Plan Carefully to Avoid GST Tax Surprises

If you want to share some of your wealth with your grandchildren or great grandchildren — or if your estate plan is likely to benefit these generations — it’s critical to consider and plan for the generation-skipping transfer (GST) tax. Designed to ensure that wealth is taxed at each generational level, the GST tax is among the harshest and most complex in the tax code. It’s also among the most misunderstood.

ABCs of the GST tax

To ensure that wealth is taxed at each generational level, the GST tax applies at a flat, 40% rate — in addition to otherwise applicable gift and estate taxes — to transfers that skip a generation. The tax applies to transfers to “skip persons,” including your grandchildren, other relatives who are more than one generation below you and unrelated people who are more than 37½ years younger than you.

There’s an exception, however, for a grandchild whose parent (your child) predeceases you. In that case, the grandchild moves up a generation and is no longer considered a skip person.

Allocation rules

Even though the GST tax enjoys an inflation-adjusted lifetime exemption in the same amount as the lifetime gift and estate tax exemption ($12.92 million for 2023), it works a bit differently. For example, while the gift and estate tax exemption automatically protects eligible transfers of wealth, the GST tax exemption must be allocated to a transfer to shelter it from tax.

The tax code contains automatic allocation rules designed to prevent you from inadvertently losing the exemption, but it can be dangerous to rely solely on these rules. In some cases, the exemption isn’t automatically allocated to transfers that may trigger costly GST taxes. And in others, the exemption is automatically allocated to transfers that are unlikely to need its protection, wasting those exemption amounts.

3 types of GST tax triggers

Three types of transfers may trigger GST taxes:

“Direct skips” — transfers directly to a skip person that are subject to federal gift and estate tax,
Taxable distributions — distributions from a trust to a skip person, or
Taxable terminations — for example, if you establish a trust for your children, a taxable termination occurs when the last child beneficiary dies and the trust assets pass to your grandchildren.

As noted above, the GST tax doesn’t apply to transfers to which you allocate your GST tax exemption. In addition, the GST tax annual exclusion — which is similar to the gift tax annual exclusion — currently allows you to transfer up to $17,000 per year to any number of skip persons without triggering GST tax or using up any of your GST tax exemption. Note, however, that transfers in trust qualify for the exclusion only if certain requirements are met.

Plan carefully

If your estate plan calls for making substantial gifts, either outright or in trust, to your grandchildren or other skip persons, be sure to allocate your GST tax exemption carefully. We can help you devise a strategy that leverages the exemption and minimizes your GST tax liability.

President Biden has released his proposed budget for the federal government for the 2024 fiscal year. The budget, which aims to cut the deficit by nearly $3 trillion over 10 years, includes numerous provisions that would affect the tax bills of both individuals and businesses. While most of these proposals stand little chance of enactment with a Republican majority in the U.S. House of Representatives, they shed light on the Democrats’ priorities as they prepare for the 2024 election season.

Individual tax provisions

The proposed budget includes tax provisions that would affect taxpayers of various income levels. In particular, it would make the following changes:

Tax rates. The proposal would reinstate the top individual tax rate of 39.6% for single filers earning more than $400,000 ($450,000 for married couples).

Net investment income tax (NIIT). The NIIT on income over $400,000 would include all pass-through business income not otherwise covered by the NIIT or self-employment taxes. The budget also would increase both the additional Medicare tax rate and the NIIT rate by 1.2 percentage points. Thus, the Medicare tax rate would be 5% for earnings above $400,000, and the NIIT rate would be 5% for investment income above $400,000.

Capital gains tax. The highest capital gains rate now is 20% (or 23.8% if the NIIT applies). For individuals with taxable income of more than $1 million, the budget proposes that capital gains be taxed at ordinary rates, with 37% (or 40.8% with the NIIT) generally being the highest rate — or 39.6% (or 43.4% with the NIIT) if the top tax rate is raised.

Child tax credit (CTC). This proposal would expand the CTC and make it fully refundable and payable in advance on a monthly basis. For eligible parents, the credit would increase from $2,000 to $3,000 for children age six and older and $3,600 for children under age six.

The proposal also would establish a “presumptive eligibility” for determining when a taxpayer is eligible to claim a monthly specified child allowance or receive a monthly advance child payment. After a taxpayer establishes presumptive eligibility for a child, that child would be treated as a specified child of the taxpayer for each month during the period of the taxpayer’s presumptive eligibility.

Premium tax credits (PTCs). The American Rescue Plan Act expanded eligibility for healthcare insurance subsidies to taxpayers with household incomes above 400% of the federal poverty line for 2021 and 2022. It also reduced the applicable contribution percentage (the percentage of household income a taxpayer must contribute toward a healthcare insurance premium). The Inflation Reduction Act (IRA) extended the expansion through 2025. The proposed budget would make this expansion permanent.

Cryptocurrency taxation. The proposal would amend the “wash-sale” rule to cover digital assets. The rule prohibits the deduction of a loss when the taxpayer acquires “substantially identical” investments within 30 days before or after the sale date.

Minimum wealth tax. The proposal would impose a minimum 25% tax on total income, generally inclusive of unrealized capital gains, for all taxpayers whose assets exceed liabilities by more than $100 million. According to the White House, the tax would apply to only the top 0.01% of taxpayers.

Gift and estate taxes. The proposal would close loopholes related to certain trust arrangements. Specifically, the changes would affect grantor-retained annuity trusts and charitable lead annuity trusts.

Business tax provisions

The proposed budget’s tax provisions target numerous issues of interest to businesses, including:

Corporate tax rates. The proposal would trim back the large cut made to the corporate tax rate in the Tax Cuts and Jobs Act (TCJA). It would hike the tax rate for C corporations from 21% to 28% — still significantly less than the pre-TCJA rate of 35%. In addition, the effective global intangible low-taxed income (GILTI) rate would increase to 14%. Overall, with other proposed changes, the effective GILTI rate would rise to 21%.

Global minimum tax. The proposal would repeal Base Erosion and Anti-Abuse Tax (BEAT) liability, replacing it with an “undertaxed profits rule.” In conjunction with the GILTI regime, the rule would ensure that income earned by a multinational company, whether parented in the United States or elsewhere, is subject to a minimum rate of taxation regardless of where the income is earned.

Stock buyback excise tax. The IRA created a 1% excise tax on the fair market value when corporations buy back their stock, with the goal of reducing the difference in the tax treatment of buybacks and dividends. The proposal would quadruple the tax to 4%.

Carried interest loophole. A “carried interest” is a hedge fund manager’s contractual right to a share of a partnership’s profits. Currently, it’s taxable at the capital gains rate if certain conditions are satisfied. The budget proposes to close this loophole.

Like-kind exchanges. Owners of certain appreciated real property can defer the taxable gain on the exchange of the property for real property of a “like-kind.” The proposal would allow the deferral of gain up to an aggregate amount of $500,000 for each taxpayer ($1 million for married couples filing a joint return) each year for like-kind exchanges. Under this proposal, any like-kind gains in excess of $500,000 (or $1 million for married couples) in a year would be recognized in the year the taxpayer transfers the real property.

Low-income housing tax credit. The budget proposes to expand and enhance the largest federal incentive for affordable housing construction and rehabilitation.

The elephant in the room

The budget proposal doesn’t address many of the temporary tax provisions of the TCJA that have expired or are set to expire in the next few years. The increased standard deduction, reduced individual tax rates, qualified business income deduction for pass-through businesses, and limit on the state and local tax deduction are among the numerous provisions scheduled to expire at the end of 2025 — potentially affecting the tax liability of a wide swath of taxpayers. We’ll keep you informed if there’s significant movement on this front.

It’s been years since the Tax Cuts and Jobs Act (TCJA) of 2017 was signed into law, but it’s still having an impact. Several provisions in the law have expired or will expire in the next few years. One provision that took effect last year was the end of current deductibility for research and experimental (R&E) expenses.

R&E expenses

The TCJA has affected many businesses, including manufacturers, that have significant R&E costs. Starting in 2022, Internal Revenue Code Section 174 R&E expenditures must be capitalized and amortized over five years (15 years for research conducted outside the United States). Previously, businesses had the option of deducting these costs immediately as current expenses.

The TCJA also expanded the types of activities that are considered R&E for purposes of IRC Sec. 174. For example, software development costs are now considered R&E expenses subject to the amortization requirement.

Potential strategies

Businesses should consider the following strategies for minimizing the impact of these changes:

Analyze costs carefully to identify those that constitute R&E expenses and those that are properly characterized as other types of expenses (such as general business expenses under IRC Sec. 162) that continue to qualify for immediate deduction.
If cost-effective, move foreign research activities to the United States to take advantage of shorter amortization periods.
If cost-effective, purchase software that’s immediately deductible, rather than developing it in-house, which is now considered an amortizable R&E expense.
Revisit the R&E credit if you haven’t been taking advantage of it.

Recent IRS guidance

For 2022 tax returns, the IRS recently released guidance for taxpayers to change the treatment of R&E expenses (Revenue Procedure 2023-11). The guidance provides a way to obtain automatic consent under the tax code to change methods of accounting for specified research or experimental expenditures under Sec. 174, as amended by the TCJA. This is important because unless there’s an exception provided under tax law, a taxpayer must secure the consent of the IRS before changing a method of accounting for federal income tax purposes.

The recent revenue procedure also provides a transition rule for taxpayers who filed a tax return on or before January 17, 2023.

Planning ahead

We can advise you how to proceed. There have also been proposals in Congress that would eliminate the amortization requirements. However, so far, they’ve been unsuccessful. We’re monitoring legislative developments and can help adjust your tax strategies if there’s a change in the law.

The “investment opportunity” someone just pitched could be a legitimate way to get in on the ground floor of a soon-to-be profitable business. However, it could also be a pyramid, Ponzi or similar fraudulent multi-level marketing scheme. How can you tell the difference between a real investment and a scam?

Don’t get scammed

Pyramid schemes can be relatively straightforward, such as recruiting people to sell vitamins or cleaning supplies and recruiting family and friends to also sell the products. Or they can take the form of extremely complicated swindles that offer no actual product or service. But in general, both simple and complex schemes are sustained by constantly recruiting new participants.

One lucrative scam involved a Florida lawyer who sold fake legal settlement agreements to investors (including hedge fund managers and other sophisticated buyers). In classic pyramid scheme fashion, the fraudster used the money from new investors to pay off earlier investors, make political and charitable donations and, of course, fund his own expensive lifestyle.

Sometimes, such schemes are couched as “clubs” or “gift programs” and promoted through social networks, including by social media “friends.” Increasingly, they involve “sales opportunities” for online marketplaces. Whatever they’re called, they usually end the same way: When the pyramid collapses, only the founder walks away with any money. The previously mentioned Florida lawyer stole at least $1.2 billion before getting caught.

Ask for disclosures and details

To assist potential investors, the Federal Trade Commission (FTC) has established a Business Opportunity Rule. Among other things, the rule requires sellers to produce a disclosure document in the language in which the buyer and seller discuss the opportunity. Sellers also must:

Detail any earnings claims in a separate statement,
Disclose prior civil or criminal litigation involving claims of misrepresentation, fraud, securities law violations, or unfair or deceptive business practices,
Outline any cancellation or refund policy, and
Provide references nearest to the potential buyer’s location.

For more about the rule, visit ftc.gov and search for “Business Opportunity Rule.”

Complete a checklist

You can protect yourself by studying the disclosure document, earnings claim statement and proposed contract. Look for potential loopholes to close. For example, are start-up costs reasonable? Is the seller required to buy back inventory you’re unable to sell?

Also research the seller’s history and reputation online and check for complaints with the Better Business Bureau (although an absence of complaints doesn’t necessarily mean the seller is honest). And as with any business proposal, research the market for the business’s goods or services. Talk to current investors or participants and have legal and financial advisors review any documents you don’t understand — particularly the contract.

When a friend isn’t a friend

If anything doesn’t check out or if your advisors are wary of the opportunity, decline it — even if the person pitching it is a friend. After all, perpetrators of many of history’s biggest pyramid schemes targeted their family members, friends and business associates. Contact us for information and help evaluating investments.

The U.S. Supreme Court recently weighed in on an issue regarding a provision of the Bank Secrecy Act (BSA) that has split two federal courts of appeal. Its 5-4 ruling in Bittner v. U.S. is welcome news for U.S. residents who “non-willfully” violate the law’s requirements for the reporting of certain foreign bank and financial accounts on what’s generally known as an FBAR. The full name of an FBAR is the Financial Crimes Enforcement Network (FinCEN) Form 114, Report of Foreign Bank and Financial Accounts.

Reporting requirement

The BSA requires “U.S. persons” to annually file an FBAR to report all financial interests in, or signature or other authority over, financial accounts located outside the country (with certain exceptions) if the aggregate value of the accounts exceeds $10,000 at any time during the calendar year. The term “U.S. person” includes a citizen, resident, corporation, partnership, limited liability company, trust or estate.

According to related regulations, individuals with fewer than 25 accounts in a given year must provide details about each. Filers with 25 or more accounts aren’t required to list each or provide specific details; they need only provide the number of accounts and certain other basic information. FBARs generally are due on April 15, with an automatic extension to Oct. 15 if the April deadline isn’t met.

Under the BSA, a willful violation of the requirement is subject to a civil penalty up to the greater of $100,000 or 50% of the balance of the account at issue. A provision prescribes a penalty of up to $10,000 for a non-willful violation of the filing requirement (with an exception for reasonable cause). Criminal penalties also may be imposed.

Violations at issue

The case before the Supreme Court was brought by Alexandru Bittner, a dual citizen of Romania and the United States. He testified that he learned of the reporting obligations after returning to the United States in 2011. Bittner subsequently submitted the required annual reports for 2007 through 2011.

The IRS deemed his FBARs deficient because they didn’t include all of the relevant accounts. Bittner then filed corrected reports with information for each of his accounts. Although the IRS didn’t contest the accuracy of the new filings or find that his previous errors were willful, it determined the penalty was $2.72 million — $10,000 for each of 272 accounts reported in five FBARs.

Bittner went to court to contest the penalty, arguing that it applies on a per-report basis, not per account — so he owed only $50,000 in penalties for his non-willful violations. The district court agreed, but the Fifth Circuit Court of Appeals reversed the ruling, siding with the IRS. By contrast, the Ninth Circuit, in U.S. v. Boyd, found in 2021 that the BSA authorized “only one non-willful penalty when an untimely, but accurate, FBAR is filed, no matter the number of accounts.” That meant it was up to the Supreme Court to settle the issue.

High court’s ruling

The Supreme Court agreed with Bittner’s interpretation of the BSA’s penalty provision for FBAR violations. It cited multiple sources that supported this conclusion.

For example, the Court noted that Congress had explicitly authorized per-account penalties for some willful violations. When Congress includes particular language in one section of a statute but omits that language from another, it explained, the Court normally understands the difference in language as conveying a difference in meaning. In other words, Congress obviously knew how to tie penalties to account-level information if that was its intent.

The Court also highlighted various public guidance from the IRS, including instructions for earlier versions of the FBAR and an IRS fact sheet. These references, the Court said, suggested to the public that the failure to file a report represents a single violation that exposes a non-willful violator to a single $10,000 penalty. (Note: The Supreme Court emphasized that such guidance wasn’t “controlling” or decisive, but only informed its analysis.)

Implications for taxpayers

The Supreme Court’s ruling significantly reduces taxpayers’ potential financial exposure for non-willful violations of the FBAR reporting requirements. The reports typically list multiple accounts, meaning the IRS’s interpretation could have led to tens of thousands of dollars in penalties for a single violation.

As the Court also pointed out, an individual with only three accounts who made non-willful errors when providing account-specific details would face a potential penalty of $30,000, regardless of how slight the errors or the value of the accounts. But a person with 300 bank accounts would shoulder far less risk because he or she is required to disclose only the correct number of accounts, with no details. Similarly, a person with a $10 million balance in a single account who fails to report the account would be subject to a penalty of $10,000 — while someone who fails to report a dozen accounts with an aggregate balance of $10,001 would be subject to a penalty of $120,000.

It’s important to note that the Supreme Court’s ruling applies only to non-willful failures to file. The penalties for violations that are knowing, intentional, reckless or due to willful blindness aren’t subject to the per-report limit and may be assessed on a per-account basis, with costly ramifications.

Questions remain

The Supreme Court’s ruling in Bittner should bring relief to taxpayers who’ve non-willfully violated the BSA’s filing requirement, but it didn’t clear all uncertainty around FBAR penalties. For example, the Court didn’t address the mens rea (level of intent) on the part of the taxpayer that the IRS must establish to impose a non-willful penalty or whether penalties for violations of the BSA’s recordkeeping requirements are determined on a per-account basis. We can help you avoid these thorny questions by ensuring you properly comply with your FBAR obligations.

Are you concerned that some of your beneficiaries might squander their inheritances or simply aren’t equipped to handle the financial responsibilities that come with large sums of money? You don’t have to hold on to your assets until the day you die with the hope that your heirs will change their ways by that time. Instead, consider using a spendthrift trust that can provide protection, regardless of how long you live.

As with other trusts, a spendthrift trust may incorporate various tax benefits, but that’s not its primary focus. Indeed, this trust type can help you provide for an heir while protecting assets from his or her potentially imprudent actions.

Spendthrift trust in action

Generally, a spendthrift trust’s assets will consist of securities such as stocks, bonds and mutual funds, and possibly real estate and cash. The appointed trustee manages the assets.

The terms of the trust restrict the beneficiary’s ability to access funds in the account. Therefore, the beneficiary can’t invade the trust to indulge in a wild spending spree or sink money into a foolhardy business venture. Similarly, the trust assets can’t be reached by any of the beneficiary’s creditors.

Instead of having direct access to funds, the beneficiary usually receives payments from the trust on a regular basis or “as needed” based on the determination of the trustee. The trustee is guided by the terms of the trust and must adhere to fiduciary standards.

Be aware that the protection isn’t absolute. Once the beneficiary receives a cash payment, he or she has full control over that amount. The money can be spent without restriction.

Role of the trustee

Depending on the trust terms, the trustee may be responsible for making scheduled payments or have wide discretion as to whether funds should be paid, and how much and when. Designating the trustee is an important consideration, especially in situations where he or she will have broad control.

Although it’s not illegal to name yourself as trustee, this is generally not recommended. More often than not, the trustee will be an attorney, financial planner, investment advisor or someone else with the requisite experience and financial acumen. You should also name a successor trustee in the event the designated trustee dies before the end of the term or otherwise becomes incapable of handling the duties.

Other key considerations

There are several other critical aspects relating to crafting a spendthrift trust. For example, will the trustee be compensated and if so, how much? You must also establish how and when the trust should terminate. The trust could be set up for a term of years or termination may occur upon a specific event (such as a child reaching the age of majority).

Finally, try to anticipate other possibilities, such as enactment of tax law changes, that could affect a spendthrift trust. A word to the wise: This isn’t a do-it-yourself proposition. We’d be pleased to assist you when considering a spendthrift trust.

International Women’s Day (IWD) is, first and foremost, a day to celebrate the social, economic, cultural, and political achievements of women. It is also an important day to raise awareness, forge progress, educate and inspire communities, and highlight the significance of gender equity.

Here are some ways to mark the day – whether with friends, families, colleagues, or the global community.

Donate to female-focused charities: Donations can make a huge and long-lasting difference to the advancement of women and girls worldwide.
Reach out to a friend: Send a text, email, or hand-written note to each of your female friends to let them know what you admire about them and how much you appreciate them.
Spread the news: Share posts about IWD on social. Here are some ready-to-post resources direct from the IWD website.
Wear purple: Show your support by wearing purple, one of this year’s campaign colors, signifying justice and dignity.

Yeo & Yeo is incredibly proud of our family-friendly culture and ability to attract and retain women. Our workforce is more than 54% female, and the number of women in leadership positions exceeds 50%, well above the industry average in professional service firms. Today and every day, we thank our women for providing valuable insights that uplift our clients and communities.

We encourage you to take time to reflect on the achievements of the women in your life, and let’s continue to push for women’s leadership. Follow us on social as we celebrate our women that lead throughout the year, sharing their insights and stories.

Under tax law, businesses can generally deduct advertising and marketing expenses that help keep existing customers and bring in new ones. This valuable tax deduction can help businesses cut their taxes.

However, in order to be deductible, advertising and marketing expenses must be “ordinary and necessary.” As one taxpayer recently learned in U.S. Tax Court, not all expenses are eligible. An ordinary expense is one that’s common and accepted in the industry. And a necessary expense is one that’s helpful and appropriate for the business.

According to the IRS, here are some advertising expenses that are usually deductible:

Reasonable advertising expenses that are directly related to the business activities.
An expense for the cost of institutional or goodwill advertising to keep the business name before the public if it relates to a reasonable expectation to gain business in the future. For example, the cost of advertising that encourages people to contribute to the Red Cross or to participate in similar causes is usually deductible.
The cost of providing meals, entertainment, or recreational facilities to the public as a means of advertising or promoting goodwill in the community.

Facts of the recent case

An attorney deducted his car-racing expenses and claimed they were advertising for his personal injury law practice. He contended that his racing expenses, totaling over $303,000 for six tax years, were deductible as advertising because the car he raced was sponsored by his law firm.

The IRS denied the deductions and argued that the attorney’s car racing wasn’t an ordinary and necessary expense paid or incurred while carrying on his business of practicing law. The Tax Court agreed with the IRS.

When making an ordinary and necessary determination for an expense, most courts look to the taxpayer’s primary motive for incurring the expense and whether there’s a “proximate” relationship between the expense and the taxpayer’s occupation. In this case, the taxpayer’s car-racing expenses were neither necessary nor common for a law practice, so there was no “proximate” relationship between the expense and the taxpayer’s occupation. And, while the taxpayer said his primary motive for incurring the expense was to advertise his law business, he never raced in the state where his primary law practice was located and he never actually got any legal business from his car-racing activity.

The court noted that the car “sat in his garage” after he returned to the area where his law practice was located. The court added that even if the taxpayer raced in that area, “we would not find his expenses to be legitimate advertising expenses. His name and a decal for his law firm appeared in relatively small print” on his car.

This form of “signage,” the court stated, “is at the opposite end of the spectrum from (say) a billboard or a newspaper ad. Indeed, every driver’s name typically appeared on his or her racing car.” (TC Memo 2023-18)

Keep meticulous records

There are no deductions allowed for personal expenses or hobbies. But as explained above, you can deduct ordinary and necessary advertising and marketing expenses in a bona fide business. The key to protecting your deductions is to keep meticulous records to substantiate them. Contact us with questions about your situation.

At the very end of 2022, President Biden signed into law the Setting Every Community Up for Retirement Enhancement 2.0 Act (SECURE 2.0). Now that the year is well underway, small employers would be well-advised not to forget about a key feature of the law: marked improvements to the small employer pension plan start-up cost tax credit.

If your organization is a smaller one, and it’s reached a point where launching a qualified retirement plan for employees is feasible, this tax break may very well sweeten the deal.

Increased percentage for start-up costs

SECURE 2.0 increases the credit from 50% to 100% of eligible plan start-up costs for employers with up to 50 employees. Employers with 51 to 100 employees continue to be eligible for a credit of 50% of qualified plan start-up costs.

In either case, an existing annual cap based on the number of employees, with a maximum of $5,000, still applies. This portion of the credit is available for the first three tax years of the plan’s existence.

New credit for employer contributions

SECURE 2.0 also provides a credit amount for all or a portion of employer contributions to qualified plans for the first five employer tax years beginning with the one that includes the plan’s start date.

Specifically, the amount of the small employer pension plan start-up cost tax credit is increased by the “applicable percentage” of employer contributions on behalf of employees, up to a per-employee cap of $1,000. The applicable percentage is:

100% in the first and second tax years,
75% in the third year,
50% in the fourth year, and
25% in the fifth year.

No credit is available in the sixth and subsequent years.

It’s important to note that the applicable percentage is based on the date the plan was established, not when employees begin to participate in the plan. Also, the amount of the credit allowed for employer contributions is reduced for employers with 51 to 100 employees. The reduction is equal to 2% multiplied by the number of employees exceeding 50 multiplied by the amount of the credit.

No credit is allowed for contributions if the employer has more than 100 employees. In addition, no credit is allowed for employer contributions on behalf of an employee who makes more than $100,000. The $100,000 figure will be adjusted for inflation in multiples of $5,000 in tax years beginning after 2023. Other limitations under the Internal Revenue Code may apply.

Now may be the time

Essentially, SECURE 2.0 divides the small employer pension plan start-up cost tax credit into two separately calculated portions: 1) a qualified start-up cost portion available for the first three years of the plan’s existence, and 2) an employer-contribution portion available for its first five years. The revised rules apply to tax years beginning after December 31, 2022. If you’re interested in establishing a qualified retirement plan for employees, please contact us for further details on the credit and help choosing the right plan.

Once upon a time, life insurance played a much larger part in an estate plan than it does now. Why? Families would use life insurance payouts to pay estate taxes. But with the federal gift and estate tax exemption at $12.92 million for 2023, far fewer families currently are affected by estate tax.

However, life insurance remains a powerful tool for providing for your loved ones in the event of your untimely death. The amount of life insurance that’s right for you depends on your personal circumstances, so it’s critical to review your life insurance needs regularly in light of changing circumstances.

Reasons to reevaluate

Consider reevaluating your insurance coverage if you’re:

Getting married,
Getting divorced,
Having children,
Approaching retirement, or
Facing health issues.

The right amount of insurance depends on your family’s current and expected future income and expenses, as well as the amount of income your family would lose should you pass away.

The events listed above can change the equation, so it’s a good idea to revisit your life insurance needs as you reach these milestones. For example, if you get married and have kids, your current and future obligations are likely to increase significantly for expenses related to childcare, mortgage, car payments and college tuition.

As you get older, your expenses may go up or down, depending on your circumstances. For example, as your children become financially independent, they’ll no longer rely on you for financial support.

On the other hand, health care expenses for you and your spouse may increase. When you retire, you’ll no longer have a salary, but you may have new sources of income, such as retirement plans and Social Security. You may or may not have paid off your mortgage, student loans or other debts. And you may or may not have accumulated sufficient wealth to provide for your family.

Periodic reassessment a must

There are many factors that affect your need for life insurance, and these factors change over time. To make sure you’re not over- or underinsured, reassess your insurance needs periodically and especially when your life circumstances change. We can help you determine whether you have an adequate amount of life insurance coverage.

If you were told someone earns more than $200,000 annually, you might assume the person is a salaried employee who’s ineligible for overtime pay. However, as demonstrated in the recent U.S. Supreme Court case of Helix Energy Solutions Group, Inc. v. Hewitt, this isn’t always a safe assumption.

The FLSA rules

Under the Fair Labor Standards Act (FLSA), hourly “nonexempt” wage earners generally must receive overtime pay for hours worked beyond 40 hours per workweek. A workweek doesn’t need to be a calendar week — for example, a Wednesday to Tuesday workweek would qualify.

To be exempt from overtime (and minimum wage) regulations, most employees need to be paid at least $684 per week or $35,568 annually. This is known as the salary level test. An exempt employee must also pass the job duties test, the conditions for which vary by position. For instance, to qualify for the executive exemption, the job duties test stipulates that:

The employee’s primary duty must be managing the enterprise or a department or subdivision of the enterprise,
The employee must customarily and regularly direct the work of at least two or more other full-time employees or their equivalents, and
The employee must have the authority to hire or fire other employees, or the employee’s suggestions and recommendations as to the hiring, firing, advancement, promotion or any other employment status change must be given particular weight.

Case details

In the aforementioned Supreme Court case, the employee involved was a “tool-pusher” whose duties included supervising other offshore oil rig workers. He was paid a daily rate ranging from $963 to $1,341 per day, resulting in earnings of more than $200,000 annually. Under the compensation scheme, the daily rate increased each consecutive day worked.

The employee filed suit claiming his employer violated the FLSA’s overtime provisions. In response, the company argued that he was exempt from overtime pay as a “bona fide executive.”

To qualify for such an exemption, an employee must meet the salary level and job duties tests as mentioned above. But the employee also needs to satisfy the salary basis test. Under FLSA regulations, a bona fide executive may satisfy the salary basis test if the person is a highly compensated employee (HCE) — that is, one who earns at least $107,432 or more per year (or $100,000 per year before January 1, 2020).

The Court’s decision

The Supreme Court held in a 6-3 ruling that an HCE who’s paid at a daily rate is not considered to be paid a salary. Therefore, the employee in question wasn’t exempt from receiving overtime pay.

In its majority opinion, the Court reasoned that the HCE rule isn’t only a “simple income level” test for the purposes of exemption. It noted that the employer could have satisfied the exemption if the daily rate was a weekly guarantee that satisfied applicable regulations, or if compensation had been a straight weekly salary.

The Court wasn’t swayed by the company’s objection that paying a weekly guaranteed daily rate or straight weekly salary would have resulted in the employee receiving compensation for days he didn’t work. According to the Court, this only further showed that the employee wasn’t paid a salary and, thus, didn’t meet the requirements for the exemption from overtime pay.

Current and compliant

The business in this case joined many others that have been tripped up by the FLSA’s rules. If your company pays employees overtime, our firm can help you stay current and compliant with the latest applicable regulations.

Helix Energy Solutions Group, Inc. v. Hewitt, No. 21-984, February 22, 2023 (U.S. Supreme Court)

GASB Statement No. 96, Subscription-based Information Technology Arrangements, is effective for fiscal years beginning after June 15, 2022, and all reporting periods after that. This Statement is based on the standards established with Statement No. 87, Leases, and follows the same foundation, steps, and rules.

The Statement defines subscription-based information technology arrangements (SBITAs) and when such SBITAs should be recorded as right-to-use subscription assets and corresponding subscription liabilities. The Statement also covers which costs associated with the SBITAs are to be included in capitalization, and the disclosures required.

What is an SBITA?

An SBITA is a contract that conveys control of the right to use another party’s (an SBITA vendor’s) information technology (IT) software, alone or in combination with tangible capital assets (the underlying IT assets), as specified in the contract for a period of time in an exchange or exchange-like transaction.

The biggest challenge for organizations will be gathering and evaluating their SBITA population and ensuring completeness. We recommended that organizations review their SBITAs and collect the data necessary to assess if the changes to GASB 96 will apply to such contracts. The information that will be needed includes vendor, description, building/location, account (G/L), contract term (period of coverage), costs associated (may involve more than just subscription payments), and options to extend.

What to Do Now?

Get an overall understanding of GASB 96.
Work with your IT/Technology Directors to obtain a list of SBITAs.
Complete Yeo & Yeo’s SBITA spreadsheet (the template can be requested from your Yeo & Yeo auditor).
After the assessment of SBITAs that will be affected by the implementation of GASB 96:

Calculate journal entries.
Work with the auditor.

Our GASB 96 for School Districts brief provides more detailed information and guidance on Statement No. 96.

Contact Yeo & Yeo if you have questions about GASB 96.

Graphs, charts, tables and other data visualizations can be inserted in your financial statement disclosures to improve transparency and draw attention to key accomplishments. As your organization prepares its year-end or quarterly financials, consider presenting some information in a more user-friendly, visual format.

Reimagine data presentation

In business, the use of so-called “infographics” started with product marketing. By combining images with written text, these data visualizations can draw readers in and evoke emotion. They can breathe life into content that could otherwise be considered boring or dry.

Annual reports are traditionally lengthy and heavy with numbers and text. Some organizations are now using visual aids to disclose critical financial information to investors and other stakeholders. In this context, infographics help stakeholders digest complex information and retain key points.

Show, don’t just tell

Examples of formats that might be appropriate in financial reporting include:

Line graphs. These graphics can be used to show financial metrics, such as revenue and expenses over time. They can help identify trends, like seasonality and rates of growth (or decline), which can be used to interpret historical performance and project it into the future.

Bar graphs. Here, data is grouped into rectangular bars in lengths proportionate to the values they represent so data can be compared and contrasted. A company might use this type of graph to show revenue by product line or geographic region to determine what (or who) is selling the most.

Pie charts. These circular models show parts of a whole, dividing data into slices like a pizza. They might be used in financial reporting to show the composition of a company’s operating expenses to use in budgeting or cost-cutting projects.

Tables. This simple format presents key figures in a table with rows and columns. A table can be an effective way to summarize complex time-series data, for example. It can provide a quick reference for information that investors may want to refer to in the future, such as gross margin or EBITDA over the last five years.

Effective visualizations avoid “chart junk.” That is, unnecessary elements — such as excessive use of color, icons or text — that detract from the value of the data presentation. Ideally, each graphic should present one or two ideas, simply and concisely. The information also should be timely and relevant. Too many pictures can become just as overwhelming to a reader as too much text.

Other uses of visual aids

In addition to using infographics in financial statements, management may decide to create data visualizations for other financial purposes. For example, they could be given to lenders when applying for loans or to prospective buyers in M&A discussions. An infographic could also be used in-house to help the management team make strategic decisions.

Additionally, nonprofits often use infographics to create an emotional connection with donors. If effective, this outreach may encourage additional contributions for the nonprofit’s cause.

Bringing the numbers to life

By supplementing text and numeric presentations with visual elements, your organization can communicate more effectively with investors, lenders, donors and other stakeholders. Contact us to decide how visual aids can help you drive home key points and clarify complex matters.

With unemployment hitting record lows, many employers are struggling to fill key positions in their organizations. If you’re dealing with just such a problem, remember that hiring isn’t the only way to find skilled workers — there’s also outsourcing. And if it’s jobs in human resources (HR) that you’re having trouble filling, engaging a professional employer organization (PEO) could be a feasible solution.

Not a provider, a co-employer

Most PEOs market themselves as “co-employers.” That is, they partner with an employer to provide a broad slate of HR services rather than simply offering help with staffing or payroll.

By signing a contract with one, you won’t need to hire HR staff. The PEO will handle tasks such as recruiting and training, payroll management, benefits administration, and regulatory compliance. You may even be able to reduce the size of your HR department or redeploy those employees to more strategically focused duties.

PEOs offer other advantages as well. Overworked HR staffers might struggle to keep up with the ever-changing trends and regulations related to employment. The built-in expertise of a PEO can help ensure compliance and help prevent costly penalties.

Further, because PEOs typically work with multiple clients, the cost to engage one can be lower than hiring more HR employees. Partnering with a PEO enables an organization to focus on its core mission while it gains access to HR know-how, technology and administrative services.

For example, many PEOs can recommend best practices for functions such as onboarding new employees. And some provide an HR information system that allows your organization to use the latest technology to track recruiting, payroll and benefits data.

Finally, long-standing PEOs often have established relationships with multiple health insurers. This enables you to shop for a greater number of policies at more competitive rates than you might be able to obtain on your own. A good PEO can also educate employees about the benefits available to them, which tends to boost participation, morale and retention.

Not always the right move

To be clear, a PEO isn’t right for every employer. You’ll incur a substantial cost in engaging one and you’ll need to be prepared to manage the relationship. From a benefits perspective, some PEOs work with a limited number of health insurers whose policies might be no better than coverage you can find on your own.

It’s also possible that your in-house expertise isn’t that far off from a PEO’s. A little more training or continuing education could get your HR staff up to speed and negate the need for investing in outside help.

The contract is key

When you partner with a PEO, your organization and the PEO enter into a legal co-employment agreement. Typically, the employer remains responsible for strategic planning and business operations, while the PEO takes on specific HR-related services outlined in the contract.

It’s important to thoroughly understand the co-employment agreement. Often, the employer engaging the PEO continues to pay employment taxes and file tax returns. Under some agreements, however, these responsibilities shift to the PEO. Assess the contract carefully with your leadership team and ask an attorney to review it.

Far from easy

Partnering with a PEO may be a way to sidestep today’s tight job market. But deciding whether to do so is far from easy. Our firm can help you assess the feasibility of such an arrangement, including forecasting the costs involved.

If you made gifts last year you may be wondering if you need to file a gift tax return. The short answer: There are many situations when it’s necessary (or desirable) to file Form 709 — “United States Gift (and Generation-Skipping Transfer) Tax Return” — even if you’re not liable for any gift tax. Let’s take a closer look at the reasons why.

What gifts are considered nontaxable?

The federal gift tax regime begins with the assumption that all transfers of property by gifts (including below-market sales or loans) are taxable. It then sets forth several exceptions. Nontaxable transfers that need not be reported on Form 709 include:

Gifts of present interests within the annual exclusion amount ($17,000 per donee in 2023, up from $16,000 in 2022),
Direct payments of qualifying medical or educational expenses on behalf of an individual,
Gifts to political organizations and certain tax-exempt organizations,
Deductible charitable gifts,
Gifts to one’s U.S.-citizen spouse, either outright or to a trust that meets certain requirements, and
Gifts to one’s noncitizen spouse within a special annual exclusion amount ($175,000 in 2023, up from $164,000 in 2022).

If all your gifts for the year fall into these categories, no gift tax return is required. But gifts that don’t meet these requirements are generally considered taxable — and must be reported on Form 709 — even if they’re shielded from tax by the federal gift and estate tax exemption ($12.92 million in 2023, up from $12.06 million in 2022).

Are there tax traps to be aware of?

If you make gifts during the year, consider whether you’re required to file Form 709. And watch out for these common traps:

Future interests. The $17,000 annual exclusion applies only to present interests, such as outright gifts. Gifts of future interests, such as transfers to a trust for a donee’s benefit, aren’t covered, so you’re required to report them on Form 709 even if they’re less than $17,000 in 2023 ($16,000 in 2022).

Spousal gifts. As previously noted, gifts to a U.S.-citizen spouse need not be reported on Form 709. However, if you make a gift to a trust for your spouse’s benefit, the trust must 1) provide that your spouse is entitled to all the trust’s income for life, payable at least annually, 2) give your spouse a general power of appointment over its assets and 3) not be subject to any other person’s power of appointment. Otherwise, the gift must be reported.

Gift splitting. Spouses may elect to split a gift to a child or other donee, so that each spouse is deemed to have made one-half of the gift, even if one spouse wrote the check. This allows married couples to combine their annual exclusions and give up to $34,000 for 2023 (up from $32,000 for 2022) to each donee. To make the election, the donor spouse must file Form 709, and the other spouse must sign a consent or, in some cases, file a separate gift tax return. Keep in mind that, once you make this election, you and your spouse must split all gifts to third parties during the year.

The deadline to file Form 709 for 2022 is April 18. Please contact us if you’re unsure of whether you need to file a gift tax return this year.

Many people began working from home during the COVID-19 pandemic — and many still work from their home offices either all the time or on a hybrid basis. If you’re self-employed and run your business from home or perform certain functions there, you might be able to claim deductions for home office expenses against your business income. There are two methods for claiming this tax break: the actual expense method and the simplified method.

How to qualify

In general, you qualify for home office deductions if part of your home is used “regularly and exclusively” as your principal place of business.

If your home isn’t your principal place of business, you may still be able to deduct home office expenses if:

You physically meet with patients, clients or customers on your premises, or
You use a storage area in your home (or a separate free-standing structure, such as a garage) exclusively and regularly for business.

Expenses you can deduct

Many eligible taxpayers deduct actual expenses when they claim home office deductions. Deductible home office expenses may include:

Direct expenses, such as the cost of painting and carpeting a room used exclusively for business,
A proportionate share of indirect expenses, including mortgage interest, rent, property taxes, utilities, repairs and insurance, and
Depreciation.

But keeping track of actual expenses can take time and it requires organized recordkeeping.

The simpler method

Fortunately, there’s a simplified method: You can deduct $5 for each square foot of home office space, up to a maximum of $1,500.

The cap can make the simplified method less valuable for larger home office spaces. Even for small spaces, taxpayers may qualify for bigger deductions using the actual expense method. So, tracking your actual expenses can be worth it.

Changing methods

When claiming home office deductions, you’re not stuck with a particular method. For instance, you might choose the actual expense method on your 2022 return, use the simplified method when you file your 2023 return next year and then switch back to the actual expense method for 2024. The choice is yours.

What if I sell the home?

If you sell — at a profit — a home on which you claimed home office deductions, there may be tax implications. We can explain them to you.

Also be aware that the amount of your home office deductions is subject to limitations based on the income attributable to your use of the office. Other rules and limitations may apply. But any home office expenses that can’t be deducted because of these limitations can be carried over and deducted in later years.

Different rules for employees

Unfortunately, the Tax Cuts and Jobs Act suspended the business use of home office deductions from 2018 through 2025 for employees. Those who receive paychecks or Form W-2s aren’t eligible for deductions, even if they’re currently working from home because their employers closed their offices due to COVID-19.

We can help you determine if you’re eligible for home office deductions and how to proceed in your situation.

Yeo & Yeo CPAs & Advisors is pleased to announce that Christopher M. Sheridan, CPA, CVA, will lead the firm’s Business Valuation and Litigation Support Services Group.

Yeo & Yeo’s Business Valuation and Litigation Support Group offers business valuation and forensic accounting, including complex litigation assignments, to businesses, law firms, receivers, trustees, financial institutions, and individuals.

“Chris is a trusted leader in the business valuation and litigation support industry. He has big-picture thinking and years of advisory experience,” said John W. Haag Sr., CPA/ABV, CVA, CFF, Managing Principal of the firm’s Midland office. “He has made a big impact by continually improving our processes and providing our clients with excellent valuation services.”

Sheridan is a senior manager and a member of the Consulting Service Line and Manufacturing Services Group. His areas of expertise include business valuation and litigation support, expert witness testimony, business consulting, and fraud investigation and prevention. As a Certified Valuation Analyst (CVA), Sheridan provides defensible, objective business valuation services for attorneys and business owners. He is a National Association of Certified Valuators and Analysts / Consultants Training Institute “40 Under Forty” honoree.

Sheridan is a member of the National Association of Certified Valuators and Analysts, the American Institute of Certified Public Accountants, the Michigan Association of Certified Public Accountants’ Manufacturing Task Force, and the Michigan Manufacturers Association. In the community, he serves as a board member for the Great Lakes Bay Economic Club and Bay Future.

“My goal is to continue to expand and build upon the services the group offers and continue to build the trust and confidence of our expertise in the industry,” Sheridan said. “John Haag has provided great mentorship and remains a crucial part of our continued growth. He will continue to serve our clients and communities with his specialized expertise.”

After your manufacturing company’s 2022 tax return has been filed, you can focus your efforts on reducing its 2023 tax liability. What are the top tax-saving opportunities available to manufacturers this year? Here are seven prime candidates available for many companies:

1. Section 179 deduction. The Sec. 179 “expensing” deduction continues to be a mainstay for manufacturers. Under the deduction, a manufacturer can expense, or currently deduct, the cost of qualified new or used business property placed in service during the year, up to an annual inflation-adjusted limit.

Qualified property includes business property with a cost recovery period of 20 years or less. For 2023, the limit is $1.16 million (up from $1.08 million for 2022).

However, the deduction can’t exceed the amount of business income for the year. Furthermore, the deduction is phased out dollar-for-dollar for amounts above an annual threshold. The threshold for 2023 is $2.89 million (up from $2.7 million for 2022).

2. First-year bonus depreciation. If the Sec. 179 deduction doesn’t cover all business property acquired in 2023, first-year bonus depreciation can be a valuable supplement. For 2023, the Tax Cuts and Jobs Act (TCJA) authorizes an 80% first-year bonus depreciation (down from 100% for 2022) for qualified property placed in service during the year. The property can be new or used. The percentage will drop to 60% for 2024 and another 20 percentage points per year through 2026. After 2026, no bonus depreciation will be allowed unless Congress revisits this issue. Accordingly, a manufacturer may want to accelerate property acquisitions into 2023 to take maximum advantage of the bonus depreciation deduction. Keep in mind that, for you to claim the deduction, the property also must be placed in service during the tax year.

Bonus depreciation generally is applied after the Sec. 179 deduction is claimed. If any amount remains, it’s subject to the regular cost recovery rules.

3. Research credit. Often referred to as the research and development or research and experimentation credit, your manufacturing company may be eligible to claim it for qualified expenses. Generally, the credit equals 20% of qualified research expenses for the year over a base amount.

For these purposes, the base amount is a fixed-base percentage (not to exceed 16%) of average annual receipts for the prior four years. It can’t be less than 50% of the annual qualified research expenses. Alternatively, a company can use a simplified 14% credit.

4. Retirement plans. The SECURE 2.0 Act, enacted at the tail end of 2022, makes sweeping changes for retirement accounts, with varying effective dates. For instance, the law:

Increases the age to begin taking required minimum distributions (RMDs) to 73 beginning January 1, 2023, and boosts it to 75 on January 1, 2033,
Eases the penalties for failing to take full RMDs, reducing the 50% excise (or penalty) tax to 25%,
Increases the annual limit for catch-up contributions,
Requires 401(k) plan catch-up contributions to be made to Roth accounts,
Provides for automatic enrollment in new plans, except for certain small companies,
Expands the eligibility for part-time workers,
Creates emergency savings accounts linked to retirement plans,
Allows penalty-free withdrawals for certain emergencies,
Enhances the tax credit for starting up a retirement plan, and
Replaces the retirement saver’s credit with a matching government contribution.

Again, the effective dates for these provisions vary. Contact us for more details.

5. Qualified business income deduction. A manufacturer operating as a pass-through entity — such as a partnership, S corporation or limited liability company — or as a sole proprietorship can benefit from the qualified business income (QBI) deduction.

The maximum deduction is equal to 20% of QBI (essentially, your net profit from the business). Notably, the QBI deduction is subject to a phase-out, based on your income. For 2023, the threshold is $182,100 for single filers and $364,200 for joint filers, up from $170,050 and $341,000, respectively, for 2022.

6. Form of business ownership. Depending on several variables, a switch in your company’s form of business entity may be warranted. For instance:

A C corporation can change to S corporation status to avoid double taxation and benefit from the QBI deduction (see above).
A sole proprietor can use a pass-through entity to save on self-employment tax.
An S corporation may revoke its status so that it can pay tax at the lower C corporation rate of 21%.

Note that changing your business’s entity may be treated as a taxable event.

7. Accounting methods. Manufacturers can save tax through astute choices relating to accounting methods. For example, it may make sense for your company to switch to the last in, first out (LIFO) method of accounting for inventory. Switching to LIFO can be beneficial when costs are rising due to inflation. LIFO may result in bigger deductions for the company as inventory prices increase.

Similarly, under the TCJA, your company may use the simplified cash method of accounting if receipts don’t exceed $25 million, indexed for inflation, for the past three tax years. The threshold is $29 million for the three years ending prior to 2023. This method may provide greater flexibility at the end of the year.

These are just seven tax-saving opportunities available to manufacturers in 2023. Contact us to discuss which strategies are right for your company.

Even though it may not be top of mind when you’re developing or revising your estate plan, it’s important to consider how bequeathing assets to your family might affect them. Why? Because when your heirs receive their inheritance, it becomes part of their own taxable estates. Giving a loved one permission to create an inheritor’s trust can help avoid this outcome.

The trust in action

In a nutshell, an inheritor’s trust allows your loved one to receive the inheritance in trust, rather than as an outright gift or bequest. Thus, the assets are kept out of his or her own taxable estate. Having assets pass directly to a trust benefiting an heir not only protects the assets from being included in the heir’s taxable estate, but also shields them from other creditor claims, such as those arising from a lawsuit or a divorce.

Because the trust, rather than your family member, legally owns the inheritance, and because the trust isn’t funded by the heir, the inheritance is protected. The reason is because everything you gift or bequeath to the trust (including growth and income from the trust) is owned by the trust, and therefore can’t be treated as community property. An inheritor’s trust can’t replace a prenuptial or postnuptial agreement, but it can provide a significant level of asset protection in the event of divorce.

With an inheritor’s trust, your heir can also realize wealth building opportunities. If you fund an inheritor’s trust before you die, your loved one can use a portion of the money to, for example, start a new business. A prefunded inheritor’s trust can also own the general partnership interest in a limited partnership or the voting interest in a limited liability company or corporation. If you decide to fund the trust now, your initial gift to the trust can be as little or as much as you like.

Talk to your heirs first

As you draft or revise your estate plan and consider who to pass your assets to, it’s a good idea to talk to family members first. Determine if they would accept the bequests and then inform them of their option of creating an inheritor’s trust. Turn to us to help determine whether an inheritor’s trust is right for your situation.

The 2022 mid-term election has shifted the scales in Washington, D.C., with the Democrats no longer controlling both houses of Congress. While it remains to be seen if — and when — any tax-related legislation can muster the requisite bipartisan support, a review of certain provisions in existing laws may provide an indication of the many areas ripe for action in the next two years.

Retirement catch-ups at risk

The SECURE 2.0 Act, enacted at the tail end of 2022, reportedly includes a technical drafting error that jeopardizes the abilities of taxpayers to make catch-up contributions to their pre-tax or Roth retirement accounts. According to the American Association of Pension Professionals and Actuaries, under the existing statutory language, no participants will be able to make such contributions beginning in 2024.

The American Retirement Association has brought the issue to the attention of the U.S. Department of Treasury and the Joint Committee on Taxation (JCT), a nonpartisan congressional committee that assists with federal tax legislation. While the JCT has apparently acknowledged that the language does appear to be a drafting error, a timely correction is far from guaranteed.

Indeed, such “technical corrections” legislation once passed Congress routinely. However, it has proven more challenging in the political climate of the last decade or so. For example, it took three years for Congress to pass minor corrections to the first SECURE Act. And a glitch in the Tax Cuts and Jobs Act of 2017 (TCJA) affecting eligibility for bonus depreciation wasn’t corrected until the CARES Act became law in 2020.

Expiring tax provisions

Tax-related legislation often includes so-called “sunset” dates — the dates tax provisions will expire, absent congressional action. For example, the Consolidated Appropriations Act, enacted in 2021, boosted the allowable deduction for business meals from 50% to 100% for 2021 and 2022. In 2023, the deduction limit returned to 50%.

A JCT report released in January 2023 highlights numerous significant provisions that are scheduled to expire in coming years without congressional action to extend them. For example, several tax credits related to renewable and alternative energy will expire at the end of 2024.

But 2026 is the year when some of the most wide-reaching and particularly valuable provisions — many of them created or modified by the TCJA — are set to disappear. They include:

Lower individual tax rates,
Enhancements to the Child Tax Credit (CTC),
Health insurance premium tax credit enhancements,
The New Markets Tax Credit,
The employer credit for paid family and medical leave,
The Work Opportunity Tax Credit,
The increase in the exemption amount and phaseout threshold for the alternative minimum tax,
The increase in the standard deduction,
The suspension of the miscellaneous itemized deduction,
The suspension of the limit on itemized deductions,
The income exclusion for employer payments of student loans,
The suspension of the deduction for personal exemptions,
The limit on the deduction for qualified residence interest,
The suspension of the deduction for home equity interest,
The limit on the deduction for state and local taxes,
The qualified business income deduction,
The deduction percentages for foreign-derived intangible income and global intangible low-taxed income,
Empowerment zone tax incentives, and
The increase in the federal gift and estate tax exemption.

At the end of 2026, bonus depreciation also is slated for elimination. In fact, the allowable deduction already has dropped from 100% to 80% of the cost of qualified assets in 2023. The limit will drop by 20% each year until vanishing in 2027.

Expired tax provisions

Several notable provisions expired or changed at the end of 2021, despite chatter in Washington about the possibility of extensions. For example, as of 2022, taxpayers can no longer deduct Section 174 research and experimentation expenses, including software development costs, in the year incurred. Rather, they must amortize these expenses over five years (or 15 years if incurred outside of the United States). In addition, the calculation of adjusted taxable income for purposes of the limit on the business interest deduction has changed, potentially reducing the allowable deduction for some taxpayers.

Individuals also saw the end of several tax provisions at the end of 2021, including the:

CTC expansions created by the American Rescue Plan for some taxpayers,
Expanded child and dependent care credit,
Increased income exclusion for employer-provided dependent care assistance,
Treatment of mortgage insurance premiums as deductible mortgage interest,
Charitable contribution deduction for non-itemizers, and
Increased percentage limits for charitable contributions of cash.

It’s possible that some of these could be included in any “extender” legislation Congress might consider this year or next.

The FairTax Act

Unlikely to see much progress, however, is the proposed FairTax Act. Although it has the support of a group of U.S. House Republicans, GOP House Speaker Kevin McCarthy has stated that he doesn’t support the legislation.

The bill would eliminate most federal taxes — including individual and corporate income, capital gains, payroll and estate taxes — as well as the IRS. It would replace the taxes with a 23% federal sales tax on goods and services, which couldn’t be offset by deductions or tax credits. The plan has been around for two decades and has yet to garner a floor vote, an indicator of its odds this time around — especially with Democrats in control of the U.S. Senate.

Ear to the ground

Congress may not feel a sense of urgency to address tax provisions that aren’t set to expire for three years, but the catch-up contribution error would have substantial repercussions for many taxpayers in less than a year. We’ll let you know if lawmakers take action on this or any other important tax matters that could affect you.