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.

Inside the Guide:

• Relevant tax law changes you should be aware of
• Details about the SECURE 2.0 Act
• How the Tax Cuts and Jobs Act (TCJA) can impact your tax planning
• An overview of the key tax provisions you should be aware of

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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:

• 3 years from the date in which the original Form 941 was filed or
• 2 years from the date the tax was paid.

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:

• Such corporation was a small business corporation,
• The stock was issued by a small business corporation for money or other property (other than stock and securities), and
• During the corporation’s five most recent taxable years ending before the date of the stock loss, derived more than 50% of its aggregate gross receipts from sources other than royalties, rents, dividends, interests, annuities, and sales or exchanges of stocks or securities.

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.

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.

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:

• Your company is increasing its investor base (S corporations are limited to 100 investors).
• There’s a possibility of going public.
• C-Corporations allow more flexibility with ownership regulations, including having foreign investors.

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 15^th 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.

In late December 2022, while most practitioners and their clients were busy with other things, Congress passed a giant omnibus budget bill. Buried within it was the Setting Every Community Up for Retirement Enhancement 2.0 Act of 2022 (“SECURE 2.0”), which contains many retirement changes and some other changes that practitioners and their clients need to be aware of. It provides new incentives for employers to offer their employees retirement plans and participate in and improve their retirement security. SECURE 2.0 helps employees and their beneficiaries, owner-employees, small businesses, and retirees and eases costs, administrative burdens, and penalties for inadvertent mistakes. It will also require most plans to be amended to comply with some of its provisions. The 2023 omnibus bill containing the following key provisions that benefit individuals was signed into law by President Biden on December 29, 2022.

Tax-free rollovers from 529 accounts to Roth IRAs. After 2023, SECURE 2.0 permits beneficiaries of 529 college savings accounts to make up to $35,000 of direct trustee-to-trustee rollovers from a 529 account to their Roth IRA without tax or penalty. The 529 account must have been open for more than 15 years, and the rollover is limited to the amount contributed to the 529 account (and its earnings) more than five years earlier. Rollovers are subject to the Roth IRA annual contribution limits but are not limited based on the taxpayer’s AGI.

Age increased for required distributions. Under SECURE 2.0, the age used to determine required distribution beginning dates for IRA owners, retired employer plan members, and active-employee 5%-owners increases in two stages from the current age of 72 to age 73 for those who turn age 72 after 2022, and to age 75 for those who will turn 74 in 2032.

Bigger catch-up contributions permitted. Starting in 2025, SECURE 2.0 increases the current elective deferral catch-up contribution limit for older employees from $7,500 for 2023 ($3,500 for SIMPLE plans) to the greater of $10,000 ($5,000 for SIMPLE plans), or 50% more than the regular catch-up amount in 2024 (2025 for SIMPLE plans) for individuals who attain ages 60-63. The dollar amounts are inflation-indexed after 2025.

More penalty-free withdrawals permitted. SECURE 2.0 adds an exception after 2023 to the 10% pre age-59 1/2 penalty tax for one distribution per year of up to $1,000 used for emergency expenses to meet unforeseeable or immediate financial needs relating to personal or family emergencies. The taxpayer has the option to repay the distribution within three years. No other emergency distributions are permissible during the three-year period unless repayment occurs.

Similarly, plans may permit participants that self-certify as having experienced domestic abuse to withdraw the lesser of $10,000 indexed for inflation, or 50% of their account free from the 10% tax on early distributions. The participant has the opportunity to repay the withdrawn money from the retirement plan over three years and get a refund of income taxes on money that is repaid. Also, the additional 10% early distribution tax no longer applies to distributions to terminally ill individuals.

Beginning December 29, 2025, retirement plans may make penalty-free distributions of up to $2,500 per year for payment of premiums for high quality coverage under certain long term care insurance contracts.

Also, retroactive for disasters after January 25, 2021, penalty free distributions of up to $22,000 may be made from employer retirement plans or IRAs for affected individuals. Regular tax on the distributions is considered  gross income over three years. Distributions can be repaid to a tax preferred retirement account. Additionally, amounts distributed prior to the disaster to purchase a home can be recontributed and an employer may provide for a larger amount to be borrowed from a plan by affected individuals and for additional time for repayment of plan loans owed by affected individuals.

SECURE 2.0 also contains an emergency savings provision that allows employers to offer non-highly compensated employees emergency savings accounts linked to individual account plans that automatically opt employees into these accounts at no more than 3% of their salary, capped at a maximum of $2,500. Employees can withdraw up to $1,000 once per year for personal or family emergencies without certain tax consequences.

Reduced penalty tax on failure to take RMDs. For tax years beginning after December 29, 2022, SECURE 2.0 reduces the penalty for failure to take required minimum distributions from qualified retirement plans, including IRAs or deferred compensation plans under Code Sec. 457(b) from the current 50% to 25% of the amount by which the distribution falls short of the required amount. It reduces the penalty to 10% if the failure to take the RMD is corrected in a timely manner.

Favorable surviving spouse election. For plan years after 2023, the surviving sole spousal designated beneficiary of an employee who dies before RMDs have begun under an employer qualified retirement plan may elect to be treated as if the surviving spouse were the employee for purposes of the required minimum distribution rules. If the election is made distributions need not begin until the employee would have had to start them.

This provision allows a designated spousal beneficiary to receive a similar distribution period for lifetime distributions under an employer plan as is permitted if the surviving spouse rolled the amount into an IRA.

The IRS will prescribe the time and manner of the election, which once made may not be revoked without the IRS’ consent.

Employer match for student loan payments. To assist employees who may not be able to save for retirement because they are overwhelmed with student debt and are missing out on available matching contributions for retirement plans, SECURE allows them to receive matching contributions by reason of their student loan repayments. For plan years after 2023, it allows employers to make matching contributions under a 401(k) plan, 403(b) plan, or SIMPLE IRA for “qualified student loan payments.”

Return of excess contributions. SECURE 2.0 specifies that earnings attributable to excess IRA contributions that are returned by the taxpayer’s tax return due date (including extensions) are exempt from the 10% early withdrawal tax. The taxpayer must not claim a deduction for the distributed excess contribution. This applies to any determination of or affecting liability for taxes, interest, or penalties made on or after December 29, 2022.

We know that this amount of information is overwhelming, but there is much here that may affect you or your business and induce or require you to change your retirement plan or how you handle your account and distributions. It’s a lot to consider. Be assured that we can help you with all of this. Please don’t hesitate to call Cray Kaiser at (630) 953-4900 if you would like to discuss how SECURE 2.0 may impact you or your business.