The shift of the coronavirus crisis from a pandemic to an endemic state has brought with it the return of the holiday shopper and traveler.

Consumers continued to demonstrate a willingness to spend against inflation headwinds with holiday-focused retailer sales in October 2022 coming in at 6.45% year-over-year, the fourth highest October year-over-year change in the last 20 years, trailing behind 2021 at 12.68%, 2020 at 11.08% and 2005 at 6.62%. This is also in line with the RSM forecast for nominal total retail sales of 6.5% to 8.0% and sets up November to be the critical month for retail sales.

And while consumers are willing to spend during this time, they continue to use inflation-fighting tactics they deployed during the back-to-school season, like buying store-brand items and shopping more comparatively.

Consumers are also showing their willingness to gather this holiday season with October and November showing strong air passenger volumes of 2.2 million and 2.15 million total number of average daily passengers, respectively, according to the Transportation Security Administration.

The return of the holiday traveler is a boon for the restaurant industry, highlighted by only the second positive monthly increase in seated diners according to OpenTable; however, restaurants have continued to face labor shortages to meet the returning demand. Consumers seeking out spending on services this holiday season may have to temper expectations.

The takeaway

The results from Black Friday this year will be telling because it is the culmination of various factors coming together over multiple years. As for consumers, they are seeking to navigate balancing returning to in-person gatherings this holiday season, while also facing continued inflationary pressures that have cut into their built-up savings. For the retailers that have been dealing with elevated inventory levels, shortages in labor and increased margin pressure, they are relying on this holiday season to perhaps help hit the reset button for them before next year.

Look for additional insights as we continue our consumer products holiday season insights series.

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This article was written by Seth Bacon and originally appeared on 2022-11-23.
2022 RSM US LLP. All rights reserved.
https://realeconomy.rsmus.com/consumer-products-holiday-season-insights-the-return-of-the-shopper/

RSM US Alliance provides its members with access to resources of RSM US LLP. RSM US Alliance member firms are separate and independent businesses and legal entities that are responsible for their own acts and omissions, and each are separate and independent from RSM US LLP. RSM US LLP is the U.S. member firm of RSM International, a global network of independent audit, tax, and consulting firms. Members of RSM US Alliance have access to RSM International resources through RSM US LLP but are not member firms of RSM International. Visit rsmus.com/aboutus for more information regarding RSM US LLP and RSM International. The RSM(tm) brandmark is used under license by RSM US LLP. RSM US Alliance products and services are proprietary to RSM US LLP.

As the calendar year comes to an end, it’s time for many organizations to reflect on challenges and issues from this year, as well as look to new efforts for the coming year. The following captures some key takeaways from 2022 and where health care leaders may want to focus on in 2023.

What did we learn?

• Consolidations of large health systems are still very real and likely to continue to be an avenue for health systems looking to build scale and obtain market position as it relates to payor contracts.
• Providers continue to be challenged with labor costs. Across the continuum of care in the U.S., labor is the most challenging issue in the industry. The only way providers will overcome this is through efficiency, likely through the use of technology.
• Consumers are still not happy with their experience in health care; price transparency has yet to make the buying experience much better, and consumers are still seeing more and more risk shifted to them from their employers through high deductible plans.

For many health care organizations, next year will mean a greater focus on becoming larger, becoming more efficient and improving the patient-consumer experience.

Thoughts for next year

Key considerations for health care leaders next year will include:

• Interest rate increases will cause health care providers to reconsider expansion of their capital spending. But it could also lead providers to double down on environmental, social and governance efforts and look toward green bonds or other capital that comes at a discount for ESG-related areas of focus.
• Inflation will impact health care providers through the cost of everything they consume, from labor to supplies. It will also create stress on their revenue as consumers will be forced to decide what bills to pay, such as their health care deductible or their energy bills.
• As health care becomes more consumer-driven, the age-old wisdom that health care is recession-resistant will be challenged.

Follow our health care thought leadership into 2023 by checking out our ongoing quarterly industry outlooks.

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This article was written by Rick Kes and originally appeared on 2022-11-21.
2022 RSM US LLP. All rights reserved.
https://realeconomy.rsmus.com/reflections-from-2022-and-a-look-forward-for-the-health-care-industry/

RSM US Alliance provides its members with access to resources of RSM US LLP. RSM US Alliance member firms are separate and independent businesses and legal entities that are responsible for their own acts and omissions, and each are separate and independent from RSM US LLP. RSM US LLP is the U.S. member firm of RSM International, a global network of independent audit, tax, and consulting firms. Members of RSM US Alliance have access to RSM International resources through RSM US LLP but are not member firms of RSM International. Visit rsmus.com/aboutus for more information regarding RSM US LLP and RSM International. The RSM(tm) brandmark is used under license by RSM US LLP. RSM US Alliance products and services are proprietary to RSM US LLP.

Nonprofit organizations are either striving to make a bigger impact, or they are falling behind. The following infographic highlights four strategies nonprofits can adopt to help them fulfill their missions to the best of their abilities.

Download infographic

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This article was written by RSM US LLP and originally appeared on Nov 21, 2022.
2022 RSM US LLP. All rights reserved.
https://rsmus.com/insights/industries/nonprofit/4-ways-nonprofits-can-drive-mission-impact.html

RSM US Alliance provides its members with access to resources of RSM US LLP. RSM US Alliance member firms are separate and independent businesses and legal entities that are responsible for their own acts and omissions, and each are separate and independent from RSM US LLP. RSM US LLP is the U.S. member firm of RSM International, a global network of independent audit, tax, and consulting firms. Members of RSM US Alliance have access to RSM International resources through RSM US LLP but are not member firms of RSM International. Visit rsmus.com/aboutus for more information regarding RSM US LLP and RSM International. The RSM(tm) brandmark is used under license by RSM US LLP. RSM US Alliance products and services are proprietary to RSM US LLP.

Putting together an appealing compensation package can help employers attract, retain and incentivize key employees in tight labor markets. Stock appreciation rights (SARs) are an option to incentivize key employees where the value is directly tied to the increase in company value. Additionally, when designing a SAR plan, employers have the added flexibility of settling the SARs with a cash payment or the transfer of shares. Before deciding what type of executive compensation device is right for your company, here are some answers to frequently asked questions about SARs.

Q.    What is a stock appreciation right?

A.    A SAR is a promise to pay an amount based on the appreciation in value of a share of employer stock, over a stated exercise price (or threshold value), which can be settled in stock or cash. While a SAR can be designed like a stock option, the holder of the SAR receives the same net proceeds without the cash outlay associated with having to pay the exercise price of stock options.

Q.    Why might a company want to issue SARs instead of actual equity?

A.    As equity ownership does not transfer upfront, SARs allow a company to provide a promise to pay an amount in the future, which is directly linked to company value without directly diluting ownership or making employees direct owners with additional rights.

SARs are generally subject to certain time or performance-based vesting which must be satisfied prior to receiving any transfer of stock or cash. Therefore, SARs provide incentive for an employee not only to stay with the company through the vesting date, but also to contribute to increasing the company value, which will result in a higher payment value when the SAR is settled. Since SARs do not require a cash outlay (i.e., exercise price) upon exercise, they are generally viewed as creating less of a financial hardship for employees, who would otherwise need to come up with the cash required to exercise stock options.

Q.    How does a SAR plan work?

A.    SARs are similar to stock options in that they are granted at a set exercise price (or threshold value) and generally have a vesting period and expiration date. Once a SAR vests, it can be designed to allow the holder to exercise it at any time prior to the SARs expiration, which is similar to the mechanics of a stock option, or it can be designed to be payable only upon a designated event. The proceeds of the SAR, which typically equals the appreciation in value over the exercise price or threshold value, are transferred either in cash, shares, or a combination of both depending on the rules of the plan.

Q.    How is the value of a SAR determined?

A.    The value of a SAR fluctuates, based on the value of company stock, and is determined at the time of exercise by the employee. When a SAR is settled, the value awarded to the employee is based on the excess of FMV over the exercise price or threshold value (which is generally equal to the FMV at the time of grant). Unlike phantom stock, if the value declines below the value at grant, the recipient will not receive any payment.

Public companies that issue SARs will use the fair market value (FMV) as reflected on the public exchange they trade on at the time the transfer is initiated. On the other hand, private companies that issue SARs don’t have a readily ascertainable market value. Instead, they must follow the general equity compensation valuation rules for private companies and use a reasonable valuation method, such as an express written formula, or have a third-party appraisal performed to determine the FMV per share.

Q.    How are SARs treated for federal income tax purposes?

A.    SARs are not taxable at grant, and therefore, allow a recipient to defer compensation into a later year because the recipient does not pick up the value of SARs as compensation until settlement, which is typically in a year subsequent to the year of the grant.

Once SARs vest and the employee exercises or the designated payment event occurs, the company either makes a cash payment or transfers shares, depending on the rules of the plan. At the time the transfer is initiated, the excess of FMV over the exercise price or threshold value is taxable compensation to the recipient.

At the time payment becomes taxable, the company is entitled to a deduction equal to the amount of income recognized by the recipient. The timing of that deduction depends on whether the SAR is settled in shares or cash, as well as when payment is made in comparison to vesting.

Additionally, if the SARs are settled in shares, the recipient becomes an owner and the holding period of the shares begins on the date of transfer. If the shares are held longer than one year, any appreciation or depreciation after the transfer date will be characterized as long-term capital gain or loss, respectively.

Q.    What are the payroll tax consequences of SARs?

A.    SARs are subject to tax under the Federal Insurance Contributions Act (FICA), which is comprised of the old-age, survivors, and disability insurance taxes, also known as social security taxes, and the hospital insurance tax, also known as Medicare tax (collectively referred to as payroll tax), for employees with a Form W-2 reporting requirement.

SARs are subject to payroll tax withholding at the time the transfer of shares or payment is initiated if such amounts are actually or constructively received in the calendar year of the exercise.

Q.    Is a section 83(b) election available?

A.    No. With SARs, either cash is transferred (in which case section 83 does not apply) or the shares are not transferred until they are already vested; therefore, a section 83(b) election does not apply.

Q.    Are there section 409A considerations with SARs?

A.    Yes, a SARs plan can be designed to be exempt from section 409A, by using the short-term deferral or by meeting the requirements of the stock right exception.

Under the short-term deferral rules, if payment occurs within the same year of vesting or within two and a half months of the end of the year in which vesting occurred, then the SARs are not considered deferred compensation and section 409A does not apply.

SARs that satisfy the requirements to be considered a “stock right” will also not be considered deferred compensation subject to section 409A. For additional detail on the requirements, see the Stock options and section 409A: Frequently asked questions article.

If neither of the above exemptions are met, the SARs plan must either (1) be designed to conform to the requirements of section 409A and the associated regulations or (2) suffer the potential adverse tax consequences of failing section 409A if they do not conform. Generally, operating deferred compensation plans requires careful consideration of the stringent and complex section 409A rules. Employers should consult a tax advisor and review their SARs plans regularly to ensure the plan is operating as intended and does not run afoul of section 409A rules, which could result in income inclusion at vesting and a 20% penalty tax to the employee if violated.

Q.    How does the executive receive value from the SAR?

A.    The number of SARs, vesting schedule, form of payment (i.e., cash or stock), and triggering payment events are typically set forth in individual grant agreements. Actual payouts of the SARs are deferred until a future exercise date or designated payment event. It should be noted that even if payments are made after the grantee terminates service, the nature of the payment is generally still treated as compensation for tax purposes and reported on Form W-2 for individuals who were employees when they received the SARs.

Q.    Can partnerships issue SARs?

A.    Yes. It’s possible for partnerships to issue unit appreciation rights (UAR) which are economically similar to SARs. A UAR awards the recipient a right to receive a cash payment equal to the appreciation of a specified number of units of the partnership subject to specified vesting conditions. The value of a UAR is tied to partnership equity value rather than common stock value. All other aspects of the plan would be the same. Because the unit appreciation rights are not actual equity in the partnership, such a plan would not give rise to any partner as employee issues.

Q.    What should a company consider when designing a SAR plan?

A.    Companies should consider the following when formulating aspects of their written plan:

• Which key employees should receive SARs?
• When and how many SARs should be granted?
• What type of vesting conditions will most incentivize employees?
• Will the plan meet the short-term deferral or stock right exception to be exempt from section 409A?
• Will the plan be section 409A compliant? If so, what designated payment events would the company like to include that are permissible under section 409A?
• For private companies, will an express written formula or third-party appraisal be performed to determine the FMV at grant?
• Do employees have enough cash to cover the required tax upon transfer (if the SARs will be settled in shares instead of cash)?
• Will special vesting rules apply in the case of death, disability, or other events?

SARs should be compared to other incentive compensation methods to determine if they achieve the company’s goals. If they do, the plan should be reviewed with tax advisors to ensure no unintended tax consequences occur.

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This article was written by Anne Bushman, Michelle Borman, Nicole Kelley, Chloe Webb and originally appeared on 2022-11-19.
2022 RSM US LLP. All rights reserved.
https://rsmus.com/insights/services/business-tax/frequently-asked-questions-about-stock-appreciation-rights.html

The information contained herein is general in nature and based on authorities that are subject to change. RSM US LLP guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. RSM US LLP assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein. This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer.

RSM US Alliance provides its members with access to resources of RSM US LLP. RSM US Alliance member firms are separate and independent businesses and legal entities that are responsible for their own acts and omissions, and each are separate and independent from RSM US LLP. RSM US LLP is the U.S. member firm of RSM International, a global network of independent audit, tax, and consulting firms. Members of RSM US Alliance have access to RSM International resources through RSM US LLP but are not member firms of RSM International. Visit rsmus.com/aboutus for more information regarding RSM US LLP and RSM International. The RSM(tm) brandmark is used under license by RSM US LLP. RSM US Alliance products and services are proprietary to RSM US LLP.

In the past year, commercial real estate has seen a dramatic rise in interest rates and a tempered slowdown in transactional activity. 2023 will provide an opportunity for well-positioned organizations to take advantage of the right avenues. Real estate owners and investors must make wise decisions now to be ready for next year.

As we close the books on 2022, here are 10 important year-end resolutions:

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This article was written by Scott Helberg and originally appeared on Nov 17, 2022.
2022 RSM US LLP. All rights reserved.
https://rsmus.com/insights/industries/real-estate/10-smart-moves-real-estate-investors-operators-year-end.html

The information contained herein is general in nature and based on authorities that are subject to change. RSM US LLP guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. RSM US LLP assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein. This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer.

RSM US Alliance provides its members with access to resources of RSM US LLP. RSM US Alliance member firms are separate and independent businesses and legal entities that are responsible for their own acts and omissions, and each are separate and independent from RSM US LLP. RSM US LLP is the U.S. member firm of RSM International, a global network of independent audit, tax, and consulting firms. Members of RSM US Alliance have access to RSM International resources through RSM US LLP but are not member firms of RSM International. Visit rsmus.com/aboutus for more information regarding RSM US LLP and RSM International. The RSM(tm) brandmark is used under license by RSM US LLP. RSM US Alliance products and services are proprietary to RSM US LLP.

Amid the many challenges in today’s economy, there is a bright spot: Supply chains, after a period of severe disruption, are back to normal.

Our RSM US Supply Chain Index pointed to supply efficiency for the fourth month in a row, reaching 0.49 standard deviations above neutral in October.

That means that supply chains have returned to their pre-pandemic level and is a sign that inflation is cooling.

Improvement in the supply chain index came mostly from strong inventory recovery as companies stocked up on goods, fearing the global supply chain snarl might persist.

But as the pandemic has retreated, many companies have been left with excess inventories, forcing them to offer more discounts ahead of the holiday season.

Other components, like capacity utilization and delivery time, were also back to neutral.

Tight labor market

The only sticky component was job vacancies, a proxy for labor supply, which continued to be a drag on the supply chain index.

While the economy is slowing down and there are signs that job vacancies will cool, we do not expect the labor market will be in balance any time soon.

The economy has continued to add hundreds of thousands of new jobs every month while the labor force participation rate is about 1 percentage point below the pre-pandemic level.

It is highly possible that the inflation problem will be under control only after the labor market shows a significant crack.

The takeaway

The improvement in supply chains should give the Federal Reserve more reason to consider a slowdown in rate hikes to avoid pushing the economy into a deeper recession, which in our base case will happen in the second half of next year.

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This article was written by Tuan Nguyen and originally appeared on 2022-11-17.
2022 RSM US LLP. All rights reserved.
https://realeconomy.rsmus.com/rsm-us-supply-chain-index-returns-to-pre-pandemic-level/

RSM US Alliance provides its members with access to resources of RSM US LLP. RSM US Alliance member firms are separate and independent businesses and legal entities that are responsible for their own acts and omissions, and each are separate and independent from RSM US LLP. RSM US LLP is the U.S. member firm of RSM International, a global network of independent audit, tax, and consulting firms. Members of RSM US Alliance have access to RSM International resources through RSM US LLP but are not member firms of RSM International. Visit rsmus.com/aboutus for more information regarding RSM US LLP and RSM International. The RSM(tm) brandmark is used under license by RSM US LLP. RSM US Alliance products and services are proprietary to RSM US LLP.

President Biden recently signed the Inflation Reduction Act of 2022 (“the Act”) into law. The Act provides for an array of tax credits intending to spur significant project development in the renewable energy space. These tax credits will affect businesses across various sectors. This article will focus on the credits that affect the Industrials sector- including manufacturing, automotive, and power and utilities. For information on provisions affecting the energy industry, review RSM’s explanation of the Clean Fuels provisions.  While many questions remain on the implementation of these new incentives, Treasury is drafting guidance and has requested comments from affected stakeholders.

Clean Energy Incentives – Overview

The Act includes many clean energy incentives affecting manufacturers. The Act extends and expands the energy investment tax credit which applies to entities placing in service certain renewable energy property at their facility- including solar, geothermal, waste energy recovery property, and combined heat and power cogeneration systems. Additionally, the Act includes a new round of funding for the qualifying advanced energy manufacturing credit and expands the definition of qualifying projects.  There have also been significant incentives to facilitate the purchase of passenger and commercial electric vehicles and refueling equipment.  The Act also provides for new opportunities for monetization of some of the credits by making some of the credits essentially refundable through the “direct pay” provisions.  In other situations, credits can be sold for cash under “transferability” provisions.

Base and Bonus rates – Apprenticeship and Prevailing Wage Requirements

Applicable to many of the provisions, the Act makes significant changes by replacing the existing credit regime with a two-tiered system that provides a minimum “base” credit amount and a maximum “bonus” credit amount that is five times the base amount. Both amounts will vary depending on the relevant project. The bonus credit amount will be available only if certain prevailing wage and apprenticeship requirements are satisfied in connection with the relevant project.

To qualify for the bonus credit rates for many of the incentives, the taxpayer must meet certain apprenticeship and prevailing wage requirements.  In general, for the apprenticeship requirements, the taxpayer must ensure that, with respect to the construction of a qualified facility, no fewer than the “applicable percentage” of total labor hours are performed by qualified apprentices. Additionally, in order to satisfy the prevailing wage requirements, the taxpayer must ensure that any laborers and mechanics employed by the taxpayer or any contractor or subcontractor for a renewable energy project are paid prevailing wages in the locality in which the project is located (as determined by the Secretary of Labor) during the construction of such project and with respect to subsequent alterations or repairs of the project following its placement in service.

Credit “Adders” – Domestic Content Requirements; Energy Communities

The Act also provides for incremental tax credits for certain renewable projects that are placed in service after 2022 and meet certain “domestic content” requirements and/or are located in specified areas or communities.

An increased tax credit rate for certain renewable energy projects may apply for projects that meet certain domestic content requirements. To meet this requirement, taxpayers must ensure that the steel, iron, or other manufactured products that comprise the project are produced in the United States. Generally, a manufactured product will be considered manufactured in the United States if a specified percentage of the total cost of the components is attributable to components that are mined, produced, or manufactured in the United States.

Additionally, an increased credit rate may apply for certain projects located in an “energy community”.  An energy community is either (1) a brownfield site; (2) an area that has employment or local tax revenue related to extraction, processing, transport, or storage of coal, oil, or natural gas and an unemployment rate at or above the national average; or (3) a census tract where a coal mine has closed or a coal-fired electric generating unit has been retired, or a census tract directly adjoining the mine or unit. 

Monetization

Important to project development and financing, the Act provides alternative ways to monetize renewable tax credits by allowing certain entities or projects to either (i) receive a cash payment from the government in lieu of tax credits by utilizing a “direct-pay” election under section 6417 or (ii) sell tax credits to third parties under section 6418.

Incentives for Manufacturers

New production tax credit for advanced manufacturing

New section 45X provides a production tax credit (“PTC”) for domestic manufacturers of certain energy property including solar, wind energy, and certain battery components. The credit is for claimed on a per-item basis for qualifying articles that are produced and sold. Eligible components include solar polysilicon, wafers, cells, modules, back sheets, torque tubes, structural fasteners, wind blades, nacelles, towers, offshore foundations, inverters; electrode active materials, critical minerals.

The full credit is for eligible components produced and sold before January 1, 2030. For components sold after that date, the credit is reduced by 25 percent each year. This credit is available for components produced and sold after 2022 and does not apply to components sold after 2032. This credit allows for a direct pay option for claimants.

New funding allocation for advanced energy projects

The Act revives the section 48C advanced energy project credit, allowing Treasury to allocate an additional $10 billion in tax credits to qualifying projects beginning in 2023 through 2031. New section 48C provides a base credit amount of 6 percent and a bonus rate of 30 percent for construction, re-equipping, or expansion of a manufacturing facility that constructs qualifying property. Included in the definition of qualifying property is:

• Property designed to produce energy conservation technologies (including residential, commercial, and industrial applications)
• Fuel cells, microturbines, or energy storage systems and components
• Property designed to be used to produce energy from the sun, water, wind, geothermal deposits, or other renewable resources
• Grid modernization equipment or components
• Property designed to remove, use, or sequester carbon oxide emissions
• Equipment designed to refine, electrolyze, or blend any fuel, chemical, or product which is renewable, low-carbon, and low emission
• Light-, medium-, or heavy-duty electric or fuel cell vehicles, as well as technologies, components, or materials for such vehicles, and associated charging or refueling infrastructure
• Hybrid vehicles with a gross vehicle weight rating of not less than 14,000 pounds, as well as technologies, components, or materials for such vehicles
• Other advanced energy property designed to reduce GHG emissions as may be determined by the Secretary

Also included is property that re-equips an industrial or manufacturing facility with equipment designed to reduce GHG emissions by at least 20% through the installation of certain property (e.g., low- or zero-carbon process heat systems, carbon capture, transport, utilization, and storage systems, critical materials processing, refining, or recycling).

Treasury is expected to issue guidance on applications for receiving a credit allocation by February 2023.  Criteria for selection of a credit allocation includes:

• Reasonable expectation of commercial viability
• Greatest job creation (direct/indirect)
• Greatest net impact in avoiding air pollutants and emissions
• Greatest potential for technological innovation and commercial deployment
• Lowest levelized cost of generated or stored energy, or of measured reduction in energy consumption or GHG emission
• Shortest time from certification to completion

For taxpayers receiving a credit allocation, the credit is claimed in the year the property is placed in service.  To receive the bonus rate, taxpayers must satisfy the prevailing wage and apprenticeship requirements.

This credit allows for monetization through transfer to another taxpayer for cash.

Extension and modification of the investment tax credit

The investment tax credit (ITC) is claimed by many manufacturers that install renewable energy property at their facilities. In most cases, the Act extends the credit for property for construction that begins before January 1, 2025. The provision generally provides a base credit rate of 6 percent of the basis of energy property or a bonus credit rate of 30 percent of the basis of energy property. These credit rates apply with respect to facilities placed into service after December 31, 2021. In order to claim the ITC at the bonus credit rate, taxpayers must generally satisfy the prevailing wage and apprenticeship requirements.

The ITC is expanded to include energy storage technology, biogas property, microgrid controllers, dynamic glass, interconnection property, and linear generators placed in service beginning January 1, 2023. These technologies are eligible for a 6 percent base credit rate or a 30 percent bonus credit rate for any property that begins construction before January 1, 2025.

Credit adders of 10 percentage points for domestic content and an additional 10 percentage points for locations in an energy community may apply.  An additional credit adder may apply for wind or solar projects located in low-income communities.

This credit may be monetized through transfer to another taxpayer for cash.

Automotive

The Act modifies the tax credits for clean vehicles and provides for a new tax credit for qualified commercial clean vehicles.  It also extends and expands the alternative fuel refueling property credit. These provisions will have a profound impact on the automotive industry. It is expected that the automotive industry will also benefit tremendously from commercial sales of these products. Certain manufacturers in the automotive industry may benefit from the section 45X PTC and the section 48C advanced energy project credit.

Clean vehicle tax credit

The Act amends the existing 30D tax credit to apply to new clean vehicles placed into service by the taxpayer during the taxable year.

The amount of credit allowed by this provision with respect to a qualified vehicle is equal to a maximum of $7,500 for a vehicle propelled primarily by electricity, with a battery of at least 7 kilowatt hours, or a hydrogen fuel cell electric vehicle. Eligible vehicles must meet the critical mineral or battery component requirements. Vehicles which meet one of the requirements, but not both, are eligible for a credit of $3,750.

To meet the critical mineral requirement, the applicable percentage of critical minerals contained in the battery must be extracted or processed in a country with which the United States has a free trade agreement or have been recycled in North America. The applicable percentage is:

• For calendar years prior to 2024, 40 percent
• For calendar year 2024, 50 percent
• For calendar year 2025, 60 percent
• For calendar year 2026, 70 percent
• For calendar years after 2026, 80 percent

To meet the battery content requirement, the applicable percentage of the components contained in the battery used in the vehicle must be manufactured or assembled in North America. The applicable percentage is:

• For calendar years prior to 2024, 50 percent
• For calendar years 2024 and 2025, 60 percent
• For calendar year 2026, 70 percent
• For calendar year 2027, 80 percent
• For calendar year 2028, 90 percent
• For calendar years after 2028, 100 percent

Clean vehicles must be assembled in the United States. For calendar years after 2023, a clean vehicle may not contain any battery components which were manufactured by a foreign entity of concern (as defined in 42 U.S.C. 18741(a)(5)), and, after calendar year 2024, a clean vehicle may not contain any critical minerals that were extracted, processed, or recycled by a foreign entity of concern.

Clean vehicles must be sold by a qualified manufacturer. A qualified manufacturer is one which enters into written agreement with the Secretary to ensure each vehicle manufactured meets the requirements of this provision,  labeled with a unique vehicle identification number, and requires the manufacturer to periodically provide such vehicle identification numbers to the Secretary in such a manner as the Secretary may prescribe.

No credit shall be allowed for vehicles by which the manufacturer’s suggested retail price exceeds the applicable limitation, which is as follows:

• Vans: $80,000
• SUVs: $80,000
• Pick-up Trucks: $80,000
• For any other vehicle: $55,000

Notably, no credit is allowed to a taxpayer with a modified adjusted gross income in excess of the threshold amount of $300,000 for married filing jointly, $225,000 for head of household, and $150,000 in any other case. For a given taxable year, the taxpayer may use modified adjusted gross income for that year or the immediately preceding year, whichever is lower.

The taxpayer may elect to transfer the credit to the vehicle dealer, provided the dealer is registered as an eligible entity with the Secretary, discloses the MSRP, credit amount, associated fees, and the amount to be paid to the taxpayer in the form of a down payment or otherwise with respect to the transfer of credit. The Secretary shall establish a program to make advance payments to any eligible dealer equal to the cumulative amount of transferred credits.

This provision generally applies to vehicles placed in service after December 31, 2022. The requirement that vehicles be assembled in North America applies to vehicles sold after the date of enactment. Treasury has issued guidance related to this provision.  The provision allowing transfers of the credit applies to vehicles sold after December 31, 2023. The credit is not allowed for any vehicle placed in service after December 31, 2032.

New tax credit for qualified commercial clean vehicles

This provision creates a new tax credit for qualified commercial electric vehicles. The credit amount is equal to 30 percent of the cost of the vehicle, up to $7,500 for vehicles that weigh less than 14,000 pounds, and up to $40,000 for all other vehicles. This provision is effective for vehicles acquired after December 31, 2022, and before December 31, 2032.

New tax credit for qualified previously-owned clean vehicles

This provision creates a new tax credit for qualified previously-owned vehicles. The credit amount is the lesser of 30 percent of the sale price of the vehicle or $4,000. Notably, no credit is allowed to a taxpayer with a modified adjusted gross income in excess of the threshold amount of $150,000 for married filing jointly, $112,500 for head of household, and $75,000 in any other case. For a given taxable year, the taxpayer may use modified adjusted gross income for that year or the immediately preceding year, whichever is lower. This provision is effective for vehicles acquired after December 31, 2022, and before December 31, 2032.

Alternative fuel refueling property credit

The provision extends the alternative fuel vehicle refueling property credit through 2032. The provision expands the credit for zero-emissions charging and refueling infrastructure, providing a base credit of 6 percent and a bonus credit level of 30 percent for expenses up to $100,000 for each charging station or refueling pump installed. In order to claim the bonus credit amount with respect to eligible property, taxpayers must satisfy prevailing wage requirements. Notably beginning in 2023, charging or refueling property is only eligible if it is placed in service within a low-income or rural census tract. This credit may be monetized through transfer to another taxpayer for cash. The provision is effective for property placed in service after 2022.

New production tax credit for advanced manufacturing and new funding allocation for advanced energy projects

As discussed in more detail above, certain manufacturers in the automotive industry may benefit from the section 45X PTC and the section 48C advanced energy project credit.

Power and Utilities

The Act also contains provisions that would affect the power and utilities industry.  These include provisions that extend and expand the credit for production of electricity from renewable sources, a new credit related to nuclear power production, a new credit for the production of clean hydrogen, and an investment tax credit for interconnection property.

Extend and modification of the production tax credit

The provision extends the current law production tax credit (PTC) under IRC section 45 for five years, for facilities that begin construction before January 1, 2025. The PTC provides a tax credit for each kilowatt of electricity produced from qualifying facilities and sold to an unrelated party. Qualifying resources are generally sources of renewable electricity, including wind, biomass, municipal solid waste (including landfill gas and trash), geothermal, hydropower, and marine and hydrokinetic energy. The provision also revives the PTC for solar energy (previously sunset in 2006) for facilities which commence construction before January 1, 2025.

The provision provides taxpayers the option of a base credit rate of 0.5 cents/kilowatt hour, or a bonus credit rate of 2.5 cents/kilowatt hour (inflation adjusted values) for those facilities that meet the prevailing wage and apprenticeship requirements. In order to claim the credit at the bonus credit rate, taxpayers must satisfy the prevailing wage requirements for the duration of the construction of the project and for each year during the 10-year credit period, and apprenticeship requirements during the construction of the project. If a facility meets the domestic content requirements, the credit rate is increased by 10 percent. The credit may be transferred for cash. This provision applies to facilities placed in service after December 31, 2024.

New Zero- emission nuclear power production tax credit

The provision provides a credit for the production of electricity from a qualified nuclear power facility. The provision provides a base credit rate of 0.3 cents/kilowatt hour and a bonus credit rate of 1.5 cents/kilowatt hour for electricity produced by the taxpayer and sold to an unrelated person during the taxable year.

The credit is reduced as the sale price of such electricity increases. Under the credit reduction formula, the credit for any qualified nuclear power facility is reduced (but not below zero) by 80 percent of the excess of the gross receipts (including Federal, State, and local zero-emissions grants) from any electricity produced and sold by such facility over the product of 0.5 cents times the amount of electricity sold during the taxable year.

In order to claim the PTC at the bonus credit rate, taxpayers must satisfy prevailing wage and apprenticeship requirements for the taxable year. A qualified nuclear power facility is any nuclear facility that is owned by the taxpayer, uses nuclear energy to produce electricity, and is placed in service before the date of enactment.

The provision applies to electricity produced and sold after December 31, 2023 and terminates on December 31, 2032. This credit may be transferred for cash.

New tax credit for clean hydrogen

This provision creates a new tax credit for the production of clean hydrogen by a taxpayer at a qualified clean hydrogen facility during the 10-year period beginning on the date such facility is placed in service. The credit amount is up to a maximum base rate of $0.60 or maximum bonus rate of $3.00 per kg of clean hydrogen produced by the taxpayer during the taxable year. The credit rate is determined based on the lifecycle greenhouse gas emission rate. To claim the bonus credit rate, taxpayers must satisfy the prevailing wage and apprenticeship requirements for the duration of the project during the 10-year credit period. Facilities which begin construction after December 31, 2032, will not be eligible for the credit. This credit allows for a direct pay by the taxpayer or transferability.

Washington National Tax takeaways

Manufacturers and industrials companies have expanded opportunities to invest in renewable energy projects under the Act.  The Act’s intent to incentivize the development of U.S. manufacturing of renewable energy components is effectuated through many clean energy incentives including those for production of renewable energy components and for building, expanding, or re-equipping a manufacturing facility for advanced energy projects.  Further, credits for the automotive industry and their customers will incentivize the production sale and resale of electric vehicles and refueling property.

The provisions outlined above are a major expansion of existing clean energy incentives in the tax code.  Taxpayers should evaluate all potential credit opportunities and model the financial impacts on investing in a clean energy project.

Additional guidance will be critical for taxpayers, specifically with respect to the proposed direct pay and transferability of credits, requirements governing apprenticeship hours; prevailing wages; and domestic contents. Treasury has indicated it is working with the public to accelerate the process for issuing guidance to benefit taxpayers as soon as possible. It has indicated that over the coming weeks, several initial stakeholder roundtables with industry, labor unions, climate, and environmental justice advocates, and others will be convened so that Treasury can hear directly from a wide range of voices. The Administration has indicated that Treasury plans to prioritize areas of the law where Congress set deadlines as early as next year such as the section 48C credit, as well as the wage and apprenticeship requirements.

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This article was written by Deborah Gordon, Christian Wood and originally appeared on Nov 14, 2022.
2022 RSM US LLP. All rights reserved.
https://rsmus.com/insights/services/business-tax/clean-energy-incentives-for-manufacturers.html

The information contained herein is general in nature and based on authorities that are subject to change. RSM US LLP guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. RSM US LLP assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein. This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer.

RSM US Alliance provides its members with access to resources of RSM US LLP. RSM US Alliance member firms are separate and independent businesses and legal entities that are responsible for their own acts and omissions, and each are separate and independent from RSM US LLP. RSM US LLP is the U.S. member firm of RSM International, a global network of independent audit, tax, and consulting firms. Members of RSM US Alliance have access to RSM International resources through RSM US LLP but are not member firms of RSM International. Visit rsmus.com/aboutus for more information regarding RSM US LLP and RSM International. The RSM(tm) brandmark is used under license by RSM US LLP. RSM US Alliance products and services are proprietary to RSM US LLP.

Executive summary: Midterm elections results remain too close to call; control of House and Senate may not be known before mid-next week

Although US congressional midterm elections took place several days ago, the potential implications for tax legislation both for the remainder of this calendar year, and over the next several years, remains uncertain.  

As things currently stand, there has been no official determination as to majority leadership in either the House or the Senate, with several key races still undecided. Republicans are inching toward control of the House, while leadership in the Senate remains undetermined. 

Should expectations of a Republican victory in the House bear out, the likelihood of a year-end tax bill would seemingly be increased, as Republicans may be inclined to clear the decks of unresolved issues such as restoring immediate expensing of R&E costs under section 174, modifying the interest deduction limitation calculation under section 163(j), and reversing the scheduled phase-down of 100% bonus depreciation, to allow them more time to organize in the new Congress. 

More broadly, the legislative landscape over the next several years will likely be devoid of significant tax legislative activity, although there remains a possibility for bipartisan agreement on certain issues, such as enhanced retirement savings proposals, to the extent they carry over into the new Congress.

Midterm elections results remain too close to call; control of House and Senate may not be known before mid-next week

Although US congressional midterm elections took place several days ago, the potential implications on tax legislation for the remainder of this calendar year, and over the next several years, remains uncertain. 

As things currently stand, Republicans are inching towards taking control of the House, with just a handful of seats remaining to reach the 218-vote majority. In the Senate, there are now just two open seats, with results pending in Nevada, and a second seat in Georgia headed to a run-off election early next month. Should the Republicans take the House, as is widely expected, Senate results arguably become somewhat mitigated, as the specter of divided government would already be upon us.¹

Irrespective of final election results, a priority of the 117th Congress in its final months of legislating will be a year-end Omnibus measure that would include several ‘must pass’ legislative provisions, such as government funding for the remainder of FY23. 

An open question, however, both before and after the election, is whether certain tax provisions currently enacted into law will be part of such measure. This would include the requirement to capitalize and amortize R&E costs under section 174, and the requirement to use EBIT (as opposed to EBITA) in the calculation of the interest expense deduction limitation under section 163(j). Similar questions arise as to provisions that are scheduled to take effect next year such as the commencement of a phase down in the percentage allowance for bonus depreciation. Interest in these provisions remains strong; however, the political calculus has shifted.

Should expectations of a Republican victory in the House bear out, the likelihood of a year-end tax bill would seemingly be increased, as Republicans may be inclined to clear the decks of such issues to allow them more time to organize in the new Congress. As part of this process, lawmakers must decide if they are willing to negotiate and seek compromise on these (and other) matters before a new Congress convenes next January. In this regard, the political will of either party remains uncertain. 

More broadly, the political landscape that could unfold over the next several years will likely be one of political gridlock and discourse, with very limited tax legislative milestones. Bipartisanship agreement will be required before any bills can be enacted into law. As Dave Kautter, former Assistant Secretary of the US Treasury for Tax Policy and RSM’s Senior Tax Policy advisor succinctly puts it: “[I]n a divided government, there’s not much chance of any significant tax legislation happening at all.”

Should the Senate remain evenly split (with Vice President Harris able to cast the tiebreaking vote for Democrats), securing the agreement of the entire Democrat caucus, including Sens. Manchin and Sinema, would continue to be necessary to move any bill out of the chamber. In the House, a change in leadership could see intra-party fractures emerge across the Republican caucus. The one constant would be the ability of Republicans to thwart President Biden’s economic agenda. 

There are also numerous implications for state and local tax policy heading into 2023 state legislative sessions. As of this writing, Democratic governors have fared well, flipping executives in both Maryland and Massachusetts, and securing trifectas in both states. However, an office could still be lost in Nevada and potentially gained in Arizona. Regardless, governors in split-controlled state governments will have to compromise to be successful. Taxpayers should also be aware of tightening fiscal conditions in the second half of fiscal year 2023, potentially impacting both parties as they consider fiscal year 2024 state budgets. While the last two years have been flush with personal and corporate income tax cuts, inflation rebates, refunds and gas tax suspensions, tax collections in a number of states are running below projections and are likely to weigh heavily on state legislatures. RSM will release a comprehensive post-midterm analysis of state and local elections soon. 

RSM’s tax policy team will host an hour-long webcast in the coming days to explain these implications in greater detail. Keep an eye on RSM’s events page for scheduling details.

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¹With the just-announced victory of Sen. Mark Kelly (D-AZ), Democrats are one step closer to retaining the Senate.  

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This article was written by Fred Gordon, Dan Ginsburg, Ryan Corcoran, Mo Bell-Jacobs and originally appeared on 2022-11-12.
2022 RSM US LLP. All rights reserved.
https://rsmus.com/insights/tax-alerts/2022/congressional-midterm-election-results-anviously-awaited.html

The information contained herein is general in nature and based on authorities that are subject to change. RSM US LLP guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. RSM US LLP assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein. This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer.

RSM US Alliance provides its members with access to resources of RSM US LLP. RSM US Alliance member firms are separate and independent businesses and legal entities that are responsible for their own acts and omissions, and each are separate and independent from RSM US LLP. RSM US LLP is the U.S. member firm of RSM International, a global network of independent audit, tax, and consulting firms. Members of RSM US Alliance have access to RSM International resources through RSM US LLP but are not member firms of RSM International. Visit rsmus.com/aboutus for more information regarding RSM US LLP and RSM International. The RSM(tm) brandmark is used under license by RSM US LLP. RSM US Alliance products and services are proprietary to RSM US LLP.

With the holiday shopping season already begun, RSM forecasts nominal retail sales from October through December to increase between 6.5% and 8.0% on a year-over-year basis.

Given that October retail sales are set to be released on Nov. 16—and because of a shift in consumer and retailer shopping strategies to stage promotional events in October outside of traditional Black Friday and Cyber Monday promotional events—we are defining the holiday shopping season as October through December for this forecast.

With inflation continuing to run hot—coming in at 7.1% and 10.8% on a year-over-year increase in durable and nondurable goods, respectively, in the September consumer price index reading—we expect to see this reflected on real sales (volumes).

While consumers have largely absorbed this pricing pressure throughout the pandemic and subsequent recovery, keeping real sales growth in positive territory throughout last year, this year has been a different story.

Real retail sales growth has declined in five of the first eight months of the year. While our forecast projects nominal sales growth on a year-over-year basis, as the chart below indicates, real sales will continue to be affected by inflationary pressure.

We expect the narrative for retailers and consumer goods companies expressed over recent public earnings calls will continue, with nominal sales growth combined with margin compression for the remainder of the year.

While consumers are faced with an uncertain economic environment, there are several tailwinds that should support our nominal sales growth forecast. Note the following.

Elevated savings

With more than $1 trillion in excess savings in real dollars, compared with January 2020, consumers have the cash on hand to spend throughout the holiday season if they choose to. While most of this savings is held with upper-income households, being that these households account for roughly 60% of overall consumer spending, the tools are available for consumers to tap these funds for the remainder of the year. With a 65% chance of recession in 2023, consumers are unlikely to pull back on discretionary spending until they are forced to.

Lower gas prices akin to cash stimulus

While gas prices have begun to increase from September lows, as of this writing, average gasoline prices in the United States for unleaded fuel are more than 20% lower than the peak in June based on data from the American Automobile Association. This reduction is akin to a cash stimulus for consumers who dipped into savings over the summer when gas prices averaged more than $5 per gallon. Lower gas prices will benefit those in the lower income tiers and provide the resources for more spending on discretionary desires.

Increased promotional activity

While retailers and wholesalers continue to work through elevated inventory levels (22.2% and 24.5% higher than one-year ago, respectively), we expect elevated promotional activity for the remainder of the year as companies work to align inventory levels with sales forecasts. Companies will look to incentivize customers who are clamoring for deals after sustained inflationary pressure, to help offload much of the excess inventory that arrived from foreign manufacturers this year. We expect more frequent and deeper promotional activity for the remainder of the year, especially on nondurable, fast-moving products. Consumers should not expect meaningful discounts on premium brands however, because those companies must juggle elevated inventory with the long-term impact to the brand by discounting the premium product.

The takeaway

The holiday shopping season is expected to continue to show strong nominal spending by consumers. While volumes will most likely not increase in the same level as nominal sales this holiday season, we do not expect consumers to dramatically shift their spending habits. The holidays are likely to be shaped by the volume and depth of promotional activity to drive sales that have shifted away from goods throughout the year.

Look for additional insights as we continue our consumer products holiday season series.

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This article was written by Mike Graziano and originally appeared on 2022-11-07.
2022 RSM US LLP. All rights reserved.
https://realeconomy.rsmus.com/consumer-products-holiday-season-insights-retail-holiday-shopping-expected-to-be-strong-this-year/

RSM US Alliance provides its members with access to resources of RSM US LLP. RSM US Alliance member firms are separate and independent businesses and legal entities that are responsible for their own acts and omissions, and each are separate and independent from RSM US LLP. RSM US LLP is the U.S. member firm of RSM International, a global network of independent audit, tax, and consulting firms. Members of RSM US Alliance have access to RSM International resources through RSM US LLP but are not member firms of RSM International. Visit rsmus.com/aboutus for more information regarding RSM US LLP and RSM International. The RSM(tm) brandmark is used under license by RSM US LLP. RSM US Alliance products and services are proprietary to RSM US LLP.

What actions can business and individual taxpayers take to advance toward their goals?

Taxpayers have grown stronger over the past three years because they have learned to adapt. They can now apply that hard-earned experience, resilience and flexibility to planning and action items for 2023. Whether you are an individual attending to your wealth strategy or a business dealing with various policy and economic uncertainties, you can take action to move forward.

A rapidly evolving legislative and economic landscape heightens the urgency for individuals and business owners to prioritize a comprehensive wealth planning strategy. Strengthening the family legacy will require diligent care to prepare for increased enforcement efforts and leveraging tax-saving opportunities while they still exist. 

“Uncertainty is the only certainty we have,” said Andy Swanson, partner in RSM’s Washington National Tax practice. “If you want to make lemonade out of lemons, start planning now for the best possible outcomes.”

Given increased audit activity by the IRS, high-income taxpayers can improve outcomes by preparing solid documentation and by working with their advisors to understand risk areas, including passive activity losses and technicalities within the law. 

“We have seen situations where the IRS is following strict rules and disallowing entire deductions, particularly with charitable contributions, or the planning and documentation was a little sloppy,” said Amber Waldman, a senior director who specializes in high net worth individuals for RSM’s Washington National Tax practice. 

Considering the undeniable economic headwinds and uncertainty around tax policy changes, individual taxpayers can manage liquidity by making cash flow projections ahead of estimated tax payments. Focusing on charitable contributions, harvesting losses and taking advantage of state and local tax deductions can help mitigate tax bills that are higher than expected. Interest rate planning and pass-through entity tax elections are two strategies worth considering in the current environment.

Gift and estate planning, meanwhile, involves some time-sensitive opportunities. For example, under the Tax Cuts and Jobs Act, a couple that starts making gifts in 2023 can pass on a lifetime total of $25.84 million. But that unified exemption is scheduled to sunset at the end of 2025.

Also, some planning tools are relatively advantageous in a higher-interest-rate environment, such as a charitable remainder annuity trust (CRAT) and a qualified personal residence trust (QPRT). Meanwhile, there is still uncertainty around grantor trusts and discounting, so it’s important to be aware of potential changes to current rules.

Swanson shared three guiding principles for taxpayers to apply when planning this year: 

1. Take small wins while you can. They will add up. For example, capturing losses in your investment portfolio throughout the year.
2. Be prepared, as there is a lot of volatility in the market. Waiting for an event to occur may mean missing out on existing opportunities. 
3. Be aware of potential changes to tax policy so there are no surprises if they happen. 

Access RSM’s 2022 tax planning considerations for families and individuals

Energy credit opportunities created through the Inflation Reduction Act could be a windfall for companies investing in clean energy initiatives—and these opportunities to improve cash flow apply to organizations well beyond the energy and industrial sectors.

The IRA included $369 billion in new funding related to climate and more than $250 billion for energy credits. These aspects of the legislation zero in on three main areas: job creation, reducing the dependence on foreign-sourced materials, and the reduction of greenhouse gas emissions.

“Many people think of energy credits just as wind and solar, but this legislation is much broader,” said Debbie Gordon, RSM principal and leader of the firm’s Washington National Tax excise and energy tax practice. “It affects many different industries.”

Take, for instance, a grocery store chain that wants to go green; the business might consider installing solar panels on the roof of its facilities or investing in commercial electric vehicles. That company might qualify for investment tax credits related to those specific projects, as well as potential increased credit rates if it uses domestically sourced materials for those investments, and possibly other state and local benefits on top of that.

“In terms of cash flow, one of the most important things to discuss is how to monetize these credits within the IRA,” said Dana Jackson, RSM partner and leader of the firm’s federal credits and incentives practice.

Companies that want to maximize the potential of these energy credits should be thinking about:

• Clean energy assessments: A third-party advisor can help your business understand which current projects might be eligible for credits, as well as the eligibility of projects planned.
• Project planning: Some of these credits don’t go into effect for a few years, and teams may need that time to ramp up and get the necessary technology in place.
• Financial impacts modeling: Businesses will need to assess which credits may be more lucrative, which ones may be taken together, and which ones may not be stackable.
• Transferability: Some companies may want to explore transferability or sale of these credits, whether through a state exchange or on a direct basis. “From a buyer perspective, you want to make sure that you’re buying something that is free and clear of any potential auditor clawback,” said Rob Calafell, RSM principal and the firm’s state and local credits and incentives practice leader.  

 Other important areas of consideration include contract negotiations, clauses for prevailing wage and apprenticeship, tax insurance and the timing of state incentives.

State fiscal situations over the last two years have been stronger than ever. The vast majority of states reported revenue above projections. States have paid down debt, increased pension payments and returned money to taxpayers. Through mid-fiscal year 23, almost all states are running surpluses over current projections.

And yet…

“If macroeconomic conditions deteriorate, that could change the health of state fiscal conditions very quickly, sometimes within one fiscal year,” said Mo Bell-Jacobs, senior manager who specializes in state and local taxes in RSM’s Washington National Tax.

Inflation and other economic headwinds are warning signs against complacency for state revenue departments and, by extension, state and local taxpayers. Yes, individual income tax collections have skyrocketed over the last eight months. Yes, sales tax revenue has climbed similarly. Yes, wages and compensation remain high in a competitive labor market that figures to continue.

But year-end state and local tax planning discussions should note that pace of growth is likely unsustainable. The U.S. economy contracted in each of the first two quarters of 2022, and inflation reached its highest level in four decades. Higher prices have helped sales tax collections, but taxpayers should be prepared to reach a tipping point for employment and consumption.

“There are some worries out there in talking to state legislators and policy officials in revenue departments,” said David Brunori, RSM senior director who specializes in SALT for Washington National Tax. “I think things are good, but there are definitely warning signs.”

Other SALT issues leading year-end planning discussions include an uptick in audit activity. States are pursuing more desk audits and passive audits, with revenue departments trending more aggressive as they return to operations that resemble those before the pandemic.

Also, taxpayers should consider including Public Law 86-272 and internet activities covered by Multistate Tax Commission guidance; remote and hybrid workforces; pass-through entity workarounds and digital assets in their year-end planning and preparation for 2023. 

Access RSM’s 2022 state and local tax planning guide

Businesses engaged in year-end federal tax planning must contend with significant uncertainties, as well as some well-defined challenges. While inflation and other economic headwinds threaten to drag the United States into a recession, less clear are the tax policy ramifications of midterm elections and a potential shift in the balance of power in Congress.

The U.S. economy contracted in each of the first two quarters of 2022. Inflation reached the highest level in 40 years. RSM’s economists in late October put the likelihood of a full-blown recession over the next 12 months at about 65%, up from 45% in the summer.

With those storm clouds forming, a leading topic of tax planning conversations is cost containment, said Matt Talcoff, leader of RSM’s Washington National Tax practice.

“As we see prices increase, businesses will need to have cash flow and liquidity, which will come partly from managing tax cash outflow,” Talcoff said.

As interest rates climb, some businesses must plan for different scenarios involving the calculation for the limitation on the deduction of business interest expense, which could be addressed by a year-end tax extenders bill. In general, Talcoff said, planning discussions will include questions about expensing of products, moving inventory in and out quickly and debt financing.

Multinationals feeling the weight of supply chain impairments can consider tax variables to issues such as inventory and sourcing. “You have to consider inventory accounting methods and understand tax treaties, think about repatriating income, think about your permanent establishment and your nexus around the globe,” Talcoff said.

The tight labor market remains a factor for many companies also. Given that it is unlikely to abate, businesses are analyzing the tax implications of strategies to recruit and retain employees. It’s a wide array of considerations, from employee credits to incentive packages to tax obligations for remote workers.

As if that weren’t enough, tax policy presents some question marks in the final weeks of 2022 and beyond.

A tax extenders bill in a lame-duck session of Congress could address the tax treatment of research and development expenses, an extension of 100% bonus depreciation, and other issues. The timing and scope of any legislation in the near term will depend partly on which party wins a majority in the Senate and House of Representatives. The variety of scenarios gives value to modeling, as businesses build resilience for 2023.

Access RSM’s 2022 business tax planning guide

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This article was written by Abbie Everist, Andy Swanson, Amber Waldman, Dana C. Jackson, Deborah Gordon, Rob Calafell, Mo Bell-Jacobs, David Brunori, Anna Cronic, James Alex, Christa Clark, Mathew Talcoff and originally appeared on 2022-11-04.
2022 RSM US LLP. All rights reserved.
https://rsmus.com/insights/services/business-tax/2022-year-end-tax-planning.html

The information contained herein is general in nature and based on authorities that are subject to change. RSM US LLP guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. RSM US LLP assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein. This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer.

RSM US Alliance provides its members with access to resources of RSM US LLP. RSM US Alliance member firms are separate and independent businesses and legal entities that are responsible for their own acts and omissions, and each are separate and independent from RSM US LLP. RSM US LLP is the U.S. member firm of RSM International, a global network of independent audit, tax, and consulting firms. Members of RSM US Alliance have access to RSM International resources through RSM US LLP but are not member firms of RSM International. Visit rsmus.com/aboutus for more information regarding RSM US LLP and RSM International. The RSM(tm) brandmark is used under license by RSM US LLP. RSM US Alliance products and services are proprietary to RSM US LLP.