Due to tax law changes, individuals and businesses face significant uncertainty. It’s important to manage any changes so that you are best positioned for success throughout the rest of 2022 and beyond.
Here are some topics we picked for you:
State tax footprint:
If you have employees, your company’s state tax footprint is the sum of taxes due in each state where the business operates. While a handful of states have instituted laws granting relief from state taxation to remote-office workers, these provisions are intended to be temporary and have not been generally adopted. If you don’t have employees, your company’s state tax footprint is the sum of taxes due in each state where the business obtains business activity or has property, inventory, or equipment.
Recovery Rebate Credit/Economic Impact Payments:
The Economic Impact Payment was a one-time payment made to taxpayers in 2018 with incomes under $150,000 that totaled $1,200 for individuals and $500 for qualifying children. Recipients received a second payment of up to $600 for taxpayers in December 2020.
When a business has employees who work from home or telecommute, there are a couple of potential tax issues to be aware of. For example, an employee who lived in their vacation home away from their state of residence for a few months during the pandemic may be required to pay tax to that state on wages earned while working there. If that employee’s time at that vacation home lingered on, they may find that they have run afoul of that state’s statutory residency rules, and may have to pay tax to two states as a resident of both. It is important to catch these issues early, as there are significant implications related to the employee’s credit for taxes paid to nonresident states and, potentially, the business’ tax withholding requirements. These types of complicated tax situations should not be taken lightly.
“Cash contributions” of up to $300 in a given year may be deducted from an individual’s adjusted gross income. The maximum deduction limit has been extended through 2021. Businesses may deduct 20% of their cash contributions for taxes in 2020 and 2022.
The Biden administration is reviewing potential changes to the transfer tax system, such as decreasing the current one-million-dollar exemption to historic levels and increasing transfer tax rates from the current forty percent rate. While considerations of these types affect only a minority of taxpayers, they are causing many taxpayers to consider updating their estate plans or using their exemptions to avoid paying taxes today. It is important to take your time when planning these things out and ensure that you aren’t doing something today that you will regret in five years.
The government has spent billions in recent years to stabilize the economy. Tax rates are currently historically low, and the administration is sending mixed signals about whether they will increase in the near future. Given these conditions, many taxpayers have begun converting their traditional IRAs into Roth IRAs to take advantage of an estate-planning strategy that can reduce or even eliminate future estate taxes.
Employee Retention Credit (ERC):
If your company paid qualified wages in the first and second quarters of 2021, you may be eligible for a payroll tax credit under the Economic Revitalization Act. To qualify for the credit, a company must have paid more than $7,000 in wages to each employee in the first quarter of 2021; $5,000 in wages to each employee in 2020; and have been approved for and received no more than ten percent federal funding from the PPP (Public-Private Partnership) program. If you meet these conditions and your company has remaining PPP funds, you can try to qualify for the tax credit.
Paycheck Protection Program (PPP):
The PPP program was one way that the CARES act assisted businesses through the H1N1 pandemic. The IRS had originally considered forgivable loans provided under the CARES act to be nondeductible, but Congress corrected this issue in December, and taxpayers who qualify for forgiveness of these loans will receive truly tax-free assistance at the federal level. At the state level, however, with many states still without guidance, and some still following the IRS’ pre-correction approach, the status of PPP remains murky.
Net operating losses (NOLs):
Last year, the Tax Cuts and Jobs act limited the use of NOLs (net operating losses), but as a temporary measure. In tax years beginning after December 31, 2017, taxpayers can carry back their NOLs for five years rather than the two-year carryback under prior law. These temporary rules will reduce overall rates of return because they permit taxpayers to deduct current losses from their previous higher profit margins in lower – and now-expired – tax brackets.