Author: Shelby Miller

The landscape of tax legislation in the United States has been marked by constant evolution, with changes often reflecting the broader economic and political priorities of the time. One area that has seen significant shifts, and consequent uncertainty, involves the treatment of research and development (R&D) expenses. Historically, businesses could immediately deduct R&D expenses in the year they were incurred, a provision that encouraged innovation and investment in new technologies.

However, the Tax Cuts and Jobs Act (TCJA) of 2017 introduced a significant change that has since cast a shadow of uncertainty over the ability of companies to deduct these expenses: the requirement to amortize R&D expenses over five years, or fifteen years for research conducted outside the U.S., starting from the midpoint of the tax year in which the expenses were paid or incurred.

This shift, effective for tax years beginning after December 31, 2021, represents a departure from previous tax treatment and poses a challenge for businesses engaged in R&D activities. The immediate deduction of R&D expenses was a critical factor in lowering the effective cost of investment in innovation. By spreading the deduction over several years, the TCJA provision increases the short-term tax burden on companies, potentially discouraging investment in R&D activities that are crucial for technological advancement and economic growth.

The Impact of Amortization

The requirement to amortize R&D expenses affects cash flow and financial planning for businesses. Immediate expensing allows companies to reduce their taxable income in the year expenses are incurred, providing a more immediate cash benefit. Amortization, on the other hand, delays this benefit, which could lead to reduced investment in R&D due to tighter cash flow, especially for startups and small businesses that are often more sensitive to cash flow constraints.

Moreover, the change complicates tax planning and increases administrative burdens. Companies must track R&D expenses over the amortization period, adjusting for any changes in their R&D investment strategies. This complexity adds to the cost of compliance and may divert resources away from productive R&D activities.

Legislative Responses and Uncertainty

In response to concerns raised by the business community and tax professionals, bipartisan bills have been introduced in both the House of Representatives and the Senate aiming to repeal the amortization requirement. If enacted, these bills would allow companies to continue fully deducting R&D expenses in the year they are incurred, maintaining the United States’ competitive edge in innovation and technology development.

However, the legislative process is inherently uncertain, and the outcome of these proposals is not guaranteed. The uncertainty surrounding the tax treatment of R&D expenses makes it difficult for businesses to plan their investment strategies. Companies may adopt a more cautious approach to R&D spending, awaiting clearer signals from Congress and the administration on the future of these tax provisions.

Early in 2024, a glimmer of hope emerged with the proposal of the Tax Relief for American Families and Workers Act, aimed at reversing these changes. However, the legislative process has been slow, leaving businesses in a state of limbo. The implications of this uncertainty are profound, influencing the way R&D expenses are reported.

The Potential Outcomes and Their Implications

Should the bill pass retroactively, businesses would once again be able to fully expense U.S.-based R&D costs for the current tax year through 2025. This would delay the requirement to amortize these expenses, providing significant relief.

However, if the bill does not become law, the current requirements under Section 174 will persist, necessitating the amortization of R&D expenditures over the stipulated periods. This could considerably impact your business’s financial planning and tax liabilities.

Alternative R&D Credit for Small Businesses

Amidst this uncertainty, there is a silver lining for small businesses in the form of the Research and Development (R&D) Tax Credit. This credit, aimed at encouraging businesses to invest in research and development, has been made more accessible to small businesses, including startups, through recent legislative changes.

For tax years beginning after December 31, 2015, qualified small businesses can elect to apply a portion of their R&D tax credit against their payroll tax liability, up to a maximum of $250,000 ($500,000 after December 2022). This provision, part of the Protecting Americans from Tax Hikes (PATH) Act, is particularly beneficial for startups and small businesses that may not have a significant income tax liability but still incur substantial payroll expenses.

To qualify, a business must have less than $5 million in gross receipts for the tax year and no gross receipts for any tax year preceding the five-tax-year period ending with the tax year.

This definition opens the door for many startups and small businesses to benefit from the R&D tax credit, supporting their investment in innovation even in the early stages of their development.

The Future

The legislative uncertainty surrounding the ability to deduct R&D expenses or having to amortize them over five years poses a significant challenge for businesses engaged in research and development. The potential shift from immediate expensing to amortization could have far-reaching implications for innovation, cash flow, and tax planning. As Congress considers proposals to repeal the amortization requirement, businesses must navigate this uncertainty, potentially adjusting their investment strategies to account for the changing tax landscape.

For small businesses, the R&D tax credit offers a valuable opportunity to offset some of the costs associated with innovation, providing a critical lifeline amidst broader legislative uncertainty. By allowing small businesses to apply the credit against payroll taxes, the government is reinforcing its commitment to fostering innovation across all sectors of the economy.

As the debate over the treatment of R&D expenses continues, it is clear that the outcome will have significant implications for the future of innovation in the United States.

Businesses, policymakers, and tax professionals alike must stay informed and engaged to ensure that the tax code supports, rather than hinders, investment in the technologies and ideas that will drive economic growth in the years to come.

How We Can Help

As your accounting partners, we understand the complexities and challenges the current legislative environment poses. We are committed to keeping you informed and providing strategic advice tailored to your situation. Whether you’re currently engaged in R&D activities or planning for future innovation, we can help you navigate the tax implications and explore all available options to optimize your financial position.

Our team closely monitors legislative developments and is ready to assist you in evaluating their potential impact on your business. Should the need arise, we can also guide you through filing for an extension or amending your tax returns to take advantage of any changes in the law.

The tax code places limits on the amounts that individuals can gift to others (as money or property) without paying taxes. This is meant to keep an individual from using gifts to avoid the estate tax that is imposed upon the assets owned by the individual at their death. This can be a significant issue for family-operated businesses when the business owner dies; such businesses often must be sold to pay the resulting estate taxes. This is, in large part, why high-net-worth individuals invest in estate planning. 

Exclusions – Current tax law provides both an annual gift tax exclusion and a lifetime exclusion from the gift and estate taxes. Because the two taxes are linked, gifts that exceed the annual gift tax exclusion reduce the amount that the giver can later exclude for estate tax purposes. The term exclusion means that the amount specified by law is exempt from the gift or estate tax.

Annual Gift Tax Exclusion – This inflation-adjusted exclusion is $18,000 for 2024 (up from $17,000 for 2023). Thus, an individual can give $18,000 each to an unlimited number of other individuals (not necessarily relatives) without any tax ramifications. When a gift exceeds the $18,000 limit, the individual must file a Form 709 Gift Tax Return. However, unlimited amounts may be transferred between spouses without the need to file such a return – unless the spouse is not a U.S. citizen. Gifts to noncitizen spouses are eligible for an annual gift tax exclusion of up to $185,000 in 2024 (up from $175,000 in 2023).

Example: Jack has four adult children. In 2024, he can give each child $18,000 ($72,000 total) without reducing his lifetime exclusion or having to file a gift tax return. Jack’s spouse can also give $18,000 to each child without reducing either spouse’s lifetime exclusion. If each child is married, then Jack and his wife can each also give $18,000 to each of the children’s spouses (raising the total to $72,000 given to each couple) without reducing their lifetime gift and estate tax exclusions. The gift recipients (termed “donees”) are not required to report the gifts as taxable income and do not even have to declare that they received the gifts on their income tax returns. 

If any individual gift exceeds the annual gift tax exclusion, the giver must file a Form 709 Gift Tax Return. However, the giver pays no tax until the total amount of gifts more than the annual exclusion exceeds the amount of the lifetime exclusion. The government uses Form 709 to keep track of how much of the lifetime exclusion an individual has used prior to that person’s death. If the individual exceeds the lifetime exclusion, then the excess is taxed; the current rate is 40%.

All gifts to the same person during a calendar year count toward the annual exclusion. Thus, in the example above, if Jack gave one of his children a check for $18,000 on January 1, any other gifts that Jack makes to that child during the year, including birthday or Christmas gifts, would mean that Jack would have to file a Form 709.

Gifts for Medical Expenses and Tuition – An often-overlooked provision of the tax code allows for nontaxable gifts in addition to the annual gift tax exclusion; these gifts must pay for medical or education expenses. Such gifts can be significant; they include.

• tuition payments made directlyto an educational institution (whether a college or a private primary or secondary school) on the donee’s behalf – but not payments for books or room and board – and
• payments made directly to any person or entity who provides medical care for the donee.

In both cases, it is critical that the payments be made directly to the educational institution or health care provider. Reimbursements to the donee do not qualify. 

Lifetime Exclusion from Gift and Estate Taxes – The gift and estate taxes have been the subject of considerable political bickering over the past few years. Some want to abolish this tax, but there has not been sufficient support in Congress to do that; instead, the lifetime exclusion amount was nearly doubled as of 2018 and has been increased annually due to an inflation-adjustment requirement in the law. In 2024, the lifetime exclusion is $13.61 million per person. By comparison, in 2017 (prior to the tax reform that increased the exemption), the lifetime exclusion was $5.49 million. The lifetime estate tax exclusion and the gift tax exclusion have not always been linked; for example, in 2006, the estate tax exclusion was $2 million, and the gift tax exclusion was $1 million. The tax rates for amounts beyond the exclusion limit have varied from a high of 46% in 2006 to a low of 0% in 2010. The 0% rate only lasted for one year before jumping to 35% for a couple of years and then settling at the current rate of 40%. 

This history is important because the exclusions can change significantly at Congress’s whim – particularly based on the party that holds the majority. In fact, absent Congressional action, the exclusion amount is scheduled to return to the 2017 amount, adjusted for inflation, in 2026, estimated to be just over $6 million per person.

Spousal Exclusion Portability – When one member of a married couple passes away, the surviving member receives an unlimited estate tax deduction; thus, no estate tax is levied in this case. However, as a result, the value of the surviving spouse’s estate doubles, and there is no benefit from the deceased spouse’s lifetime unified tax exclusion.  For this reason, the tax code permits the executor of the deceased spouse’s estate (often, the surviving spouse) to transfer any of the deceased person’s unused exclusion to the surviving spouse. Unfortunately, this requires filing a Form 706 Estate Tax Return for the deceased spouse, even if such a return would not otherwise be required. This form is complicated and expensive to prepare, as it requires an inventory with valuations of all the decedent’s assets. As a result, many executors of relatively small estates skip this step. As discussed earlier, the lifetime exclusion can change at the whim of Congress, so failing to take advantage of this exclusion’s portability could have significant tax ramifications. 

Qualified Tuition Programs – Any discussion of the gift and estate taxes needs to include a mention of qualified tuition programs (commonly referred to as Sec 529 plans, after the tax code section that authorizes them). These plans are funded with nondeductible contributions, but they provide tax-free accumulation if the funds are used for a child’s postsecondary education (as well as, in many states, up to $10,000 of primary or secondary tuition per year). Contributions to these plans, like any other gift, are subject to the annual gift tax exclusion. Of course, these plans offer tax-free accumulation when distributions are made for eligible education expenses, so it is best to contribute funds as soon as possible. 

Under a special provision of the tax code, in a given year, an individual can contribute up to 5 times the annual gift tax exclusion amount to a qualified tuition account and can then treat the contribution as having been made ratably over a five-year period that starts in the calendar year of the contribution. However, the donor then cannot make any further contributions during that five-year period. 

Basis of Gifts – Basis is the term for the value (usually cost) of an asset; it is used to determine the profit when an asset is sold. The basis of a gift is the same for the donee as it was for the donor, but this amount is not used for gift tax purposes; instead, the fair market value as of the date the gift is made is used.

Example: In 2024, Pete gifts shares of stock to his daughter. Pete purchased the shares for $6,000 (his basis), and they were worth $25,000 in fair market value when he gifted them to his daughter. Their value at the time of the gift is used to determine whether the gift exceeds the annual gift tax exclusion. Because the gift’s value ($25,000) is greater than the $18,000 exclusion, Pete will have to file a Form 709 Gift Tax Return to report the gift; he also must reduce his lifetime exclusion by $7,000 ($25,000 – $18,000). His daughter’s basis is equal to the asset’s original value ($6,000); when she sells the shares, her taxable gain will be the difference between the sale price and $6,000. Thus, Pete has effectively transferred the tax on the stock’s appreciated value to his daughter. 
If Pete’s daughter instead inherited the shares upon Pete’s death, her basis would be the fair market value of the stock at that time (let’s say it is $28,000) and if she sold the shares for $28,000, she would have no taxable gain. 

This is only an overview of the tax law regarding gifts and estates; please call this office for further details or to get advice for your specific situation. 

The current American economy is characterized by inflation, rising credit card debt, and the looming threat of a recession. As a result, small to medium-sized business owners face many challenges. A recent report indicating a GDP growth of 1.6% in the first quarter of 2024 – well below the expected 2.5% – alongside predictions of a recession by mid-2024, indicates the urgency business owners face to safeguard their finances. This article showcases comprehensive strategies business owners like you can use to navigate challenging economic headwinds, ensuring operations remain stable and cash flow positive.

Understanding the Economic Context

The economic indicators are clear: with credit card delinquency rates rising and retail sales experiencing a downturn, businesses of all kinds are dealing with financial difficulties. Challenges like these often starkly highlight the fact that cast flow management is key in tough economic times. If you’ve been tightening your company’s purse strings, read on.

Critical Strategies for Cash Flow Management

1. Enhanced Cash Flow Monitoring

Establishing an effective cash flow monitoring system is the first step in safeguarding your business against economic fluctuations. This involves keeping a close eye on cash inflows and outflows, ensuring you always clearly understand your financial position. Accurate cash flow projections can help you anticipate future financial needs and adjust your strategies accordingly.

2. Operational Efficiency

Operational efficiency is more important than ever in times of economic uncertainty. Reevaluating your business operations to identify areas for improvement can lead to significant cost savings, helping you and your core employees thrive in what could have otherwise been difficult times. This might involve outsourcing non-core activities, reducing part-time staff during slower periods, and renegotiating vendor contracts to secure better terms. Such measures can reduce operational costs without compromising the quality of your products or services.

3. Leveraging Technology

Technology can be a powerful tool in streamlining business processes and improving efficiency. Modern accounting software, for example, can simplify the task of budgeting and cash flow forecasting, providing a comprehensive view of your financial health. Additionally, artificial intelligence (AI) platforms can help you save hours a day and potentially allow you to reduce staffing needs. Embracing technological advancements can help your business succeed, especially if your competitors are slow to adapt.

4. Debt Management and Financing Options

In challenging economic times, managing debt and exploring financing options becomes crucial. Refinancing existing high-interest debt can reduce financial burdens while securing lines of credit during financially stable periods can provide a safety net for future downturns. Alternatively, financing options such as invoice factoring can offer immediate cash flow relief, allowing you to access funds tied up in unpaid invoices.

5. Building a Cash Reserve

A cash reserve can act as a financial buffer, enabling your business to navigate unexpected downturns or seize growth opportunities without straining your cash flow. Balancing growth capital with working capital is challenging but essential for long-term sustainability. A financial planner or tax advisor can help you develop a savings plan that works for your company.

6. Inventory and Sales Management

Optimizing your inventory and focusing on high-demand products and services can enhance your sales and improve cash flow. Regularly reviewing your inventory to eliminate underperforming items can free up cash and reduce holding costs, allowing you to invest in more profitable areas.

7. Seeking Professional Advice

As we noted, seeking professional financial advice can be invaluable with the complexity of businesses’ economic challenges today. A financial advisor or accountant can provide personalized guidance tailored to your business’s specific needs and circumstances, helping you confidently navigate these uncertain times and future economic fluctuations.

What’s Ahead

As small to medium-sized business owners grapple with the possibility of a recession, adopting a strategic approach to cash flow management is more critical than ever. By enhancing cash flow monitoring, improving operational efficiency, leveraging technology, managing debt wisely, building a cash reserve, and optimizing inventory and sales, businesses can position themselves for resilience and growth no matter what is happening economically. Remember, the economy will always ebb and flow – all you can control is your preparedness!

Initial ERC Claim Disallowance Letters Issued

The IRS has taken a proactive stance by sending out disallowance letters to more than 20,000 businesses. These letters target claims made by businesses that either did not exist or lacked paid employees during the eligibility period (March 13, 2020, to December 31, 2021). This preemptive measure aims to identify ineligible claims before they are paid.

Dubious TV Promotions and Claim Withdrawal Process

A prior warning was issued on September 29th, cautioning business owners against aggressive TV marketing related to ERC claims. Subsequently, a November 9th article outlined a procedure for those who made ineligible claims to withdraw them and avoid potential issues with the IRS. The disallowance letters play a crucial role in preventing incorrect refunds from going to ERC promoters.

How These Letters Help Taxpayers

The disallowance letters serve a dual purpose:

1. Help ineligible taxpayers avoid audits, repayment, penalties, and interest.
2. Protect taxpayers by preventing incorrect refunds from reaching ERC promoters.

Enforcement Activities and Future Plans

These disallowance letters are part of the IRS’s broader enforcement activities, with plans for additional letters in the future. The IRS continues to caution taxpayers against aggressive maneuvers by marketers and scammers in the ERC space. However, those engaged in fraudulent activities may face potential criminal investigation and prosecution.

New Voluntary Disclosure Program

Additionally, the IRS launched a new Voluntary Disclosure Program on December 21st, 2023. The new disclosure program allows taxpayers who received ERC but did not qualify to repay only 80% of the credit they received without interest or penalties. Taxpayers must apply by March 22, 2024 to enter the program. To qualify for this program, the taxpayer must provide the IRS with names, addresses, and telephone numbers for the advisors who assisted with the ERC claims. If a taxpayer is unable to repay the 80% of the credit, they may be able to apply for an installment agreement however the taxpayer would be required to pay penalties and interest under the installment agreement.

In the ever-evolving landscape of business regulations, the Corporate Transparency Act (CTA), passed as part of the National Defense Authorization Act for Fiscal Year 2021, introduces new reporting requirements for businesses in the United States, specifically focusing on beneficial ownership.

The CTA aims to combat illicit activities such as money laundering, tax fraud, and terrorism financing by increasing transparency in the ownership structures of companies. It requires corporations, limited liability companies (LLCs), and similar entities to report their beneficial owners to the Financial Crimes Enforcement Network (FinCEN).

What Is FinCEN? – The Financial Crimes Enforcement Network (FinCEN) is a bureau of the U.S. Department of the Treasury. Established in 1990, FinCEN’s primary role is to safeguard the financial system from illicit use, combat money laundering, and promote national security through the collection, analysis, and dissemination of financial intelligence.

FinCEN works closely with law enforcement agencies, intelligence agencies, financial institutions, and regulatory entities. It implements and enforces compliance with certain parts of the Bank Secrecy Act, including the requirement for financial institutions to report suspicious activities that might signify money laundering, tax evasion, or other financial crimes.

FinCEN also plays a crucial role in fighting terrorism by tracking and cutting off sources of funding for terrorist activities. It achieves this by analyzing financial transactions and sharing this information with domestic and international partners.

Companies Required to Report Beneficial Ownership Information (BOI) to FinCEN –

There are two types of reporting companies:
• Domestic reporting companies – corporations, limited liability companies, and any other entities created by the filing of a document with a secretary of state or any similar office in the United States. This includes single member LLCs.
• Foreign reporting companies – entities (including corporations and limited liability companies) formed under the law of a foreign country that have registered to do business in the United States by the filing of a document with a secretary of state or any similar office.

There are 23 types of entities that are exempt from the reporting requirements. See FinCEN Q&A C.2. Carefully review the qualifying criteria before concluding that your company is exempt.

Who is a Beneficial Owner – A beneficial owner, as defined by the CTA, is an individual who exercises substantial control over a company or owns or controls at least 25% of the ownership interests of that company. There can be multiple beneficial owners for a single company. The CTA excludes certain entities from this requirement, such as publicly traded companies, banks, credit unions, and certain regulated entities, among others.

The information to be reported includes each beneficial owner’s full legal name, date of birth, current residential or business street address, and a unique identifying number from an acceptable identification document, such as a passport or driver’s license. This information must be updated within a year of any change in beneficial ownership.
Non-compliance with the CTA can result in hefty fines and potential imprisonment. Therefore, it is crucial for businesses to understand their obligations under this new law and take the necessary steps to comply.

The CTA represents a significant shift in U.S. corporate law, and its impact will be far-reaching. While it aims to enhance corporate transparency and combat illicit activities, it also imposes new administrative burdens on small and medium-sized businesses.

Companies will need to devote resources to identify their beneficial owners, collect the required information, and report it to FinCEN. They will also need to ensure that this information is kept up to date, which could require ongoing monitoring and reporting efforts.

Moreover, the CTA raises privacy concerns. Although FinCEN is required to keep the reported information confidential, it can be disclosed in certain circumstances, such as in response to a request from law enforcement agencies.

Filing Due Dates

Existing Businesses -If your company already exists as of January 1, 2024, it must file its initial BOI report by January 1, 2025, which provides plenty of time to comply. But it is best not to procrastinate and risk penalties for not complying.

New Businesses – For a U.S. business newly created on or after January 1, 2024 and before January 1, 2025, as well as a foreign entity that becomes a foreign reporting company in that time frame, the BOI report is due 90 calendar days from the earlier of the date on which the business receives actual notice that its creation has become effective or the date on which a secretary of state or similar office first provides public notice that the company has been created or registered. The reporting deadline is reduced to 30 days for both U.S. and foreign entities created or registered on or after January 1, 2025.

In addition to information about the company and beneficial owners, these businesses must also report information about the “company applicant,” defined as(1)the individual who directly files the document that creates, or first registers, the reporting company and (2) the individual that is primarily responsible for directing or controlling the filing of the relevant document.

Penalties – If a person has reason to believe that a report filed with FinCEN contains inaccurate information and voluntarily submits a report correcting the information within 90 days of the deadline for the original report, then the CTA creates a safe harbor from penalty. However, should a person willfully fail to report complete or updated beneficial ownership information to FinCEN as required under the Reporting Rule, FinCEN will determine the appropriate enforcement response in consideration of its published enforcement factors. The willful failure to report complete or updated beneficial ownership information to FinCEN, or the willful provision of or attempt to provide false or fraudulent beneficial ownership information may result in civil penalties of up to $500 for each day that the violation continues, or criminal penalties including imprisonment for up to two years and/or a fine of up to $10,000. Senior officers of an entity that fails to file a required BOI report may be held accountable for that failure. So, this reporting requirement should not be taken lightly.

Updates – When the information an individual or reporting company reported to FinCEN changes, or when the individual or reporting company discovers that reported information is inaccurate, the individual or reporting company must update or correct the reported information, as applicable.

FinCEN Small Entity Compliance Guide – This 50-page guide includes interactive flowcharts, checklists, and other aids to help determine whether a company needs to file a BOI report with FinCEN, and if so, how to comply with the reporting requirements. This Guide will be updated periodically with new or revised information.

How Does a Company File a BOI Report? If your company is required to file a BOI report, you must do so electronically through FinCEN’s online secure filing system.

FinCEN will publish instructions and other technical guidance on how to complete the BOI report form.

Navigating the complexities of the CTA and its reporting requirements can be challenging. If you need assistance, contact your legal counsel.