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If you think that education credits are just for sending your children to college, think again—the credits are available to you, your spouse (if you are married), and your dependents. Even if you or your spouse is only attending school part time, you still may qualify for a tax credit.

There are two education-related credits available: the American Opportunity Tax Credit (AOTC) and the Lifetime Learning Credit (LLC). For either credit, the student must be enrolled in an eligible educational institution for at least one academic period (semester, trimester, or quarter) during the year. An eligible educational institution is any accredited public, nonprofit, or proprietary postsecondary institution that can participate in the U.S. Department of Education’s student aid programs.

The credits phase out for higher-income taxpayers who are married filing jointly or who are unmarried. Those who are married filing separately do not qualify for either credit.

The following table provides the qualifications and details for both credits:

*Generally, credits are nonrefundable, meaning that they can only be used to offset your tax liability; any amount exceeding your current-year tax liability is lost. However, unlike other credits, the AOTC is partially refundable in most cases.

Many individuals who both work and attend school can be enrolled less than half-time and still qualify for the LLC.

Another interesting twist to education credits is that the taxpayer who qualifies for and claims the student’s exemption for the year gets the credit—even if someone else pays the expenses.
Thus, for example, even if a noncustodial parent pays a child’s college expenses, the custodial parent gets the credit if he or she is otherwise qualified. The same applies when grandparents help pay for their grandchild’s education: the grandparents do not qualify for the credit unless they, and not the child’s parents, claim the student as a dependent.

Generally, the educational institution sends a Form 1098-T to the taxpayer (or dependent). This includes the information necessary to complete the IRS form and claim the credit. Sometimes the 1098-T needs to be retrieved online from the educational institution. The law requires the taxpayer to have this 1098-T in hand to claim either of the credits, but credit can be claimed for other qualified expenses.

The qualifying expenses for the AOTC and LLC differ in many cases. See the table below for which expenses qualify for the credits.

If you have questions about how these education tax credit provisions apply to you or if you are missing out on credit, please give our office a call.

One of the most important things to understand about being a startup entrepreneur is that there is no “one size fits all” approach to what you’re doing. Everyone’s path is different, and you need to find out your own if you want to have any reasonable chance for long-term success.

Having said that, there are a number of qualities that successful startups share — and there are a plethora of best practices that you can and should use to your advantage. Again — nobody can tell you exactly what to do as there is no road map. But by keeping a few critical things in mind, you can increase the chances that your startup will stand the test of time exponentially.

Launching Your Startup the Right Way: An Overview

By far, one of the most important tips that you can use to get your startup off the ground has to do with practicing patience whenever possible. Rome wasn’t built in a day, and your successful business won’t be, either.

Yes, there are times when progress will move slower than you’d like. You may set a timeframe for yourself to hit certain milestones, and there will be situations where you’ll miss them.

Sometimes, they’re because of mistakes you’ve made along the way, while other times they’ll be due to factors that are totally outside your control. But while the arc of progress may be slow, it’s also nothing if not stable — meaning that if you just remain patient and stay the course, you will soon get the results that you’re after.

Another critical tip that can help with your startup efforts involves spending that initial capital not just slowly, but wisely. Many of the entrepreneurs who run into issues try to “spend their way to the top,” as it were. Similar to the point about patience outlined above, they just want to hit each milestone as quickly as they possibly can. Soon, they begin to get careless — almost greedy. They lose sight of the things that really matter and believe too much in the old saying that “you have to spend money to make money.”

Instead, what you should really be doing is investing every dollar available to you into short-term returns. That way, as you begin to generate more income, you can funnel that money back into the business in those areas where it will do the most good. This helps avoid major cashflow issues (another significant pain point for many startups), and it also allows you to grow at a steady and stable rate as well.

But while growth is certainly important, also remember that sometimes you need to focus your actions on the tasks that don’t scale, too. If you’re a software development company, for example, sometimes, you have to spend time writing code with which you’re not necessarily 100% satisfied to get features to customers not in months or weeks, but in days. You can always go back and fix those issues later — never lose sight of the fact that the number one priority involves making sure that your product is always moving along the path you’ve set out for yourself.

Finally, one of the best ways to make sure that your startup gets off on the right foot involves freeing yourself of the idea that outsourcing is somehow beneath you. You’re an entrepreneur, yes. That “can-do” spirit is a large part of what allowed you to enjoy so much success up to this point. But that doesn’t mean that you’re an expert in everything, and outsourcing can be an ideal way to help fill those gaps in your skillset that currently exist.

If accounting isn’t your strong point, for example, don’t assume that you can “learn on the fly.”

The stakes are too high to get that one wrong.

In that situation, outsourcing is far more efficient — not to mention more cost-effective — than building an expensive in-house team.

If nothing else, outsourcing also frees up your valuable time so that you can devote the maximum amount of your attention where it belongs — on your business. That in and of itself may be the most important benefit of all.

If you’d like to find out about even more tips that you can use to effectively get your startup off the ground so that you can make the best possible first impression, or if you’d like to get answers to any additional questions you may have in a bit more detail, please don’t delay — contact our office today.

If you employ household workers — which may include nannies, babysitters, housekeepers, cooks, gardeners, health care workers and other employees — it’s important to understand your tax obligations, commonly referred to as “nanny taxes.” Here’s a quick review.

Which workers are covered?

Simply working in your home doesn’t necessarily make a worker a household employee. You’re not required to withhold or pay taxes for independent contractors — such as occasional babysitters who work for many different families.

But the rules for distinguishing between employees (who trigger nanny tax obligations) and independent contractors (who don’t) are complicated, So be sure to consult your tax advisor if you’re uncertain.

Which taxes must you pay?

Your nanny tax obligations vary depending on the type of tax:

Income tax. You’re not required to withhold federal income taxes (or, usually, state income taxes) from a household employee’s pay, unless the employee asks you to and you agree. In that case, you’ll need to have the employee complete Form W-4 and you’ll need to withhold income taxes on both cash and noncash wages (other than certain meals and lodging).

FICA taxes. You must withhold and pay FICA taxes (Social Security and Medicare) if your household employee’s cash wages reach a specified threshold ($2,300 for 2021). If you meet the threshold, you must pay the employer’s share of Social Security taxes (6.2%) and Medicare taxes (1.45%) on the employee’s cash wages (but not on meals, lodging or other noncash wages). In addition, you’re responsible for withholding the employee’s share of these taxes (also 6.2% and 1.45%, respectively), although you may opt to pay the employee’s share rather than withholding it.

Note: There’s no FICA tax liability for wages you pay to certain family members or to household employees under the age of 18 if working for you isn’t their principal occupation. A student who babysits on the side would be one example.

Unemployment taxes. You must pay federal unemployment tax (FUTA) if you pay total cash wages to household employees (other than certain family members) of $1,000 or more in any quarter in the current or preceding calendar year. The tax applies to the first $7,000 of an employee’s cash wages at a 6% rate, although credits reduce that rate to 0.6% in most cases.

How are taxes reported and paid?

Unlike businesses, you generally don’t need to file quarterly employment tax returns for household employees. Rather, you report household employment taxes on Schedule H of your personal income tax return. However, if you own a business as a sole proprietor, you may add the taxes for household employees to the deposits or payments you make for your business employees and include household employees on Forms 940 and 941.

Even if you report household employment taxes on Schedule H, you’re still responsible for paying the tax throughout the year, either through quarterly estimated tax payments or by increasing withholdings from your wages. Otherwise, you’ll have to pay the tax when you file your return and be subjected to penalties for underpayment of estimated tax.

You’ll also need to file Form W-2 if you’re required to withhold FICA taxes or agree to withhold income taxes for a household employee.

Know your obligations as an employer

In addition to the tax requirements discussed above, there may be other obligations that come with being an employer. These may include complying with minimum wage and overtime requirements, and documenting immigration status. Turn to your tax advisor for more information.

© 2021

Based upon a recent McKinsey Global Survey, nearly 9 in 10 (87 percent) of respondents management level and above affirmed they are currently dealing with a skills gap among their employees or expect to be within the next five years. With the vast majority of businesses experiencing or forecasting a skills-gap, how can they close or reduce this challenge?

Due to the so-called “Fourth Industrial Revolution,” as the World Economic Forum (WEF) explains, the best scenario it sees is 54 percent of workers requiring “reskilling and upskilling by 2022.” However, the WEF points out that 3 in 10 workers susceptible to occupation disruption due to advancements in applied science obtained additional training in 2018.

It’s important to clarify the differences between re-skilling and up-skilling. Re-skilling is where workers who are displaced by industries becoming obsolete, such as coal miners, are forced to retrain for a new career, such as coding, teaching, etc. Up-skilling, in contrast, involves building and staying current in one’s field – a programmer learning the newest programming language or a marketing manager learning the latest search engine optimization (SEO) techniques.

Carve Out Skill-Improvement Time Blocks

Even for companies that strive to provide their employees with flexible time for a work-life balance, it doesn’t always guarantee companies foster a culture of self-improvement and upskilling. When personal, professional, and/or global crises occur, there’s not always time for employees to learn new computer programs or the latest programming language. However, by providing employees with a few hours a week dedicated to professional development, businesses give employees the opportunity to up-skill, leading to more satisfied employees, along with limited strain on the budget.

Arrange Worker-Guided Study Groups

When it comes to learning a new skill, according to Degreed via Harvard Business Review (HBR), workers will go to their peers 55 percent of the time, second only to reaching out to their supervisor for guidance, when looking to up-skill.

Few businesses are known to have developed a system for peer-to-peer learning in the workplace. According to McKinsey, “Learning & Development officers” reported businesses letting their employees put their skills into practice to develop additional skills, along with holding academic-type instruction and “experiential learning” for developing role competency. When it comes to structured peer-to-peer learning, fewer than 50 percent of businesses have anything established. Thirty-three percent of those surveyed responded that there’s no system established to facilitate skills development opportunities between co-workers.

From HBR’s “The Expertise Economy,” one reason that peer-to-peer learning is not the first choice for employee learning is due to a common belief that those who are proficient at a particular skill often exist outside the organization, such as a paid training consultant. This belief is reinforced due to external educational experiences normally condensed into a single session, compared to smaller and more frequent in-house sessions.

HBR argues that peer-to-peer learning leverages the business’ internal expertise more effectively. If more experienced employees share their expertise with less seasoned co-workers to increase their skills, it can be very productive. In fact, HBR lays out a four-point plan for peer-to-peer learning to maximize employee up-skilling.

By using HBR’s “Learning Loop,” businesses can help employees learn new skills and knowledge through four steps:

1. Employees obtain new information.
2. After assimilating the new information, they practice implementing the new information.
3. After it’s been applied, they obtain feedback on the application.
4. The employee then reflects on what has been learned to further assimilate the new information.

While this program must be tailored to every organization, it shows that by taking a personal approach to up-skilling employees and building on their existing knowledge and skill sets, peer-to-peer learning can be one effective approach to helping employers and their employees close the skills gap.

Sources

https://www.weforum.org/agenda/2019/04/skills-jobs-investing-in-people-inclusive-growth/

https://www.mckinsey.com/~/media/McKinsey/Business%20Functions/Organization/Our%20Insights/Beyond%20hiring%20How%20companies%20are%20reskilling%20to%20address%20talent%20gaps/Beyond-hiring-How-companies-are-reskilling.ashx

https://hbr.org/2018/11/how-to-help-your-employees-learn-from-each-other

Today, 70 percent of college students graduate with an average of $30,000 in student loan debt. The average payment is nearly $400 a month and will take about 20 years to pay off. On an individual level, paying off high debt can delay hopes of saving to buy a house, start a family, launch a business, or invest for retirement.

On a broader level, the national burden of student debt could impact America’s economic future. When young adults are unable to afford home ownership, that reduces spending on all types of consumer products that accompany home buying. It also reduces property taxes used to support local resources and reduces the insurance pool of property owners used to help repair and rebuild homes after extreme weather crises.

Whether you’re a graduate or the relative of a graduate in this situation, it’s worth considering various strategies to help pay off this debt. After all, it may be better – for both your offspring and the country’s GDP – to help them out financially right now rather than later via a larger inheritance.

High Interest and Consolidation Considerations

The strategic way to approach student debt is to focus on paying off high-interest loans first. This generally includes private loans and any others with variable interest rates that may increase over time. Be aware that with federal student loans there are different types, and the borrower is permitted to switch to a different payment plan that better suits his needs over time. Another option is to consolidate student loans. However, if sometime in the future federal student loans are forgiven, your student could miss out on that by having transferred or consolidated to a privately held loan.

Employer Assistance Programs

In recognition of student loan debt as both a personnel and national concern, many employers are starting to offer repayment assistance programs – even to parents paying off parent student loans. It’s important to inquire whether or not an employer offers this benefit, as they are not always promoted, especially to current workers. However, these programs have become more appealing to companies since passage of the CARES Act, which extended pre-tax employer-provided educational assistance for up to $5,250 per employee, per year through 2025.

Another program that some companies have introduced is one that allows employees to convert the cash value of unused paid-time-off (PTO) toward their student loan payments. In other words, if a worker is not able to use all his accrued paid vacation days in a given year, he can request the employer contribute that income toward his student loan debt.

College Savings Plans

Each state sponsors a Section 529 college savings and investment plan, which feature tax-deferred growth and tax-free withdrawals when used to pay for qualified education expenses.

In 2019, as part of the Setting Every Community Up for Retirement Enhancement (SECURE) Act, Congress created a provision that permits up to $10,000 (a lifetime cap, per each beneficiary) from 529 College Savings Plans to be used to repay student loans. For example, if a family has three college students, the parents may withdraw up to $30,000 from their 529 account(s) to help pay off that debt. Note that a 529 account owner can change the 529 plan beneficiary at any time without tax consequences.

Be aware, however, if 529 college funds are used to make principal and interest payments on a qualified student loan, that student loan interest cannot be claimed as a deduction on the student’s tax return.

Video conferencing in and of itself is certainly nothing new. It’s been around in some form or another for decades — businesses used it for remote meetings in the 1990s, and personal users have been “Skyping” with friends and family members since high-speed Internet connections found their way into just about every home. But at the same time, certain organizations have become virtually synonymous with the trend in much the same way that “Google it” became shorthand for “search for something online” all those years ago.

Zoom Video Communications is one such company.

Originally launched in 2013 by a former Cisco engineer and executive named Eric Yuan, Zoom has enjoyed an almost unprecedented level of growth over the last two years, thanks in large part to the still-ongoing COVID-19 pandemic. In March 2020 as the Coronavirus began to make its way around the world, people were sent to work from home indefinitely during lockdowns. Of course, they still needed a way to communicate and collaborate with one another. They had to suddenly figure out how to be just as productive at home as they could be in the office.

For many, Zoom became that solution.

Charting the Rise of Zoom

From just about every angle, it’s clear that COVID-19 has contributed enormously to Zoom’s current success.

In January of 2020, for example, it was estimated that the service saw approximately 56,000 daily downloads. By February, that number had already climbed to 1.7 million. Just a month later, when the worldwide lockdowns and other social distancing restrictions began, it had risen again to 2.13 million — a trend that shows no signs of slowing down anytime soon.

Likewise, the platform has also seen a dramatic surge in the number of people participating in meetings every day. After all, Zoom is a free download from both the service’s website and in various app stores — downloads don’t amount to much if people aren’t actively using the software.

Thankfully for Zoom, they are. In December of 2019, there were approximately 10 million daily meeting participants as per the same research outlined above. In March of 2020, that number had climbed to 200 million. A month later and it had hit more than 300 million — pointing to a trend that was somehow still only getting stronger.

The idea for Zoom was born from Eric Yuan, an immigrant from China who first arrived in the United States in the 1990s. Even back then, he was passionate about finding a way to make video calls not only easy but portable — and this was before the advent of the smartphone.

His career began at WebEx, where he worked as an engineer. After WebEx was acquired by Cisco a decade later, he became that company’s Corporate Vice President of Engineering. He enjoyed a tremendous amount of success during that time… but he still had visions of something far bigger.

While he was at Cisco, he listened carefully to customers who would express various complaints about how WebEx operated. They were constantly dealing with unreliable connections, with a disconnect between the audio and video and more. They even found the installation process frustrating — particularly in IT departments that were working with a large number of users.

They wanted something faster, more reliable, more efficient and more straightforward.

Yuan was more than happy to oblige.

In 2011, he left Cisco and began to work on the solution that would become Zoom. It would officially launch in January of 2013, and by all accounts, it was a major hit right out of the gate. Not only did it hit one million active participants just a few months later in May, but Yuan was also able to secure funding of $10 million to continue his work.

But even without the pandemic, Zoom still found a way to differentiate itself from so many other competitors in the marketplace. For starters, Yuan prioritized very low data usage — meaning that calls would still function on slower Internet connections and on mobile devices. Not only that, but Zoom was based in the cloud — virtually eliminating the irritating installation procedure that so many WebEx customers had complained about in the past. This also made it available on any device or platform, no exceptions.

But even the “Pro” package cost just $9.99 per month at that time — far cheaper than just about anything out there. Even still, Zoom was offered to K-12 schools free of charge in many of the countries it had entered.

All of this combined to form a perfect storm in the best possible way. Zoom had slowly begun to increase its market share, and then the COVID-19 pandemic acted as an accelerant that solidified what many in the industry already knew. Video conferencing was here to stay, and Zoom was now permanently tied to it.

Sharing business success stories will help inspire you to stay focused and determined. If you need any assistance with your start-up or are scaling your business, feel free to give us a call.

At its core, a family business is exactly what it sounds like: a company or other enterprise owned, operated, and actively managed by at least two people from the same family. This can be a parent and their kids, two siblings, or some other configuration — it doesn’t actually matter, as the management is made up of people with some type of similar close relation.

According to one recent study, family businesses make up between 80% and 90% of all business enterprises in North America. They contribute approximately 64% to the gross domestic product of this country, equaling roughly $5 trillion every year. Not only that, but they also comprise around 60% of the workforce — making their contribution every bit as significant as it is comprehensive.

Having said that, as is true with so many other types of businesses, simply beginning an enterprise with someone you trust isn’t nearly enough to guarantee success. Family organizations often fail the same as others do, and if you truly want to make sure that yours gets off on the right foot, there are a few key things to keep in mind.

Building a Family Business: An Overview

By far, the biggest thing to understand about running a successful family business is that not every family member necessarily has a place in the proceedings.

Indeed, experts agree that this is one of the major traps that most new entrepreneurs, in particular, tend to fall into — a deeply-rooted obligation that kids or other relatives “need” to join the company. The issue is that while this is a kind gesture, it could also create a situation where people with authority aren’t invested in being there.

For parents trying to bring their kids into the business, it’s far more beneficial to create a situation where they feel free to join the organization should they so choose. It shouldn’t feel like an obligation to them, as that will only cause problems later on.

Along the same lines, not every family member is necessarily qualified for this level of responsibility — a similar issue that causes problems from a different perspective. Experience still needs to be the driving force behind what role someone will be given in an organization if any. There’s no sense in bringing someone with no experience into an industry and elevating them to a position of authority simply out of some sense of obligation that “there is always a place for you here.” Doing so isn’t just doing them a disservice — it also dramatically increases the chances that the business will ultimately fail.

Another major pitfall that many family businesses fall into is where the organization simply cannot grow fast enough to support everyone at the same time. If one were to start a business and immediately give their four kids management-level positions, especially in those early days, there might not be enough work to go around. There certainly may not be revenue to support those salaries, either.

Instead, all family businesses need to be created in a strategic way that allows them to grow and scale over time — only bringing new members into the fold when the time is right. As the organization gets larger, there may be enough revenue and work to support additional family members — and only then should new entries be considered.

Beyond that, there are several essential best practices to lean into that can help increase the chances of success for any family business. Communicating openly and often with all parties is critical, especially in making sure that everyone is always on the same page and moving in the right direction. Family members need to be kept abreast of major decisions regarding the company’s trajectory and the reality of competitive challenges.

Similarly, it’s always important to solidify the values of the family — and thus the business — as early on in this process as possible. Before you even begin to think about a direction for the business, consider how this path might impact the family. If everything is overwhelmingly successful, what will that look like? What does each participating family member see happening in five or even ten years — from their point of view and in the overarching sense of the company? What does the organization stand for, what entity is best for succession and taxes, who is it dedicating itself to serving, and does everyone agree on these things?

The answers to these questions need to impact many of the decisions that one will make moving forward.

In the end, if you’re going to be starting a family business in a leadership position, you also need to respect everyone involved. Remember that just because they’re relatives doesn’t mean that they cannot bring fair value to the table. They’re not there to simply take orders — they’re there to offer a unique perspective that you might not have access to through other means. If one or more of your children don’t want to join the family business, that’s okay — but the qualified ones who do should be given the room they need to perform to the best of their abilities. Sometimes that means allowing them to give their objective, third-party opinions — even when they don’t necessarily align with your own.

Sometimes it means them taking a role in the company that you didn’t necessarily see for them, so long as it is one that they excel at.

Following these best practices means that you’ll end up with something more effective than a traditional family business. You’ll have a true legacy that has the potential to last several generations — which in and of itself is the most important benefit of all.

Feel free to reach out with any questions or concerns in running and managing your family business. If you are thinking of succession or possible sale, it takes careful planning way in advance. Feel free to contact our office to talk things over.

Before the COVID-19 pandemic, the IRS was getting refunds out swiftly and responded to calls and correspondence in a reasonable amount of time. However, COVID-19 brought about a perfect storm of delays, initially caused by employees having to stay home because lockdowns prevented processing centers from operating and workers from going to their offices. And in most instances, IRS employees could not work from home because of the secure nature of their tasks and the IRS’s computer system.

Congress also heaped more work on the IRS by making the service responsible for distributing the economic recovery payments (stimulus payments), not just once but three times. Plus, Congress made retroactive tax changes, which required the IRS to modify already filed tax returns. Bottom line: it has been a rough couple of years for the IRS, and it is taking a long time for them to catch up.

More recently, Congress mandated paying eligible taxpayers 50% of their child tax credit for 2021, estimated based on the 2020 return information, in six monthly installments from July through December, placing an additional burden on IRS resources.

For those who hadn’t filed their 2020 return yet, the third economic recovery payment and the advance child tax credit payments were based on their 2019 tax return. But as people filed their 2020 returns, the IRS needed to recalculate the amounts of the payments so that taxpayers weren’t shorted. These do-overs take away time that otherwise could be spent working through the backlog of correspondence and amended returns for prior years and processing the 2020 returns being filed on extension.

One of the IRS watchdogs, National Taxpayer Advocate Erin Collins, applauded the IRS in her mid-year report to Congress for processing most returns in a timely manner and issuing most of the economic recovery payments despite all of its added responsibilities.

According to the advocate, the IRS did not have time to adjust its systems for the last-minute Dec. 27, 2020, legislation that made changes for the 2021 filing season. This required the IRS to manually verify the returns for which the taxpayer elected to use their 2019 earned income to claim the 2020 earned income tax credit or the additional child tax credit. Unlike prior years, the IRS had to deal with a large volume of returns requiring manual reviews. At the end of the 2021 tax season, the IRS had over 35 million individual and business returns backlogged.

But the IRS is chipping away at the logjam. As of the end of July 2021, the backlog was down to 13.8 million returns.

So, if you are caught up in the gridlock, not much can be done except to be patient. But there’s some good news – if the IRS owes you a refund that’s been delayed, they’ll likely pay you interest at the annual rate of 3%.

There are not enough IRS employees to field all the calls about “Where is my refund?” or other issues, and anyone who does get through on the phone is lucky. Most spend hours on hold and never get through.

We are not trying to make excuses for the IRS but just letting you know what the problems are and that it may be a bit longer for them to catch up. Let us know if we can help.

The House Ways and Means Committee has released an extensive list of proposed tax changes that impact individual, retirement, international and corporate tax law. We have been selective and have only included a portion of the proposed changes. A full list of proposed changes is available from the PDF file titled Responsibility Funding Our Priorities.

As you read through the article you will quickly become aware that the provisions are aimed at higher income taxpayers. The full list available from the link above includes numerous provisions not included in this article and are primarily related to corporate foreign transactions.

• Increase in Corporate Tax Rate – This provision replaces the flat corporate income tax with a graduated rate structure. The rate structure provides for a rate of 18 percent on the first $400,000 of income; 21 percent on income up to $5 million, and a rate of 26.5% on income thereafter. The benefit of the graduated rate phases out for corporations making more than $10,000,000. Personal services corporations are not eligible for graduated rates. The domestic dividends received deduction is adjusted to hold constant the tax on domestic corporate-to-corporate dividends.
• Increase in Top Marginal Individual Income Tax Rate – The provision increases the top marginal individual income tax rate to 39.6%. This marginal rate applies to married individuals filing jointly with taxable income over $450,000, to heads of households with taxable income over $425,000, to unmarried individuals with taxable income over $400,000, to married individuals filing separate returns with taxable income over $225,000, and to estates and trusts with taxable income over $12,500. The amendments made by this section apply to taxable years beginning after December 31, 2021.
• Increase in Capital Gains Rate for Certain High-Income Individuals – The provision increases the capital gains rate to 25%. The amendments made by this section apply to taxable years ending after the date of introduction of this Act. A transition rule provides that the preexisting statutory rate of 20% continues to apply to gains and losses for the portion of the taxable year prior to the date of introduction. Gains recognized later in the same taxable year that arise from transactions entered into before the date of introduction pursuant to a written binding contract are treated as occurring prior to the date of introduction.
• Deduction for Certain Employee Trade or Business Expenses – The provision allows for up to $250 in dues to a labor organization be claimed as an above-the-line deduction. The provision is effective for taxable years beginning after December 31, 2021.
• Application of Net Investment Income Tax to Trade or Business Income – This provision expands the net investment income tax to cover net investment income derived in the ordinary course of a trade or business for taxpayers with greater than $400,000 in taxable income (single filer) or $500,000 (joint filer), as well as for trusts and estates. The provision clarifies that this tax is not assessed on wages on which FICA is already imposed. Effective for taxable years beginning after December 31, 2021.
• Limitation Qualified Business Income Deduction – The provision amends IRC Sec 199A pass through deduction by setting the maximum allowable deduction at $500,000 in the case of a joint return, $400,000 for an individual return, $250,000 for a married individual filing a separate return, and $10,000 for a trust or estate. (Effective for taxable years beginning after December 31, 2021).
• Limitations on Excess Business Losses of Noncorporate Taxpayers – This provision permanently disallows excess business losses (i.e., net business deductions more than business income) for non-corporate taxpayers. The provision allows taxpayers whose losses are disallowed to carry those losses forward to the next succeeding taxable year. Effective for taxable years beginning after December 31, 2021.
• Surcharge on High-Income Individuals, Trusts, and Estates – This provision imposes a tax equal to 3% of a taxpayer’s modified adjusted gross income more than $5,000,000 ($2,500,000 for married individuals filing separately). Effective for taxable years beginning after December 31, 2021.
• Termination of Temporary Increase in Unified Credit – This provision terminates the temporary increase in the unified credit against estate and gift taxes which for 2021 is $11,700,000, reverting the credit to its 2010 level of $5,000,000 per individual, indexed for inflation.
• Estate Tax Valuation for Real Property Used in Farming – This provision would increase the special valuation reduction available for qualified real property used in a family farm or family business. This reduction allows decedents who own real property used in a farm or business to value the property for estate tax purposes based on its actual use rather than fair market value. This provision increases the allowable reduction from $750,000 to $11,700,000.
• Certain Tax Rules Applicable to Grantor Trusts – This provision adds IRC Sec 2901, which pulls grantor trusts into a decedent’s taxable estate when the decedent is the deemed owner of the trusts. Prior to this provision, taxpayers were able to use grantor trusts to push assets out of their estate while controlling the trust closely.

  The provision also adds a new section 1062, which treats sales between grantor trusts and their deemed owner as equivalent to sales between the owner and a third party. The amendments made by this section apply only to future trusts and future transfers.

• Valuation Rules for Certain Transfers of Nonbusiness Assets – This provision clarifies that when a taxpayer transfers nonbusiness assets, those assets should not be afforded a valuation discount for transfer tax purposes. Exceptions are provided for assets used in hedging transactions or as working capital of a business. A look-through rule provides that when a passive asset consists of a 10-percent interest in some other entity, the rule is applied by treating the holder as holding its ratable share of the assets of that other entity directly. The amendments made by this section apply to transfers after the date of the enactment of this Act.
• Contribution Limits for Individual Retirement Plans – Under current law, taxpayers may make contributions to IRAs irrespective of how much they already have saved in such accounts. To avoid subsidizing retirement savings once account balances reach very high levels, the legislation creates new rules for taxpayers with very large IRA and defined contribution retirement account balances.

  Specifically, the legislation prohibits further contributions to a Roth or traditional IRA for a taxable year if the total value of an individual’s IRA and defined contribution retirement accounts generally exceed $10 million as of the end of the prior taxable year. The limit on contributions would only apply to single taxpayers (or taxpayers married filing separately) with taxable income over $400,000, married taxpayers filing jointly with taxable income over $450,000, and heads of households with taxable income over $425,000 (all indexed for inflation).

  The legislation also adds a new annual reporting requirement for employer defined contribution plans on aggregate account balances more than $2.5 million. The reporting would be to both the Internal Revenue Service and the plan participant whose balance is being reported. Effective for taxable years beginning after December 31, 2021.

• Increase in Minimum Required Distributions – If an individual’s combined traditional IRA, Roth IRA and defined contribution retirement account balances generally exceed $10 million at the end of a taxable year, a minimum distribution would be required for the following year. This minimum distribution is only required if the taxpayer’s taxable income is above the thresholds described in the section above (e.g., $450,000 for a joint return). The minimum distribution generally is 50 percent of the amount by which the individual’s prior year aggregate traditional IRA, Roth IRA and defined contribution account balance exceeds the $10 million limit.

  In addition, to the extent that the combined balance amount in traditional IRAs, Roth IRAs and defined contribution plans exceeds $20 million, that excess is required to be distributed from Roth IRAs and Roth designated accounts in defined contribution plans up to the lesser of (1) the amount needed to bring the total balance in all accounts down to $20 million or (2) the aggregate balance in the Roth IRAs and designated Roth accounts in defined contribution plans. Once the individual distributes the amount of any excess required under this 100 percent distribution rule, then the individual is allowed to determine the accounts from which to distribute to satisfy the 50 percent distribution rule above. Effective for taxable years beginning after December 31, 2021.

• Limiting Back Door IRA Conversions – Under current law, contributions to Roth IRAs have income limitations. For example, the income range for single taxpayers for making contributions to Roth IRAs for 2021 is $125,000 to $140,000. Those single taxpayers with income above $140,000 generally are not permitted to make Roth IRA contributions.

  In 2010, the similar income limitations for Roth IRA conversions were repealed, which allowed anyone to contribute to a Roth IRA through a conversion. irrespective of the still-in-force income limitations for Roth IRA contributions. As an example, if a person exceeds the income limitation for contributions to a Roth IRA, he or she can make a nondeductible contribution to a traditional IRA – and then shortly thereafter convert the nondeductible contribution from the traditional IRA to a Roth IRA.

  To close these so-called “back-door” Roth IRA strategies, the bill eliminates Roth conversions for both IRAs and employer-sponsored plans for single taxpayers (or taxpayers married filing separately) with taxable income over $400,000, married taxpayers filing jointly with taxable income over $450,000, and heads of households with taxable income over $425,000 (all indexed for inflation). This provision applies to distributions, transfers, and contributions made in taxable years beginning after December 31, 2031.

  Furthermore, this section prohibits all employee after-tax contributions in qualified plans and prohibits after-tax IRA contributions from being converted to Roth regardless of income level, effective for distributions, transfers, and contributions made after December 31, 2021.

• Statute of Limitations with Respect to IRA Noncompliance – The bill expands the statute of limitations for IRA noncompliance related to valuation-related misreporting and prohibited transactions from 3 years to 6 years to help IRS pursue these violations that may have originated outside the current statute’s 3-year window. This provision applies to taxes to which the current 3-year period ends after December 31, 2021.
• Investment of IRA Assets in Entities Where Owner Has a Substantial Interest – To prevent self-dealing, under current law prohibited transaction rules, an IRA owner cannot invest his or her IRA assets in a corporation, partnership, trust, or estate in which he or she has a 50 percent or greater interest. However, an IRA owner can invest IRA assets in a business in which he or she owns, for example, one-third of the business while also acting as the CEO. The bill adjusts the 50 percent threshold to 10 percent for investments that are not tradable on an established securities market, regardless of whether the IRA owner has a direct or indirect interest. The bill also prevents investing in an entity in which the IRA owner is an officer. Further, the bill modifies the rule to be an IRA requirement, rather than a prohibited transaction rule (i.e., to be an IRA, it must meet this requirement). This section generally takes effect for tax years beginning after December 31, 2021, but there is a 2-year transition period for IRAs already holding these investments.
• IRA Owners Treated as Disqualified Persons – The bill clarifies that, for purposes of applying the prohibited transaction rules with respect to an IRA, the IRA owner (including an individual who inherits an IRA as beneficiary after the IRA owner’s death) is always a disqualified person. This section applies to transactions occurring after December 31, 2021.
• Funding of the Internal Revenue Service – This provision appropriates $78,935,000,000 for necessary expenses for the IRS for strengthening tax enforcement activities and increasing voluntary compliance and modernizing information technology to effectively support enforcement activities. No use of these funds is intended to increase taxes on any taxpayer with taxable income below $400,000. Further, $410,000,000 is appropriated for necessary expenses for the Treasury Inspector General for Tax Administration to provide oversight of the IRS. Finally, $157,000,000 is appropriated for the Tax Court for adjudicating tax disputes. These appropriated funds are to remain available until September 30, 2031.
• Limiting Qualified Conservation Contribution Deductions – To curb syndicated conservation easement tax shelters, this provision denies charitable deduction for contributions of conservation easements by partnerships and other pass-through entities if the amount of the contribution (and therefore the deduction) exceeds 2.5 times the sum of each partner’s adjusted basis in the partnership that relates to the donated property. This general disallowance rule does not apply to donations of property that meet the requirements of the 3-year holding period rule, and contributions by family partnerships. In addition, certain taxpayers whose deeds are found to have certain defects and are notified by the Commissioner can correct such defects within 90 days of the notice. This ability to cure does not apply in the case of reportable transactions and transactions for which deduction is disallowed under this section.

  Various accuracy-related penalties apply, including gross valuation misstatement penalty, and adjustments are made to the statute of limitations on assessment and collection by the IRS, in case of any disallowance of a deduction by reason of this provision.

  This section applies to contributions made after December 23, 2016 (the date of the relevant IRS Notice). In the case of contributions of easements related to the preservation of certified historic structures, this section applies to contributions made in taxable years beginning after December 31, 2018. The ability to cure defective deeds are permitted for returns filed after the date of the enactment and for returns filed on or before such date if the section 6501 period has not expired as of such date.

• Limitation on Deduction of Excessive Employee Remuneration – This provision moves up the effective date of the amendment to section 162(m) in the American Rescue Plan Act of 2021 (ARPA) to tax years following December 31, 2021. The ARPA expanded the set of applicable employees under section 162(m) to include the eight most highly compensated officers other than the principal executive and principal financial officers for a taxable year, beginning in tax years after December 31, 2026. The additional five employees scoped in under the ARPA amendment are not considered permanent covered employees for the purposes of the section. The provision also applies the section 414 aggregation rules for covered health insurance providers to the general rule under section 162(m), expands the IRS’s regulatory authority under the general rule, and expands the definition of applicable employee renumeration.
• Termination of Employer Credit for Paid Family Leave and Medical Leave -This provision accelerates termination of employer credit for wages paid to employees during family and medical leave to taxable years beginning after 2023. Currently, the credit will terminate for wages paid in taxable years beginning after 2025.
• Temporary Rule to Allow Certain S Corporations to Reorganize as Partnerships Without Tax – This provision allows eligible S corporations to reorganize as partnerships without such reorganizations triggering tax. Eligible S corporation means any corporation that was an S corporation on May 13, 1996 (prior to the publication of current law “check the box” regulations with respect to entity classification). The eligible S corporation must completely liquidate and transfer substantially all its assets and liabilities to a domestic partnership during the two-year period beginning on December 31, 2021.
• Enhancement of Work Opportunity Credit During COVID-19 Recovery Period – This provision increases the Work Opportunity Tax Credit (WOTC) to 50% for the first $10,000 in wages, through December 31, 2023, for all WOTC targeted groups except for summer youth employees. The increase is also available for qualified wages earned by a WOTC target group employee in his or her second year of employment (current law limits allows WOTC to be claimed only on first-year wages).
• Research and Experimental Expenditures – This provision delays the effective date of section 13206 of Public Law 115-97. That section provides for amortization of the research and experimental expenditures starting taxable years beginning after December 31, 2021. Under this provision, the amortization of research and experimental expenditures will begin for amount paid or incurred in taxable years beginning after December 31, 2025.

Of course, these are all proposed changes that must pass Congress. But this article provides advance notice of these proposed changes and the opportunity to plan your tax strategies should they become law. Please give our office a call if we can be of assistance.

Here are five things that happened this past month that affect your small business.

1) The Senate passed a $1.2T infrastructure package.
At the beginning of August, the Senate passed a bipartisan infrastructure package, “the largest upgrade to the country’s roads, bridges, pipes, ports and broadband in decades.” There are a few steps left before this bill becomes law, but it is expected to make its way through the House of Representatives and be signed by President Biden. (Source: The Washington Post)

Why this is important for your business:
Many aspects of the bill present revitalization prospects for small businesses, including the money set aside for broadband and power infrastructure.

2) We are better understanding how many workers retired early during the pandemic.
“Roughly 2 million more people than expected have joined the ranks of the retired during the pandemic,” according to a new analysis. Some of these workers chose to retire early, while others “were forced into retirement after losing their jobs or quitting out of fears of exposure to COVID-19.” (Source: NPR)

Why this is important for your business:
The economy is changing, and business owners should be aware of how their hiring pool may shift in coming years. With 10,000 baby boomers retiring every day, millennials and Gen Z are set to become an even larger proportion of the workforce.

3) The government opened a Paycheck Protection Program (PPP) loan forgiveness portal.
To help expedite the process of getting PPP loans forgiven, a new portal was opened “through which small businesses that borrowed up to $150,000 can apply to have their loans eliminated.” About 92% of PPP loans fall under this cap. However, some lenders – including some larger banks – are choosing not to use the portal and to stick with their own processes instead. (Source: The New York Times)

Why this is important for your business:
If you received a PPP loan that has not yet been forgiven, this portal could help you eliminate that debt faster – but only if your lender is allowing it.

4) A judge ruled that California’s gig worker initiative (Proposition 22) is unconstitutional.
A California judge has ruled that Proposition 22 – a 2020 ballot measure exempting ride-share and food delivery drivers (think Uber, Doordash, and Instacart) from a state labor law – is unconstitutional “as it infringes on the legislature’s power to set workplace standards.” (Source: Reuters)

Why this is important for your business:
This is another piece of news on the nationwide battle over the gig economy and worker classification. Continue to pay attention to developments on this issue, as it will likely affect businesses far into the future.

5) Consumer sentiment hit a pandemic-era low as fears over the delta variant rise.
The consumer sentiment index fell to 70.2 in the preliminary August reading from the University of Michigan. “That is down more than 13% from July’s result of 81.2 and below the April 2020 mark of 71.8 that was lowest of the pandemic era.” It was also the lowest reading for that measure since 2011. This comes as the delta variant of Covid-19 spreads rapidly across the US, leading to some states reinstating health restrictions. (Source: CNBC)

Why this is important for your business:
Lower consumer sentiment could be an indicator of diminished economic performance, and some consumers may choose to spend less money if they fear a downturn.