any other person is the beneficiary, the fair market value of the HSA becomes taxable to the beneficiary in the year of the HSA owner’s death.

Therefore, while you can no longer contribute to an HSA after losing eligibility, the account remains a valuable tool for managing healthcare expenses.

Health Savings Accounts stand out as a versatile financial tool that can significantly impact your tax planning and retirement preparedness. By understanding who qualifies for an HSA, leveraging its tax benefits, and recognizing its potential as a supplemental retirement plan, individuals can make informed decisions that enhance their financial well-being.

Whether you’re navigating high-deductible health plans or seeking additional avenues for tax-efficient savings, an HSA may be the key to unlocking substantial long-term benefits.

Call us at Cray Kaiser at (630) 953-4900 to discuss your situation and how an HSA might be beneficial for you.  

Here we are again, on the precipice of another round of significant tax changes. The last round of significant tax law changes occurred in 2018, with the Tax Cuts and Jobs Act (TCJA). Most of the tax changes made by the TCJA are not permanent and will expire (sunset) after 2025. With little time before December, 2025, we are encouraging all to review your 2024 and 2025 tax planning – NOW!

We’ll highlight some of the significant provisions deserving of everyone’s attention.

Estate Tax Exclusion – TCJA significantly increased the inflation-adjusted estate and gift tax exclusion. Before TCJA, the estate and gift tax exclusion was $5.49 million (meaning, estates with more than that level of assets faced the prospect of federal estate tax). Post TCJA, the 2024 exemption is dramatically higher at $13.61 million.

However, with the sunset of the TCJA, the exemption would revert back to pre-TCJA levels. Many estate planning professionals are advising clients to act now to reduce their taxable estate, usually through gifts to family members. Especially notable is t the IRS has indicated they will not challenge this strategy. According to the IRS, “Individuals planning to make large gifts between 2018 and 2025 can do so without concern that they will lose the tax benefit of the higher exclusion level once it decreases after 2025.”

With the additional clarification of the lifetime gift exclusion availability for future estates, wealthy donors should strongly consider ensuring that their gifting strategy maximizes future tax benefits.

Corporate Tax Rate/Qualified Business Income (QBI) Deduction – As part of TCJA, Congress changed the tax rate structure for C corporations to a flat rate of 21% instead of the former graduated rates that topped out at 35%. If allowed to sunset with TCJA, businesses organized as C corporations will face significant tax increases. In fact, the after-tax rate of corporate distributions will well exceed 50%.

Needing a way to equalize the rate reduction for all taxpayers with business income, Under the TCJA, Congress came up with a new deduction for businesses that are not organized as C corporations. This resulted in a new and substantial tax benefit for most non-C corporation business owners in the form of a deduction that is generally equal to 20% of their qualified business income (QBI). Notably for personal service industries (lawyers and accountants for example), the QBI was limited.

Given the potential increase in C corporation tax rates and the elimination of the QBI deduction, businesses may need to revisit their tax structure after 2025.

SALT Limits – SALT is the acronym for “state and local taxes”. TCJA limited the annual SALT itemized deduction to $10,000, which primarily impacted residents of states with high state income tax and real property tax rates, such as New York, New Jersey, and California. Several states have developed somewhat complicated work-a-arounds (called the pass-through entity tax, or PTET) to the limits that benefit taxpayers who have partnership interests or are shareholders in S corporations. The future of the PTET is uncertain with an expired TCJA.

Standard Deductions – The standard deduction is the amount of deductions you are allowed on your tax return without itemizing your deductions. The standard deduction is annually adjusted for inflation. In 2018, the TCJA just about doubled the standard deduction which generally benefited lower income taxpayers and retirees. The increased standard deductions also meant fewer taxpayers claimed itemized deductions – roughly 10% of filers now itemize versus 30% before TCJA.

Personal & Dependent Exemptions – Prior to 2018, the tax law allowed a deduction for personal and dependent exemption allowances. One allowance was permitted for each filer and spouse and each dependent claimed on the federal return. Under current law, there is no dependency exemption. It’s possible that in 2026, the tax benefits related to personal exemptions will come back into play.

Child Tax Credit – Prior to 2018 the child tax credit was $1,000 for each child below the age of 17 at the end of the year. With the advent of TCJA the child tax credit was doubled to $2,000 for each child below the age of 17 at the end of the year. This more than made up for the loss of a child’s personal exemption deduction for lower income families.

Home Mortgage Interest Limitations – Prior to the passage of TCJA, taxpayers could deduct as an itemized deduction the interest on $1 Million ($500,000 for married taxpayers filing separate) of acquisition debt and the interest on $100,000 of equity debt secured by their first and second homes. With the passage of TCJA, the $1 Million limitation was reduced to $750,000 for loans made after 2017 and any deduction of equity debt interest was suspended (not allowed). A return to pre-TCJA levels will tend to benefit higher income taxpayers with more expensive homes and higher mortgages.

Tier 2 Miscellaneous Deductions – TCJA suspended the itemized deduction for miscellaneous deductions for tax preparation and planning fees, unreimbursed employee business expenses, and investment expenses. Most notable of these is unreimbursed employee expenses which allowed employees to deduct the cost of such things as union dues, uniforms, profession-related education, tools and other expenses related to their employment and profession not paid for by their employer. Investment expenses included investment management fees charged by brokerage firms. These types of expenses were allowed only to the extent they totaled more than 2% of the taxpayer’s adjusted gross income. These expenses are currently not deductible.

Tax Brackets – TCJA altered the tax brackets and although most taxpayers benefited, higher income taxpayers benefited the most with a 2.6% cut in the top tax rate. A return to the pre-TCJA rates would have the largest negative effect on higher income taxpayers.

The tax changes to occur with the sunset of TCJA will be dramatically impacted by the November 2024 elections.

Depending upon your circumstances, these changes may impact your long-term planning such as your business structure, estate planning, buying a home, retirement planning, and other issues. It’s going to be an interesting year, for sure, and best to get planning now. Please contact Cray Kaiser at (630) 953-4900 with any questions.

Effective July 1, 2024 certain taxing jurisdictions in Illinois have imposed a local sales tax or changed their local sales tax rate on general merchandise sales. The following taxes are affected:

• Business district sales tax
• County public safety, public facilities, mental health, substance abuse, or transportation sales tax
• Home rule municipal sales tax
• Non-home rule municipal sales tax

To be in compliance with the new tax rates, you must adjust your point of sale and/or accounting system to ensure that you will collect and pay the correct sales tax effective July 1, 2024. You may need to contact your software vendor to confirm that they will correct their systems to the appropriate tax rate. Remember that even if you under-collect tax, the tax is still due. That means it will be your responsibility to pay the difference.

To verify your new combined sales tax rate (state and local tax) use the Tax Rate Finder and select rates for July 2024.

Who is impacted?

The sales tax rate change will affect anyone collecting sales tax in some cities in Cook County, DuPage County, Kane County, Madison County, McHenry County, Stephenson County and other jurisdictions. To see a full list of all the cities impacted and the new rates, please click here.

What is taxed?

These rate changes do not impact what is and is not subject to sales tax. As a reminder, most sales are subject to both the state sales tax and the locally imposed sales tax.

Note that some jurisdictions may impose and administer taxes not collected by the Illinois Department of Revenue. Contact your municipal or county clerk’s office for more information.

If you have any questions regarding the sales tax rate change, please don’t hesitate to contact Cray Kaiser today or call us at (630) 953-4900.

In this video, Maria Gordon, Tax Supervisor of State and Local Taxation, delves into the intricacies of sales tax nexus, taxable items and customer exemptions. She also talks about the invaluable lifeline offered by the voluntary disclosure programs offered by some states.

Transcript:

My name is Maria Gordon. My title is Tax Supervisor of State and Local Taxation. Each of the states really wants to get a piece of their pie from taxpayers.

There’s lots of different types of taxes that businesses need to be concerned about. Income tax is an obvious one, but also requirements for sales taxes are continually changing with the states. And then we have local income taxes, we have personal property taxes and even gross receipts taxes based upon total receipts collected in a state and franchise taxes.

 So, a business needs to determine whether or not they’re required to collect sales tax in the various states where they ship product or they do services and determining whether that business has nexus for sales tax is different from determining nexus for income tax.

 In the past, if the business didn’t have any physical presence in the state, they really didn’t have to worry about sales tax, but that all changed in 2018 when the Supreme Court ruled on South Dakota versus Wayfair.

And now the states, all of the states, have enacted economic thresholds, whereby if you have sales into that state over a certain threshold, even if you don’t have any physical presence there, you are required to begin collecting sales tax from your customers in that state. And this has been an area over the past few years that businesses have really had to keep a close eye on. So, this is something that each year, you know, we’re taking a look at that to see where our clients have exceeded those nexus thresholds.

Once a business decides that they are subject to collecting sales tax in a state, then the next step is to really determine what of their products or services are taxable. And this varies again from state to state. So, in some states, services across the board, you know, pretty much are not taxable and other states only specific services might be taxable. And then in this day and age, we have additional considerations like computer software. You know, when is that software considered a taxable product? Or when is it considered a non-taxable service?

So, there’s a lot to consider there just in determining what items are taxable. Once that’s determined, you also need to take a look at your customers and find out who of your customers are taxable because you may have resellers who you don’t have to charge tax to because they’re taxing the end customer that they sell to and so another really big aspect of protecting your business is to collect those exemption certificates, make sure that you have those on hand, and also make sure that they’re current. You know, if it’s been a few years since you’ve collected one, it’s always a good idea to go back to your customers and request an updated certificate from them.

But a business discovers that they have nexus in a state for income tax or for sales tax and that that nexus has existed for the last several years. There is a way that they can go to the states and get some protection and this is called voluntary disclosure. So many of the states offer a voluntary disclosure program where the taxpayers are coming forward and saying, you know, we recognize that we should have been filing income tax or collecting sales tax in your state. We’d like to make it right and the states in response to that coming forward place a limit on the look back period, so they may only go back three or four years to collect tax and then also they often will waive penalties. So it is it’s a great program to protect the business from back audit exposure because it limits those years and the states are very willing to work with taxpayers to get them into compliance.

The tax bill put forth a few weeks ago, the Smith-Wyden Tax Act, has the potential to bring about significant changes for both individual and business taxpayers in 2024 and possibly even retroactively to 2022 and 2023. Although the bill passed the House, it is currently stalled in the Senate. Here’s a highlight of the tax provisions that we believe will be most impactful to our clients:

R&D Expense Correction:

• Restores full and immediate expensing for businesses’ research and development expenditures.
• Reverses the five-year amortization requirement implemented in 2022.
• Retroactively applies R&D expensing to investments made from 2022 through 2025.
• Incentivizes business investments, enhancing productivity and economic growth.

Child Tax Credit Expansions:

• Enhances refundability of the Child Tax Credit (CTC) to support low-income families.
• Ensures parents receive a portion of the credit even without federal tax liability.
• Retains work incentives, such as the earned-income phase-in.

Bonus Depreciation Reinstatement:

• Reinstates 100% bonus depreciation from January 1, 2023.
• Reverses phased reduction under TCJA to 80% in 2023 and 60% in 2024.

Business Interest Expense Limitation:

• Reinstates allowance for depreciation and amortization for the 30% limitation on interest deductions.
• Makes allowance retroactive from January 1, 2023, or January 1, 2022 if elected by the taxpayer.

Section 179 Small Business Expensing Cap:

• Increases small business write-off limit to $1.29 million, surpassing the 2017 cap of $1 million, for property placed in service after December 31, 2023.
• Makes additional adjustments for inflation after 2024.

We will continue to monitor the Act – whether it continues to move through Senate or stalls. Given the proximity to the tax filing due date for calendar year entities, we are advising our affected clients to extend their 2023 tax returns to avoid possible amendments to their returns should the Act pass on a retroactive basis. If you have any questions on how the Act may impact your tax situation, please call us at 630-953-4900.

In this video, Maria Gordon, Tax Supervisor of State and Local Taxation, sheds light on the crucial topic of tax incentives offered by states and localities to businesses. From empowerment and edge credits to research and development incentives, she underscores the vast array of opportunities available.

Transcript:

My name is Maria Gordon. My title is Tax Supervisor of State and Local Taxation. Businesses should really be thinking about tax incentives that many states and localities offer to them.

The states really want to see economic development in their state and even certain areas, and so often they will offer empowerment, credits, edge credits where your business is employing people there, investing in capital. And these credits are very specific. You apply for it with the state. And then it helps businesses to really expand and get some credit, some benefits there. And some states offer, you know, research and development credits. You can get that at the federal level, but if you are also doing research and experimentation in a state, you may be able to receive a state -level credit as well.

And then there’s even states that have credits that have to do with your activities such as the Wisconsin Manufacturing Tax Credit, that’s a credit against income tax. So, there is an awful lot out there with respect to state incentives and if a business isn’t thinking about these things, they really could be missing out on some benefits.

One benefit that business owners have had had for the last couple years is taking advantage of the pass-through entity tax, which is a tax whereby the business can pay state income tax at the entity level rather than having it paid at the individual level for partnerships and s-corporations where the income would generally flow through to the owners.

Now as a workaround to the state and local tax deduction cap, businesses can pay those at the entity level and get a state tax deduction against the business income. For most states, this is set to expire after 2025. So, we’re doing all we can to take advantage of those deductions right now.

I think the hope is that some of these states will extend that provision, but as of now for most of them it’s expiring 2025 and this is just an issue that we’re going keep up on and make sure we know all the changes that are happening over the next couple of years.

Starting January 1, 2024, a significant number of businesses were required to comply with the Corporate Transparency Act (“CTA”). The CTA was enacted into law as part of the National Defense Act for Fiscal Year 2021. The CTA requires the disclosure of the beneficial ownership information (otherwise known as “BOI”) of certain entities from people who own or control a company.

It is anticipated that 32.6 million businesses will be required to comply with this reporting requirement. The BOI reporting requirement intends to help U.S. law enforcement combat money laundering, the financing of terrorism and other illicit activity.

The CTA is not a part of the tax code. Instead, it is a part of the Bank Secrecy Act, a set of federal laws that require record-keeping and report filing on certain types of financial transactions. Under the CTA, BOI reports will not be filed with the IRS, but with the Financial Crimes Enforcement Network (FinCEN), another agency of the Department of Treasury.

Below is some preliminary information for you to consider as you approach the implementation period for this new reporting requirement. This information is meant to be general-only and should not be applied to your specific facts and circumstances without consultation with competent legal counsel and/or another retained professional adviser.

What entities are required to comply with the CTA’s BOI reporting requirement?
Entities organized both in the U.S. and outside the U.S. may be subject to the CTA’s reporting requirements. Domestic companies required to report include corporations, limited liability companies (LLCs) or any similar entity created by the filing of a document with a secretary of state or any similar office under the law of a state or Indian tribe.

Domestic entities that are not created by the filing of a document with a secretary of state or similar office are not required to report under the CTA.

Foreign companies required to report under the CTA include corporations, LLCs or any similar entity that is formed under the law of a foreign country and registered to do business in any state or tribal jurisdiction by filing a document with a secretary of state or any similar office.

Are there any exemptions from the filing requirements?
There are 23 categories of exemptions. Included in the exemptions list are publicly traded companies, banks and credit unions, securities brokers/dealers, public accounting firms, tax-exempt entities and certain inactive entities, among others. Please note these are not blanket exemptions and many of these entities are already heavily regulated by the government and thus already disclose their BOI to a government authority.

In addition, certain “large operating entities” are exempt from filing. To qualify for this exemption, the company must:

1. Employ more than 20 people in the U.S.;
2. Have reported gross revenue (or sales) of over $5M on the prior year’s tax return; and
3. Be physically present in the U.S.

Who is a beneficial owner?
Any individual who, directly or indirectly, either:

-Exercises “substantial control” over a reporting company, or
-Owns or controls at least 25 percent of the ownership interests of a reporting company

An individual has substantial control of a reporting company if they direct, determine or exercise substantial influence over important decisions of the reporting company. This includes any senior officers of the reporting company, regardless of formal title or if they have no ownership interest in the reporting company.

The detailed CTA regulations define the terms “substantial control” and “ownership interest” further.

When must companies file?
There are different filing timeframes depending on when an entity is registered/formed or if there is a change to the beneficial owner’s information.

• New entities (created/registered in 2024) — must file within 90 days
• New entities (created/registered after 12/31/2024) — must file within 30 days
• Existing entities (created/registered before 1/1/24) — must file by 1/1/25
• Reporting companies that have changes to previously reported information or discover inaccuracies in previously filed reports — must file within 30 days
  

What sort of information is required to be reported?
Companies must report the following information: full name of the reporting company, any trade name or doing business as (DBA) name, business address, state or Tribal jurisdiction of formation, and an IRS taxpayer identification number (TIN).

Additionally, information on the beneficial owners of the entity and for newly created entities, the company applicants of the entity is required. This information includes — name, birthdate, address, and unique identifying number and issuing jurisdiction from an acceptable identification document (e.g., a driver’s license or passport) and an image of such document.

Risk of non-compliance
Penalties for willfully not complying with the BOI reporting requirement can result in criminal and civil penalties of $500 per day and up to $10,000 with up to two years of jail time. For more information about the CTA, visit www.aicpa-cima.com/boi.

If you have any questions about how the CTA affects you and your business, please contact the experts at CK by calling 630-953-4900.

In 2017, the Tax Cuts and Jobs Act (TCJA) introduced limiting state and local taxes (including real estate taxes) to $10,000. Prior to this legislation, state and local taxes were usually deducted in full on individual income tax returns. As a result of this legislation, many Americans, especially in high tax states or those owning their own business, lost the ability to itemize their deductions. 

Many states have worked around this limitation by allowing owners of passthrough entity businesses the ability to deduct their share of state taxes on the business return itself, reducing total profit and thereby giving a back-door deduction for business owners. This is commonly referred to as a pass-through entity tax (PTET) deduction and many states have allowed it, including Illinois, Indiana, Michigan, and Wisconsin. While this back-door deduction is a benefit for business owners that have profitable pass-through entities, it doesn’t benefit those without businesses or those living in states with higher state taxes, such as California, New York, New Jersey, Connecticut, Maryland and Illinois. 

Change of Heart

This legislation has been controversial since it was introduced and is expected to sunset (expire) in 2026. The current 118^th US Congress, primarily the House of Representatives, has three bills before it that would liberalize the current itemized deduction limitation on state and local taxes. 

What are the Bills?

In short, the three bills have different outcomes. One bill proposes to eliminate the limitation altogether, which would result in the full deduction of state and local taxes paid during the year. The second bill proposes to increase the limitation from the current $10,000 to $100,000 for single filers and $200,000 for married filing jointly. The final bill proposes to modestly increase the cap for married filing jointly to $20,000 but retain the current $10,000 limitation on single filers. 

What’s Next?

Congress has squabbled over many policies and bills during the recent years, and to expect a clear decision anytime soon does not seem likely. As taxes have become politicized, the outcome of the full repeal of the SALT limitation prior to 2026 does not seem likely. However, we will continue to monitor the status of the other two bills which would at least raise the cap on the limitation of state and local taxes. The outcome of either bill progressing significantly could bring about a substantial change in limitations.

While any proposals in Congress, especially tax changes, can cause confusion, Cray Kaiser is here to help you navigate potential pitfalls and opportunities. Please contact us at 630-953-4900 with any questions.

For tax years beginning January 1, 2024 there are big changes to the Ohio Commercial Activity Tax (“CAT”). For one thing, the CAT annual minimum tax is being eliminated. More importantly, the receipts exclusion is increased from $1 million to $3 million for 2024 and will be increased to $6 million for 2025. Taxpayers having 2024 calendar year Ohio gross receipts of $3 million or less will no longer be subject to the CAT. The CAT rate remains unchanged at 0.26% and will apply to Ohio gross receipts in excess of $3 million.

What does this mean for your business? If you expect your 2024 Ohio gross receipts to be under $3 million, you must close your CAT account. Failure to close the account could result in non-filing notices. You may close the CAT account online by visiting the Ohio Business Gateway. Select the CAT Cancel Account transaction and indicate a closure date of December 31, 2023.

Remember to file your final CAT return for tax year 2023! CAT filing deadlines are:

• February 12, 2024 for quarterly filers
• May 10, 2024 for annual filers

Ohio is just one of many states that imposes a tax on gross receipts. Cray Kaiser can help your business evaluate the impact of these types of taxes on your business. Contact us by calling 630-953-4900 and one of our State and Local Tax professionals will be happy to provide assistance.