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Member of Russell Bedford International, a global network of independent professional service firms.
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.
CPA | Tax Supervisor
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.
This legislation has been controversial since it was introduced and is expected to sunset (expire) in 2026. The current 118th 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.
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.
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.
Tax Supervisor – SALT
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:
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.
In-Charge Staff Accountant
As the end of the year approaches, a lot of us take time to look back at the past year and plan for the year ahead. Now is the time to look for new opportunities, plan for the future, and take steps to avoid surprises.
Teaming up with your advisor to put together a year-end tax projection is a good idea that’s worth making time for. A tax projection is essentially an estimated tax return that will use a combination of information you already know and estimates of things you can’t know until the year is over to form a rough idea of what to expect come tax time. No projection will be perfect, especially in recent years when tax laws have changed so frequently and drastically. But starting with a good projection can eliminate at least some unknowns. In the words of Gen. Dwight D. Eisenhower, “Plans are useless, but planning is indispensable.”
Unpleasant surprises often come in the form of a higher-than-expected amount of tax due with your return, and a year-end projection can help avoid this. In many cases, an extra year-end estimated payment might be a good idea, since it can help ensure timely payment and avoid incurring penalties or interest that the government might add on to your balance due.
In addition, a year-end tax projection can often help you and your advisor uncover opportunities for additional tax savings. For many people, this might come in the form of maximizing contributions to retirement savings accounts, health savings accounts, or education savings accounts. It can also aid in the planning of charitable giving.
Beyond that, a year-end projection can aid in planning for future savings, as well. For business owners, conducting a projection can help in evaluating timing decisions for major investments in equipment or other aspects of their businesses. The same activity might have different tax consequences if it takes place before or after the current year ends. Certain deductions and credits for individuals have annual limits, as well. Some of these are fixed and other limits have a sliding scale based on your adjusted gross income (AGI) as calculated on your tax return. A tax projection can show whether the benefit will be greater in the current year or in a future year.
Of course, a projection is just an estimate, and there will be uncertainties involved. But a year-end projection can help put you in the best position to step into the year ahead. For assistance with completing your year-end tax projection, please contact the tax experts at CK at 630-953-4900.
CPA | Tax Supervisor
Cryptocurrency is relatively established with 17% of Americans using it, but the regulations on tax reporting are still in the infancy stage.
The Treasury Department has proposed a new Form 1099-DA to modernize reporting requirements related to cryptocurrency. It would result in an easier way to determine the transactions that result in a taxable event and gives crypto users a clearer answer regarding taxation around cryptocurrency. While the form is new, the rationale aligns with what Congress adopted in 2021 with the passage of the Infrastructure Investment and Jobs Act (IRA).
The current system in place is a hodgepodge of rules, with part of it being based on the honor system. The proposed 1099-DA would require brokers to annually report the sales and exchanges of digital assets to both the IRS and the taxpayer, similar to how the sale of securities is reported. As such, the learning curve is low as most taxpayers are used to the reporting regime related to the sale of stocks, bonds, and mutual funds.
This Proposal gives a clearer definition of who brokers are and will encompass both traditional brokers (i.e. Morgan Stanley) and new entrants (i.e. Coinbase). It includes both centralized and decentralized trading platforms, crypto payment processors and online applications that store digital assets, such as Bitcoin, Ethereum and NFTs.
The government is catching up to the nascent crypto world and trying to bring order and consistency to the taxation of digital assets. Currently, the IRS is waiting to hear feedback until October 30, and once fine-tuned, implementation would occur for the 2025 tax year, giving the industry two years to get systems and best practices in compliance.
While any change, especially tax changes, can cause anxiety, Cray Kaiser is here to help you navigate potential pitfalls and opportunities. Please call us today at 630-953-4900.
Although you can’t avoid taxes, you can take steps to minimize them. This requires proactive tax planning – estimating your tax liability, looking for ways to reduce it and taking timely action. To help you identify strategies that might work for you, we’re pleased to present the 2023 – 2024 Tax Planning Guide.
CK Principal
Many small businesses have received refunds by claiming the Employee Retention Credit (ERC) which had expanded opportunities under the Consolidated Appropriations Act of 2021 and the American Rescue Plan Act of 2021. If you have not yet claimed the ERC, time will be running out soon and you will want to check the availability for this payroll credit before it is too late. To qualify for the ERC, you will want to review our blog.
As a reminder, the ERC is claimed by filing an amended payroll tax return for the quarter in which you qualified. The IRS regulations require amended payroll tax forms to be filed by the later of the following:
However, the IRS considers Form 941 for a calendar year as filed on April 15 of the succeeding year as long as the original 941 was filed by this date. This consideration by the IRS is allowing you to still claim the ERC for calendar quarters in 2020 up to April 15, 2024 and for calendar quarters in 2021 up to April 15, 2025.
While the ERC offers an opportunity for significant refunds, it is important for you to confirm your eligibility before claiming the credit. There is increased scrutiny on companies trying to fraudulently solicit claims related to ERC. In response to rising concerns of fraudulent claims for ERC, the IRS recently ordered an immediate moratorium on processing new ERC claims through at least December 31, 2023. The IRS will continue to process ERC claims received prior to the moratorium however processing times are expanding due to the fraud concerns and the increased review time needed for the claims.
We are available to assist you in determining your qualifications and the preparation of the associated amended payroll tax returns. Please contact Cray Kaiser at (630) 953-4900 for additional information.
We’ve talked previously about opportunities to reduce the tax bite from capital gains. For example, the 2017 Tax Act brought us opportunity zones; by investing in these programs, the capital gains tax exposure can be minimized or even eliminated. You are also likely familiar with tax-deferred exchanges, commonly referred to as 1031 exchanges. But there are other provisions that are sometimes overlooked by investors.
Internal Revenue Code Section 1244 benefits investors that take the risk of starting a small business that fails. Section 1244 provides special tax treatment to the disposition of certain qualifying stocks of small businesses. It essentially allows losses up to $50,000 ($100,000 for married taxpayers filing jointly) to be subject to the more favorable ordinary loss treatment. Why is this beneficial? The loss is all deductible in the year of the loss rather than being treated as a capital loss limited to a per-year loss of $3,000 ($1,500 for married taxpayers filing separately). In addition, Sec 1244 stock losses are allowed for net operating loss purposes without being limited by non-business income.
Congress originally created this benefit to encourage investment in small business enterprises. It may also be a factor in determining the choice of entity when originally initiating a business. In addition to the benefits provided by Sec 1244, another part of the Internal Revenue Code, Sec 1202, allows gain from C corporation stock to be excluded from income where the aggregate gross assets of the corporation immediately after the issuance (determined by considering amounts received in the issuance) does not exceed $50 Million, the corporation meets an active business requirement, and the stock is held more than 5 years. The maximum excludable gain under Sec 1202 can’t exceed $10 million ($5 million, if married filing separately).
Section 1202 stock has been a hot topic in the tax planning world. In particular, start-up companies have been keen to organize the entity in such a way that investors will qualify for the Section 1202 gain exclusion.
1244 Stock – In general the term 1244 stock means stock in a domestic corporation if at the time such stock is issued:
Taxpayers taking advantage of the Section 1244 stock rules should document the factors that allow them to qualify. This could include corporate minutes and resolutions, accounting and bank records, and even operational records.
1202 Small Business Corporation Stock Defined – A corporation is treated as a small business corporation if the aggregate amount of money and other property received by the corporation for stock, as a contribution to capital, and as paid-in surplus, does not exceed $1,000,000. The determination under the preceding sentence is made as of the time of the issuance of the stock in question but also includes amounts received for such stock and for all stock previously issued.
The losses are reported by the individual stockholder; however, individual stockholders do not include trusts or estates.
If you would like to discuss the benefits of either the Section 1244 or Section 1202 stock provisions, call Cray Kaiser at (630) 953-4900 or contact us here.
Illinois shoppers can expect their grocery bill to increase a bit in July. The sales tax holiday on groceries, implemented in July 2022, is set to expire on June 30, 2023. The sales tax holiday was part of a state budget plan to provide residents relief from the rising costs of groceries. The sales tax rate for groceries in Illinois was already low, at 1%, but the State suspended the 1% sales tax rate from July 1, 2022, to June 30, 2023.
What does this mean for your business? Effective July 1, 2023, retailers should resume collection of the 1% grocery tax. Certain products, such as alcohol, candy, and soda, remain subject to the general sales tax rate of 6.25%. Note that the 1% is a state rate and local tax rates may also apply.
According to the U.S. Department of Agriculture, grocery prices are expected to grow more slowly in 2023 than in 2022. However, the increases are still substantial, and consumers are feeling the effect. The Consumer Price Index for food purchases was 7.1% higher in April 2023 compared to April 2022.
Cray Kaiser can assist in ensuring that your business is charging the appropriate sales tax on groceries. Please contact us here or call us at (630) 953-4900 if you have questions.
The most recent Illinois informational bulletin on the grocery tax suspension may be found here.
You have heard from us about the benefits of the Employee Retention Credit (ERC). And you have probably received solicitations from third parties on the credit or even seen and heard commercials on the television and radio. The ERC is definitely a hot topic, given the advertised claims of billions of dollars returned to employers.
The Internal Revenue Service (IRS) has heard the chatter as well and is aggressively cracking down on so-called “ERC mills” – promoters of the credit making very misleading claims about the benefits.
The IRS has stepped up audit and criminal investigation work involving these claims. In fact, criminal charges have begun to be filed against the promotors of fraudulent claims. Businesses, tax-exempt organizations and others considering applying for this credit need to carefully review the official requirements for this limited program before applying. Those who improperly claim the credit face follow-up action from the IRS. Additionally, if the credit is overstated, the credit – plus penalty and interest – will need to be repaid.
“The aggressive marketing of the Employee Retention Credit continues preying on innocent businesses and others,” said IRS Commissioner Danny Werfel. “Aggressive promoters present wildly misleading claims about this credit. They can pocket handsome fees while leaving those claiming the credit at risk of having the claims denied or facing scenarios where they need to repay the credit.”
The IRS notes the following warning signs of aggressive ERC marketing:
Cray Kaiser continues to be at the forefront of understanding whether you qualify for the ERC. If you would like us to review your situation to determine credit eligibility, please call our office today at (630) 953-4900 or connect with us here.
