Index

This is index.php

Amy Langfelder

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.

By now you have probably gotten used to the provisions in the Tax Cuts and Jobs Act (TCJA) that became effective January 1, 2018. But don’t forget, most of the tax changes made by the TCJA are not permanent and will expire (sunset) after 2025. This will have an impact on long range tax planning and will result in a mixed bag of tax increases and tax cuts. How it will impact individual taxpayers will depend upon which provisions of TCJA affect them. The following is a review of the most significant changes for individuals when TCJA expires if Congress doesn’t intervene.

Estate Tax Exclusion – TCJA virtually doubled the inflation-adjusted estate and gift tax exclusion as illustrated in the table below. This benefited wealthier taxpayers with larger estates. Also illustrated in the table is the inflation adjusted amount for 2023.

Most taxpayers have estates well under the pre-TCJA exclusion amount and will not be affected by a restoration of the lower amounts. However, this is not true of wealthier taxpayers, especially considering the estate tax rate is currently 40%. This provision is the most discussed when we look ahead to 2026.

Standard Deductions – The standard deduction is that 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 as illustrated in the table below that also illustrates the 2023 standard deduction amounts. With the expiration of TCJA the standard deduction will be cut roughly in half.

The increased standard deduction under TCJA benefited lower income taxpayers and retirees, whose itemized deductions often were just barely more than the pre-TCJA standard allowance. 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 the current law, there is no dependency exemption.

Child Tax Credit – Prior to 2018 the child tax credit was $1,000 for each child under 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.

If the credit is allowed to revert to the pre-TCJA amount of $1,000 and the lower income phaseout levels, it will have a significant negative impact on families.

You may recall that for one year during the Covid-19 pandemic, the child credit amount was increased to $3,000 or $3,600, depending on the child’s age, and other temporary changes were made. Some in Congress want to permanently bring back these enhancements, so that possibility could become part of any legislative negotiations surrounding the sunsetting or extension of TCJA provisions.

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.

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 NY, NJ, and CA. Several states have developed somewhat complicated workarounds to the $10,000 limits that benefit taxpayers who have partnership interests or are shareholders in S corporations. The elimination of the SALT limitation will favor those residing in states with a state income tax and those with larger property taxes.

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. The table only reflects different tax brackets. They may or may not apply to the same levels of income.    

A return to the pre-TCJA rates would have the largest negative effect on higher-income taxpayers. 

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%. Needing a way to equalize the rate reduction for all taxpayers with business income, 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). If allowed to sunset with TCJA, businesses (generally small businesses) will lose a substantial deduction.

Of course, these potential changes assume Congress does not extend or alter them. And they aren’t the only tax issues impacted by the December 31, 2025, TCJA sunset date, but are probably those that will affect the most taxpayers. Depending upon your particular circumstances, these possible changes can potentially impact your long-term planning such as buying a home, retirement planning, estate planning, future tax liability and other issues. Please contact Cray Kaiser at (630) 953-4900 with any questions.

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 DefinedA 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:

  • Unsolicited calls or advertisements mentioning an “easy application process.”
  • Statements that the promoter or company can determine ERC eligibility within minutes.
  • Large upfront fees to claim the credit.
  • Fees based on a percentage of the refund amount of ERC claimed. This is a similar warning sign for average taxpayers who should always avoid a tax preparer basing their fee on the size of the refund.
  • Aggressive claims from the promoter that the business receiving the solicitation qualifies before any discussion of the group’s tax situation. In reality, the ERC is a complex credit that requires careful review before applying.
  • These promoters may lie about eligibility requirements. In addition, those using these companies could be at risk of someone using the credit as a ploy to steal the taxpayer’s identity or take a cut of the taxpayer’s improperly claimed credit.

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.

Many of us have just put our 2022 taxes in the rearview mirror, but it’s still not too early to start planning for 2023. A little thinking ahead now can help you avoid unpleasant year-end surprises with your tax bill. In 2020, the IRS introduced a new format for the W-4 withholding certificate, which is the form you use to tell your employer how much to take out of your paycheck towards your income tax. Because the new W-4 works a bit differently than the old one, this has caused confusion, and many people find that their payroll withholding now falls short of covering their tax liability at the end of the year. Some taxpayers who were used to always breaking even or getting refunds when they filed their returns now find that they owe money.

Get Ahead with The IRS Estimator

The nature of this new W-4 requires a little additional planning, and to help with this, the IRS has introduced a withholding calculator to help you estimate what you should be withholding each pay period. Just input your earnings and withholding for the year so far and estimate some of your deductions and credits. Then you’ll get a general idea of whether your withholding will be enough for the year.

Click here to access the IRS estimator.

When completing the estimator, it is recommended that you have your most recent paystub handy (including your spouse’s if married), as well as the previous year’s tax return. Most of the information the estimator asks for will come from your paystub. The calculator also allows you to go into as much detail as you like with credits and deductions. We typically suggest keeping it simple by using the numbers from your prior year’s return. If you used the standard deduction, go with that again. If you itemized, start with the prior year’s numbers and adjust to reflect anything major that might have changed. Unless you expect significant life events like marriage, a new baby, or a child beginning college, most people will get accurate results using numbers from the previous year.

Calculate, Estimate, and Adjust

The estimate from the calculator will give you a rough idea of whether the tax you are withholding through your W-2 will cover your tax bill at the end of the year. If the calculator shows you’re likely to owe, you can ask your employer to adjust the amount taken out of your check each pay period. The easiest way to do this is to take the estimated amount owed from the calculator and divide it by the number of pay periods left in the year. Then round that to an even number and ask your employer to withhold that additional amount from each paycheck. The person responsible for HR or payroll at your employer will normally be the one who can provide that form and make the adjustment for you.

It’s important to keep in mind that this is only an estimate. Many events can affect your final tax liability, like a bonus, a raise, a new job, or increased income earned outside of your W-2, like dividends or gig work. If your situation changes during the year, you can always revisit the calculator and adjust again. And of course, you can always connect with your Cray Kaiser advisor with any questions. Give us a call at (630) 953-4900 or connect with us here.

April 18th is behind us, but there are other important tax due dates to keep in mind during the remainder of 2023. Here is a list of them.

2023 Remaining Tax Deadlines

June 15, 2023

  • Second quarter estimated tax payments.

September 15, 2023

  • Third quarter estimated tax payments.
  • Deadline for extended partnership and S-Corporation returns.

October 16, 2023

  • Federal tax-filing deadline for individuals who filed an extension.
  • Deadline for extended C-corporation returns.

If you have questions about the upcoming deadlines, please call us at 630-953-4900 or contact us here. We are happy to help.

The issue of foreign tax reporting has been in flux for the last few years. For the 2021 tax year, the IRS hastily published regulations without warning, that made it onerous for many passthrough entities, and created more complexity and paperwork than many believe was necessary. These were the K-2 and K-3 schedules, which run about 20 pages per owner, and which many of you might have noticed when you received your 2021 K-1’s from S-Corps or Partnerships.

The goal of these schedules was to provide information on the portion of the income from the S-Corp or Partnership related to foreign activities. However, the implementation by the IRS was heavy-handed and made the process complex which added time and cost to the income tax preparation process.

For the current year, the IRS has bowed to pressure and has provided two exemptions that give relief to most passthrough entities with little or no foreign activity. While in theory, this is good news, the qualifications to utilize the exemption are complicated. 

Exemption 1: Domestic Entity Exception

To qualify, passthrough entities must only have direct partners and shareholders who are U.S. citizens, resident aliens, or certain domestic estates and trusts, and any foreign activity is limited to less than $300 of foreign taxes paid or accrued. If these definitions are met, then an election can be made to exclude the K-2 and K-3 schedules.

A wrench in what should be a simple election

This is where things get a little convoluted. Before the passthrough entity can file the return with this election, they must provide each owner a K-1 with a disclosure that K-3 will only be provided if the owner specifically requests it. The owner has up to one month before the return is filed to request a K-3. If this is the case, one owner can cause the S-Corp or Partnership to file the return with K-2 and K-3s, and the owner who requested the K-3 will receive it with their K-1. This can hold up filing the S-Corp and Partnership return to much later, causing all owners to file their individual returns later than desired.

Exemption 2: Individuals are exempt from Filing Form 1116

Another exemption to the K-2 and K-3 filing requirements is if all owners qualify for the Form 1116 exemption. If so, the S-Corp or Partnership doesn’t have to file K-2 or K-3.

Form 1116 reports foreign income and foreign taxes paid on the individual income tax return. The exemption from filing this form is if an individual receives less than $600 ($300 for single filers). By doing so, the individual return is more simplified. However, it disallows any foreign taxes carried over to be utilized. 

This exemption will likely be less often utilized because it requires every owner to disclose their intent and qualification for Form 1116 exemption to the S-Corp or Partnership. In addition, the time frame for notifying the S-Corp or Partnership is much shorter than the first exemption; owners were required to disclose their intention by February 15 of the current year for 2022 tax returns, a month before the S-Corp or Partnership’s unextended due date. 

At CK, we are working with our clients directly to ensure that the exceptions to filing the K-2 and K-3 schedules are reviewed and disclosed appropriately. If you have questions about these exemptions and if they apply to your S-Corp, Partnership, or your individual return, please call Cray Kaiser today at 630-953-4900.

Effective for tax years starting in 2022, there is a policy change that will impact how research and development (R&D) is handled for U.S. tax purposes. Rather than being allowed to deduct those costs immediately, companies are now being told that they must spread those costs out over a period of at least five years.

Unsurprisingly, many companies are not thrilled with that change. It has the potential to hurt manufacturers in a number of different ways, all of which are worth exploring.

The R&D Tax Policy Change: An Overview

In a letter that was sent on November 4, 2022, no less than 178 CFOs – primarily those from some of the biggest names in United States manufacturing, like Ford Motor Company, Lockheed Martin, Boeing, and others – outlined why they believe that these aforementioned new rules would lead to what they call a “competitive disadvantage” for American companies. This would likely lead to job losses, harming their ability to innovate over the next decade.

Their point of view was simple: they were asking the current Congress to switch back to a system that allowed them to immediately deduct their costs regarding R&D as soon as the end of the year.

Until January 1, 2022, businesses could deduct 100% of all expenses directly attributed to R&D in the same year they were incurred. This is a major new expense – the tax liabilities of these companies are about to increase exponentially. This makes it more expensive to invest in advancements that will help innovate various sectors like manufacturing and in the growth of these companies.

One company that is particularly worried about the implications of this change is Miltec UV. However, company leadership believes that an exciting new opportunity is within reach. They have spent years developing new technology for lithium-ion batteries – otherwise known as the rechargeable batteries found in countless devices like your smartphones or tablets. This new technology could potentially be used for next-generation electric vehicles.

Miltec UV has poured at least 11 years of development into manufacturing the electrodes used in these batteries. They’ve spent countless amounts of money on prototyping. Various proof of concepts have been developed to indicate that these microbes can do what the company thinks they can. There has been testing. On top of it all, there is the cost of manufacturing the batteries. Officials agree that they are very close to the point where they can commercialize the batteries and begin to sell them, but with these new rule changes, they will have to pay more taxes than they previously thought they would.

What Are R&D Expenses?

For smaller businesses than Miltec UV, how do you know if you will be affected? The first clue is to look at your financial statements or recent tax return – do you have “R&D expenses”? Or have you claimed the R&D credit in the past? If either of these are true, you will likely be affected by the new law.

But you’ll need to do an even deeper dive. That’s because how R&D expenses are defined for credit purposes differs from expenses affected by the new law. The nuances of the differences are beyond the scope of this article, but needless to say that those companies with significant R&D would benefit from an R&D study to ensure that the least amount of costs are categorized as R&D. 

Those companies will also need to look at where the development is performed.  Believe it or not, the law is even worse for those with international development costs; these are written off over not a five-year period but a fifteen-year period.  Either way, the “half-year” convention determines the write-off.

To summarize the write-off of R&D expenses:

Pre-2022: 100% write-off

2023 and forward – domestic R&D: 10% write-off in year one, 20% in years two through four, 10% in year five

2023 and forward – international R&D: 3.33% write-off in year one, 6.66% in years two through fourteen, 3.33% in year fifteen

Many businesses are hopeful that Congress will reverse these rules. But until then, large and small taxpayers need to address their R&D costs and the effect on 2022 tax liabilities. If you have questions about how these changes to the R&D tax policy will affect your business, please contact Cray Kaiser at (630) 953-4900.

By now, you are familiar with the Tax Cuts and Jobs Act (TCJA) passed a few years ago and likely recall that it lowered regular corporate taxes to 21%.  In response to the lower corporate tax rate, there was a provision to lower overall taxes on the individual level using the Qualified Business Income. This allowed S-corporations (flow-through entities) to benefit from lower business taxes without converting to a C-corporation.

However, there might be other considerations to converting your S-Corporation to a C-Corporation. You can voluntarily convert your S-Corporation to a C-Corporation almost any time, but once you do, there is a five-year hold where you cannot convert back. 

Reasons to Convert from an S-Corporation to a C-Corporation

There are a few scenarios in which it would make sense to convert from an S-Corporation to a C-Corporation:

How to Go About Converting

Once most shareholders who own the business agree to conversion and sign the Statement of Consent, the process with the IRS is quite simple. Any CPA can prepare the proper forms for the IRS so that the Company can convert to a C-Corporation. However, you must note that the process must be done by March 15th of the year you want to convert. Otherwise, the conversion will occur during the tax year, which will cause you to have to prepare and file two short-period tax returns. You can elect to convert to a C-Corporation beginning January 1st of the following year, which would allow you to submit the application any time during the year before conversion.     

Effects of Conversion on Taxes

The biggest downside of a C-Corporation is double taxation. The corporation pays the federal income tax on its profit, usually at 21%. Any qualified dividends paid to investors are taxed again at the individual level at rates between 15% – 23.8%. For S-Corporations, the flow-through income is taxed once at the individual owner’s level, ranging anywhere from 10% – 37%. Assuming there is sufficient undistributed corporate income, the S-corporation distribution to owners would not be taxed again. 

The other point to consider is that once you apply to convert to a C Corporation, you have a limited time to distribute the undistributed S-corporation earnings to the shareholders (which is tax-free) before it’s considered a dividend (and taxed between 15% – 23.8% on the shareholders’ personal return).

Converting from an S-Corp to a C-Corp has its benefits, but there are also long-term implications that you need to be aware of. Therefore, before you start the process of changing your tax status, speak with a CPA to review any pitfalls that might occur based on your unique situation.

If you have questions about the conversion and if it’s a good fit for your business, please call Cray Kaiser at 630-953-4900.