Tax Credit Archives - Page 3 of 3 - MGO CPA | Tax, Audit, and Consulting Services

Don’t forget to factor 2022 cost-of-living adjustments into your year-end tax planning

The IRS recently issued its 2022 cost-of-living adjustments for more than 60 tax provisions. With inflation up significantly this year, mainly due to the COVID-19 pandemic, many amounts increased considerably over 2021 amounts. As you implement 2021 year-end tax planning strategies, be sure to take these 2022 adjustments into account.

Also, keep in mind that, under the Tax Cuts and Jobs Act (TCJA), annual inflation adjustments are calculated using the chained consumer price index (also known as C-CPI-U). This increases tax bracket thresholds, the standard deduction, certain exemptions and other figures at a slower rate than was the case with the consumer price index previously used, potentially pushing taxpayers into higher tax brackets and making various breaks worth less over time. The TCJA adopts the C-CPI-U on a permanent basis.

Individual income taxes

Tax-bracket thresholds increase for each filing status but, because they’re based on percentages, they increase more significantly for the higher brackets. For example, the top of the 10% bracket increases by $325 to $650, depending on filing status, but the top of the 35% bracket increases by $16,300 to $19,550, again depending on filing status.

The TCJA suspended personal exemptions through 2025. However, it nearly doubled the standard deduction, indexed annually for inflation through 2025. For 2022, the standard deduction is $25,900 (married couples filing jointly), $19,400 (heads of households), and $12,950 (singles and married couples filing separately). After 2025, standard deduction amounts are scheduled to drop back to the amounts under pre-TCJA law unless Congress extends the current rules or revises them.

Changes to the standard deduction could help some taxpayers make up for the loss of personal exemptions. But it might not help taxpayers who typically used to itemize deductions.

Alternative minimum tax

The alternative minimum tax (AMT) is a separate tax system that limits some deductions, doesn’t permit others and treats certain income items differently. If your AMT liability is greater than your regular tax liability, you must pay the AMT.

Like the regular tax brackets, the AMT brackets are annually indexed for inflation. For 2022, the threshold for the 28% bracket increased by $6,200 for all filing statuses except married filing separately, which increased by half that amount.

The AMT exemptions and exemption phaseouts are also indexed. The exemption amounts for 2022 are $75,900 for singles and heads of households and $118,100 for joint filers, increasing by $2,300 and $3,500, respectively, over 2021 amounts. The inflation-adjusted phaseout ranges for 2022 are $539,900–$843,500 (singles and heads of households) and $1,079,800–$1,552,200 (joint filers). Amounts for separate filers are half of those for joint filers.

Education and child-related breaks

The maximum benefits of certain education and child-related breaks generally remain the same for 2022. But most of these breaks are limited based on a taxpayer’s modified adjusted gross income (MAGI). Taxpayers whose MAGIs are within an applicable phaseout range are eligible for a partial break — and breaks are eliminated for those whose MAGIs exceed the top of the range.

The MAGI phaseout ranges generally remain the same or increase modestly for 2022, depending on the break. For example:

The American Opportunity credit. For tax years beginning after December 31, 2020, the MAGI amount used by joint filers to determine the reduction in the American Opportunity credit isn’t adjusted for inflation. The credit is phased out for taxpayers with MAGI in excess of $80,000 ($160,000 for joint returns). The maximum credit per eligible student is $2,500.

The Lifetime Learning credit. For tax years beginning after December 31, 2020, the MAGI amount used by joint filers to determine the reduction in the Lifetime Learning credit isn’t adjusted for inflation. The credit is phased out for taxpayers with MAGI in excess of $80,000 ($160,000 for joint returns). The maximum credit is $2,000 per tax return.

The adoption credit. The phaseout ranges for eligible taxpayers adopting a child will also increase for 2022 — by $6,750 to $223,410–$263,410 for joint, head-of-household and single filers. The maximum credit increases by $450, to $14,890 for 2022.

(Note: Married couples filing separately generally aren’t eligible for these credits.)

These are only some of the education and child-related breaks that may benefit you. Keep in mind that, if your MAGI is too high for you to qualify for a break for your child’s education, your child might be eligible to claim one on his or her tax return.

Gift and estate taxes

The unified gift and estate tax exemption and the generation-skipping transfer (GST) tax exemption are both adjusted annually for inflation. For 2022, the amount is $12.060 million (up from $11.70 million for 2021).

The annual gift tax exclusion increases by $1,000 to $16,000 for 2022.

Retirement plans

Not all of the retirement-plan-related limits increase for 2022. Thus, depending on the type of plan you have, you may have limited opportunities to increase your retirement savings if you’ve already been contributing the maximum amount allowed.

Your MAGI may reduce or even eliminate your ability to take advantage of IRAs. Fortunately, IRA-related MAGI phaseout range limits all will increase for 2022:

Traditional IRAs. MAGI phaseout ranges apply to the deductibility of contributions if a taxpayer (or his or her spouse) participates in an employer-sponsored retirement plan:

For married taxpayers filing jointly, the phaseout range is specific to each spouse based on whether he or she is a participant in an employer-sponsored plan:
For a spouse who participates, the 2022 phaseout range limits increase by $4,000, to $109,000–$129,000.
For a spouse who doesn’t participate, the 2022 phaseout range limits increase by $6,000, to $204,000–$214,000.
For single and head-of-household taxpayers participating in an employer-sponsored plan, the 2022 phaseout range limits increase by $2,000, to $68,000–$78,000.

Taxpayers with MAGIs in the applicable range can deduct a partial contribution; those with MAGIs exceeding the applicable range can’t deduct any IRA contribution.

But a taxpayer whose deduction is reduced or eliminated can make nondeductible traditional IRA contributions. The $6,000 contribution limit (plus $1,000 catch-up if applicable and reduced by any Roth IRA contributions) still applies. Nondeductible traditional IRA contributions may be beneficial if your MAGI is also too high for you to contribute (or fully contribute) to a Roth IRA.

Roth IRAs. Whether you participate in an employer-sponsored plan doesn’t affect your ability to contribute to a Roth IRA, but MAGI limits may reduce or eliminate your ability to contribute:

For married taxpayers filing jointly, the 2022 phaseout range limits increase by $6,000, to $204,000–$214,000.
For single and head-of-household taxpayers, the 2022 phaseout range limits increase by $4,000, to $129,000–$144,000.

You can make a partial contribution if your MAGI falls within the applicable range, but no contribution if it exceeds the top of the range.

(Note: Married taxpayers filing separately are subject to much lower phaseout ranges for both traditional and Roth IRAs.)

2022 cost-of-living adjustments and tax planning

With many of the 2022 cost-of-living adjustment amounts trending higher, you have an opportunity to realize some tax relief next year. In addition, with certain retirement-plan-related limits also increasing, you have the chance to boost your retirement savings. If you have questions on the best tax-saving strategies to implement based on the 2022 numbers, please give us a call. We’d be happy to help.

IRS Releases New Requirements for 2022 Research and Development Tax Credit Claims

On October 15, 2021, the Chief Counsel’s office released memorandum number 20214101F in response to questions from IRS officials in the Large Business & International division and the Small Business/Self-Employed division about what information taxpayers should provide with their claims for refunds or tax credits and what format they should use.

What qualifies a taxpayer for the R&D refund claim?

In short, the IRS stated that for a taxpayer’s R&D refund claim to be valid, the taxpayer must, at a minimum:

Identity all the business components to which the I.R.C. § 41 research credit claim relates for that year.
For each business component:
- identify all research activities performed,
- identify all individuals who performed each research activity, and
- identify all the information each individual sought to discover through the activities performed.
Provide the total qualified employee wage expenses, total qualified supply expenses, and total qualified contract research expenses for the claim year (this may be done using Form 6765, Credit for Increasing Research Activities).

These statements reconfirm the standard that a business components list (often referred to as a project list) is a fundamental necessity for filing research credit claims. For each business component taxpayers need to identify all the research activities they’ve performed, name the individuals who performed each research activity, and include the information each individual sought to discover. In other words, each business component must satisfy the elements set forth in I.R.C. § 41.

What’s new: the Specificity Requirement

The memorandum also includes a new requirement referred to as the specificity requirement. This is a jurisdictional prerequisite to filing a suit for refund, entailing taxpayers to provide the facts in a written statement to support any refund claims. For the claim or refund to be considered, the statement of the grounds and facts must be verified by a written declaration stating it is made under the penalties of perjury. The taxpayer’s signature on the amended return constitutes the declaration under the penalties of perjury for what is contained in the claim and what is attached to it.

The written statement must be submitted when a refund claim is filed. Otherwise, the refund claim should be rejected as deficient.

This new requirement is said to enable the Service to determine if a refund should be paid immediately based on the information provided or if an examination is needed to verify the taxpayer’s entitlement to the refund. This information helps the Service avoid paying refunds to taxpayers who have no factual support for their claim and allows the Service to effectively allocate its limited resources to determining which procedurally compliant claims to examine.

What’s the timing of this new requirement?

The additional information will now be required for all research credit claims made after a grace period ending January 10, 2022. A one-year transition period will be provided following this grace period to allow taxpayers 30 days to perfect a research credit claim before the IRS makes a final decision.

Generally, taxpayers are expected to file valid claims within three years of the date that the tax return was filed—or two years from the time the tax was paid, whichever is later. All additional requirements must be met.

How we can help

R&D credit claims often result in examinations, a process that is costly and burdensome to both the Service and taxpayers. MGO is here to help taxpayers determine their eligibility for R&D tax credits and develop and implement procedures to document R&D activities before claims are made, to ensure a smooth filing process.

About the author

Michael Silvio is a partner at MGO. He has more than 25 years of experience in public accounting and tax and has served a variety of public and private businesses in the manufacturing, distribution, pharmaceutical, and biotechnology s

Businesses Can File Retroactive Claims for the Employee Retention Tax Credit

Many people are excited about the pace of economic recovery, and it’s fair to say we are moving in the right direction. But as the excitement continues and life feels more like it is returning to normal after the pandemic, make sure you don’t forget to take advantage of some of the programs that were put in place to help us through the COVID-19 crisis.

Employee Retention Tax Credit

The Employee Retention Tax Credit (ERTC) is a refundable tax credit created by the Coronavirus Aid, Relief and Economic Security (CARES) Act, to encourage businesses to keep employees on their payroll. For 2020, the credit is 70% of up to $10,000 in wages paid by an employer whose business was fully or partially suspended because of COVID-19 or whose gross receipts declined by more than 50%

For 2021, an employer can receive 70 percent of the first $10,000 of qualified wages paid per employee in each qualifying quarter. The credit applies to wages paid from March 13, 2020, through December 31, 2021. And the cost of employer-paid health benefits can be considered part of employees’ qualified wages.

It’s an attractive credit if you qualify.

Eligible businesses

The credit applies to all employers regardless of size, including tax exempt organizations that had a full or partial shutdown because of a government order limiting commerce due to COVID-19 during 2020 or 2021. With the exceptions of state and local governments or small businesses that take Small Business Administration loans, this credit is available to almost everyone.

Of course, there is some fine print:
• To qualify, gross receipts must have declined more than 50 percent during a 2020 or 2021 calendar quarter, when compared to the same quarter in the prior year.
• For employers with 100 or fewer full-time employees, all employee wages qualify for the credit, whether the employer is open for business or shutdown.
• For employers with more than 100 full-time employees, qualified wages are wages paid to employees when they are not providing services due to COVID-19-related circumstances.

One bright point about the ERTC is that employers can be immediately reimbursed for the credit by reducing the amount of payroll taxes they would usually have withheld from employees’ wages. That was a nice touch by the IRS.

Retroactive claims for the ERTC

Although it appears the IRS tried to make this as easy as possible, you may still need a tax professional to sort it out. For instance, if your business had a substantial decline in gross receipts but has now recovered, you can still claim the credit for the difficult period

Retroactive claims for refunds will probably be delayed because currently everything is delayed at the IRS. The credit can be claimed on amended payroll tax returns as long as the statute of limitations remains open, which is three years from the date of filing. So you have some time to claim the credit, but why wait?

Keep December 2021 in mind

The economy is in a state of change, and it is fair to say that we are once again in uncharted territory. On the positive side, there seems to be significant resources and support for businesses from both government and consumers. You and your tax professional should keep your eyes open for credits and benefits to make sure you don’t miss any opportunitie

The ERTC expires in December 2021. Though it may be difficult to think about year-end in the middle of the summer, you’ll want to figure out your position on this credit before December. A tax professional can help you understand the ERTC and help you decide on your next step.

About the author

Are You Maximizing R&D Tax Credit Benefits?

The Research and Development (R&D) tax credit is a commonly underutilized, yet powerful, tax incentive available for companies to substantially reduce their tax liability, improve their bottom-line, and reinvest back into their business. Daily activities performed by companies in a wide range of industries may qualify for federal and state R&D tax savings.

Unfortunately, R&D tax credits are also one of the most misunderstood methods of tax relief because there are many false assumptions about what is needed to qualify. In the following overview we’ll provide a brief description of the R&D tax rules, qualification criteria, and useful tips to maximize potential benefits. This article focuses specifically on federal R&D tax credits but there are also 40 states that provide R&D tax credits, each with its own set of rules and qualification criteria.

You don’t have to be scientists in white lab coats to qualify

For more than 40 years, companies have taken advantage of the R&D tax credit, claiming roughly $10 billion per year in tax savings. This powerful tax credit is not just available to large companies or companies employing hundreds of scientists. Companies of all sizes, in many different industries, may qualify for R&D tax credits including those working in software, manufacturing, aerospace and defense, agriculture, food and beverage, and life sciences. Even startups that have not yet generated taxable income may be able to monetize the R&D tax credit by claiming these R&D credits against their payroll tax liability.

There are many rules to claim an R&D tax credit but simply stated, if your company is involved in the technical development of new or improved products, or processes that require the undertaking of a systematic evaluation of multiple alternatives, to achieve the desired result, you may qualify. This applies to new product development, product enhancements, software development, manufacturing process improvements, and the list goes on…

Benefits of R&D tax credits for startups and small businesses

Unfortunately, many small businesses do not take advantage of this tax benefit because they self-censor, believing that their business will not qualify.

The Protecting Americans from Tax Hikes Act of 2015 opened the door for companies with little to no income tax liability to monetize the R&D tax credit. Eligible small businesses are now able to take the R&D credit against their alternative minimum tax liability. Eligible small businesses are defined as corporations that are not publicly traded, and are corporations, partnerships, or a sole proprietorship with average annual gross receipts not exceeding $50 million for the three taxable years preceding the current taxable year.

Startups with no more than five years of gross receipts and less than $5 million in gross receipts can also take advantage of the R&D tax credit incentive to offset up to $1,250,000 (over a five year period) of their Federal Insurance Contributions Act payroll taxes.

Benefits of timely capture of R&D tax credits

Even though a company may not be paying tax and may not be able to utilize the R&D tax credit currently, there are still good reasons to claim the credit. One of these reasons is that it is always easier to identify and document these credits while the supporting information is available and “fresh” in everyone’s minds. Waiting too long or until the company is profitable may be too late to capture the credits effectively, efficiently, and completely.

Another reason to choose to capture these credits in a timely fashion is because these credits can become extremely valuable in a sale transaction. Accumulated research and development credits can impact purchase price in an M&A or other deal, as a buyer may be inclined to pay more for the company if it has accumulated research credits (subject to IRC Sec. 383 limitations) and also if it has infrastructure in place to capture these credits on a “real time” basis.

Additionally, the accumulated credits may also be able to be used to offset the tax as result of a sale transaction. These credits may be able to offset the tax at the corporate level in the event of a C corporation sale or at the shareholder level in the event of pass-through entity sale.

The four-part R&D tax credit test

The criteria established by the following R&D four-part test will help to determine if your business qualifies for the R&D tax credit.

1. Technological in Nature – The activity performed must fundamentally rely on principles of engineering, computer science, physical or biological science.

2. Process of Experimentation – The company must demonstrate that they have undertaken an iterative development process, evaluating alternatives to eliminate uncertainty.

3. Elimination of Uncertainty – The activity must be aimed at eliminating uncertainty with respect to the development of a product or process.

4. Permitted Purpose – The activity must be intended to develop a new or improved business component.

Reviewing the tax code requirements and the company’s eligible activities should be the first step in the process of identifying potential R&D tax credits. Due diligence is required when adhering to the R&D tax credit rules and calculating and documenting the company’s qualified research activities. On the surface the rules may not seem complicated but there are many steps to claiming R&D credits – and many complicated tax court cases and a lot of misinformation that can make R&D claims confusing.

Importance of R&D tax credit documentation

To meet the requirements for the R&D tax credit, a history of the business’ qualifying activities must be documented. Documentation of R&D efforts can be challenging because employees may work on several projects at once and perform different types of duties. To address this, it is important to segment qualified R&D activities from all other work performed. Thankfully, today’s payroll systems can be programmed to track qualified research wages to qualified research projects.

The R&D tax credits may be claimed for both current and prior tax years, so it is recommended that companies document their R&D activities, so they’re well positioned to claim the credit for both situations.

The types of documentation that can be used to substantiate R&D labor expenses include:
• Time tracking data
• Employee W-2 forms
• Project lists
• Payroll registers
• Time questionnaires
• Job descriptions
• Meeting minutes
• Lab results
• Interview notes provided for oral testimony

Common misconceptions about R&D tax credits

Today, more companies than ever are qualified to take advantage of the R&D tax credit. However, many businesses still have reservations and don’t believe they will qualify based on misconceptions about how the tax credit may apply to their business. Some of these misconceptions include:

• They don’t believe they do R&D work – The definition of R&D work is broad. If the business is attempting to develop or improve a new product or process it may qualify for the R&D tax credit.

• They don’t believe they are inventing anything – There is no requirement that product or processes be successful or new to the world.

• They believe the risk of an audit will increase – The R&D tax credit is a permanent incentive intended to promote innovation in the U.S. Claiming R&D credits on timely filed tax returns, whenever possible, is encouraged and in most cases does not trigger an audit. However it is imperative that the taxpayer collect and retain proper documentation to support any R&D tax credit claim.

Claiming the R&D credit

A taxpayer shouldn’t feel intimidated by preconceived notions of what R&D is or what companies can qualify. Across industries, the possibilities for qualifying activities exist, and vital tax savings may be uncovered to be used for future projects.

At MGO, our professionals bring more than 30 years of R&D tax experience to help you file and defend your R&D tax credit claim. We welcome the opportunity to provide your company with a complimentary R&D tax credit eligibility analysis to determine if this tax incentive can help fuel your company’s growth.

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10 Things Government Contractors Need to Know About Tax Reform

The $1.5 trillion new tax law represents the most sweeping change to tax code in a generation. Tax reform of this magnitude will have broad implications for government contractors. While accountants and tax departments wade through the 185-page legislation, here are the top 10 things government contractors need to know:

1. The corporate tax rate was permanently reduced from 35 percent to 21 percent.

The top corporate tax rate has been permanently reduced from 35 percent to a flat rate of 21 percent, beginning in 2018. Unlike all other provisions in the new law, including tax breaks for individuals, the new corporate tax rate provision does not expire.

2. There’s a tax break for owners of pass-through entities.

The new law provides owners of pass-through businesses — which include individuals, estates, and trusts — with a deduction of up to 20 percent of their domestic qualified business income, whether it is attributable to income earned through an S corporation, partnership, sole proprietorship, or disregarded entity. Without the new deduction, taxpayers would pay 2018 taxes on their share of qualified earnings at rates up to 37 percent. With the new 20 percent deduction, the tax rate on such income could be as low as 29.6 percent. It should again be noted that certain service industries are excluded from the preferential rate, unless taxable income is below $207,500 (for single filers) and $415,000 (for joint filers), under which the benefit of the deduction is phased out.

3. There might be huge tax benefits to changing your company’s current choice of entity.

Taxpayers should consider evaluating the choice of entity used to operate their businesses. The 21 percent reduced corporate tax rate may increase the popularity of corporations. However, factors such as the new 20 percent deduction for pass-through income, expected use of after-tax cash earnings, and potential exit values will significantly complicate these analyses. The potential after-tax cash benefits ultimately realized by owners could make choice-of-entity determinations one of the most important decisions taxpayers will now make.

4. There have been significant changes to the international tax system.

In connection with these changes, some U.S. shareholders who own stock in certain foreign corporations will have to pay a one-time “transition tax” on their share of accumulated overseas earnings. Other changes include a “participation exemption,” which is a 100 percent dividend-received deduction that permits certain domestic C corporations to receive dividends from their foreign subsidiaries without being taxed on such dividends when certain conditions are satisfied. There is also a new requirement that certain U.S. shareholders of controlled foreign corporations (CFCs) include in income their share of the “global intangible low-taxed income” of such CFCs. Finally, there are new measures to deter base erosion and promote U.S. production.

5. The corporate AMT and DPAD are dead, but Research Tax Credits live on.

The law repeals the Section 199 Domestic Production Activities Deduction (DPAD) and the corporate Alternative Minimum Tax (AMT) for tax years beginning after 2017. The Research Tax Credit was retained and is now more valuable given the reduction of the corporate tax rate from 35 percent to 21 percent.

6. They’ve scrapped NOL carrybacks and limited the use of carryforwards.

Previously, businesses were able to offset current taxable income by claiming net operating losses (NOLs), generally eligible for a two-year carryback and 20-year carryforward. Now NOLs for tax years ending after 2017 cannot be carried back, but can be indefinitely carried forward. In addition, NOLs for tax years beginning in 2018 will be subject to an 80 percent limitation. Companies will have to track their NOLs in different buckets and consider cost-recovery strategy on depreciable assets in applying the 80 percent limitation.

7. Tax reform’s impact on accounting methods may change when revenue is recognized, but new provisions could also lead to temporary and permanent tax benefits.

Under the new law, accrual basis taxpayers must now recognize income no later than the taxable year in which such income is taken into account as revenue in an applicable financial statement.

However, new provisions also provide favorable methods of accounting that were not previously available. That, coupled with the reduction in tax rates, creates a favorable and unique environment for filing accounting method changes.

There are many method changes still available for the 2017 tax year. Taxpayers should evaluate current accounting methods to identify any actionable opportunities to accelerate deductions and defer income for the 2017 tax year, which could result in significant tax savings.

8. There are new rules for bonus depreciation and full expensing on new and used property.

The new tax law allows a 100 percent first-year deduction — up from 50 percent — for the adjusted basis of qualifying assets placed in service after Sept. 27, 2017, and before Jan. 1, 2023, with a gradual phase down in subsequent years before sunsetting after 2026. The definition of qualifying property was also expanded to include used property purchased in an arm’s-length transaction. Businesses should pay close attention to any qualifying asset acquisitions made during the fourth quarter of 2017, as the full expensing can be taken on the 2017 return if the property was acquired and placed in service after Sept. 27, 2017.

Additionally, under new tax law, taxpayers may now deduct up to $1 million under Section 179 for properties placed in service beginning in 2018 — double the previous allowable amount. The phase-out threshold is increased to $2.5 million and will be indexed for inflation in future years and the types of qualifying property has been expanded.

9. The availability of the cash method of accounting expanded for small businesses.

Beginning in 2018, the average annual gross receipts threshold for businesses to use the cash method increases from $5 million to $25 million. Additionally, small businesses who meet the $25 million gross receipts threshold are not required to account for inventories and are exempt from the uniform capitalization rules. The $25 million is indexed for inflation for tax years beginning after 2018.

10. Now is the time to assess total rewards strategies.

Tax reform significantly impacts various components of an employer’s total compensation program — namely the expansion of the $1 million deduction cap on pay to covered employees; disallowed deductions for transportation fringe benefits provided to employees; income inclusion for employer-paid moving expenses; further deduction limitations on certain meal and entertainment expenses; and a two-year tax credit for employer-paid family and medical leave programs. As the IRS releases guidance, employers must immediately modify their payroll systems to reflect tax reform changes impacting individual taxpayers.

For more information about the impact of tax reform on the Government Contracting industry, please reach out to us.