Executive summary: Distribution options

Employers establish retirement plans to provide a vehicle to set aside monies, whether funded by the employee or the employer, to be preserved for a retirement benefit. The rules related to when an employee can take a distribution from their retirement plan account are restrictive considering the goal of preserving the retirement funds. SECURE 2.0, enacted on Dec. 29, 2022, included provisions that loosen some of the restrictions on withdrawals from a retirement plan. The additional options available give plan sponsors flexibility in choosing what to offer their employees.

In general

There are a few general concepts to keep in mind as we dive deeper into some of the provisions added by SECURE 2.0.

1. A plan sponsor has discretion as to whether and how these optional plan provisions will be incorporated into the plan.
2. All the distribution provisions discussed are exempt from the 10% tax on early withdrawals (i.e., before age 59½) from a retirement plan. However, the amount withdrawn is still subject to income tax.
3. While income tax applies, there is the ability for an individual to recoup taxes, and restore their retirement savings, by re-contributing to the plan some or all the amounts withdrawn within three years of distribution.
4. The provisions can be made available to any plan participant, not just a current employee.

Domestic abuse

A survivor of domestic abuse often needs access to additional funds to assist in escaping or recovering from an unsafe situation. “Domestic abuse” for this purpose is defined in SECURE 2.0 as: “physical, psychological, sexual, emotional, or economic abuse, including efforts to control, isolate, humiliate, or intimidate the victim, or to undermine the victim’s ability to reason independently, including by means of abuse of the victim’s child or another family member living in the household.” The survivor must certify that they experienced domestic abuse within the last year to receive a distribution that is no more than the lesser of $10,000 (for 2024, as indexed) or 50% of the survivor’s vested plan balance.

This distributable event became available, after Dec. 31, 2023, for implementation by an IRC section 401(a) defined contribution plan (including 401(k), but not money purchase pension plans), 403(a) annuity plan, 403(b) plan and a governmental 457(b) plan, as well as individual retirement accounts (IRAs).

Emergency personal expense

Unforeseen emergency situations that require immediate financial resolution are a common occurrence. This distributable event allows up to $1,000 of the participant’s plan account to be withdrawn. To receive the distribution, the participant must certify that they have an expense for themselves or a family member that is an immediate financial need. Only one such distribution can be issued in a calendar year. Another personal expense distribution cannot be issued in the three calendar years following the year of distribution unless the withdrawn amount is repaid to the plan or contributions made by the participant to the plan after the distribution are at least equal to the amount distributed.

Many plans already provide hardship distribution options for employees. However, the circumstances under which a hardship distribution can be issued are limited. For example, an employee’s car may require a $750 repair, which would not fall under one of the safe harbor reasons for hardship distribution. However, the employee could use the emergency personal expense provision to take a distribution to cover the $750 repair.

This distributable event became available, after Dec. 31, 2023, for implementation by an IRC section 401(a) defined contribution plan (including 401(k), but not money purchase pension plans), 403(a) annuity plan, 403(b) plan and a governmental 457(b) plan, as well as IRAs.

Federally declared disasters

Repeatedly, Congress has enacted legislation after disasters (e.g., hurricanes, floods, wildfires) providing individuals the opportunity to take a penalty-free distribution or loan from their retirement plan accounts to assist them as they rebuild their lives. In lieu of the disaster-by-disaster approach, Congress enacted permanent rules for distributions and loans related to federally declared disaster areas.

Key features of the new distribution provision are:

• A participant can request a distribution of up to $22,000 up to 180 days after the date of the disaster.
• The individual must have sustained an economic loss in relation to the disaster and must have a principal place of residence located in the disaster area.
• The tax effect of the amount withdrawn can be spread over three years rather than the entire amount being taxable in the year withdrawn.

Key features of the new loan provision are:

• The maximum dollar amount that can be made available is the lesser of 50% of the individual’s vested plan balance or $100,000 (increased from $50,000 under the normal loan rules).
• Loan repayments, whether on an existing loan or one taken because of the disaster, owed between the date of the disaster and up to 180 days after the disaster can be delayed for one year.

These provisions became available for disasters after Jan. 26, 2021, and can be implemented by an IRC section 401(a) defined contribution plan (including 401(k) plans), 403(a) annuity plan, 403(b) plan, and a governmental 457(b) plan, as well as IRAs.

Terminal illness

This provision was not added as a distributable event, but rather just as an exception to the early withdrawal penalty. Therefore, it only applies when a distribution is issued under another plan provision. The intention was to have this be an optional plan distributable event. There has been a technical corrections bill drafted that would address this, as well as some other SECURE 2.0 provisions, but it has not yet been finalized.

IRS Notice 2024-2 provides guidance on terminal illness distributions in the form of Q&As. The guidance confirmed the following:

• A terminally ill individual is one who has an illness or physical condition that a physician has certified is expected to result in death in 84 months or less. The 84 months is measured from the date of certification.
• Certification must be obtained prior to the distribution and contain specific information (e.g., the name and contact information of the physician, a narrative description to support the conclusion that the individual is terminally ill, the date the physician examined the individual, etc.) as outlined in Notice 2024-2.
• Only the physician’s certification must be provided to a plan administrator to support the distribution. However, the individual should retain appropriate underlying documents to support their distribution and as part of maintaining complete tax records.
• Generally, there is no limit to the amount that can be treated as a terminal illness distribution. However, distributions cannot be made solely because of a terminal illness. Therefore, the participant must qualify for a distribution based on another plan provision, and any limits applicable to the distributable event being utilized to issue the distribution would have to be considered. For example, a plan may allow in-service distributions, but it might cap such distributions to $10,000.

The provision became available after Dec. 29, 2022, for distributions from IRC section 401(a) defined benefit and defined contribution plans (including 401(k) plans), 403(a) annuity plans, and 403(b) plans, as well as IRAs.

Takeaway

Legislators see that employees have unexpected financial needs arise for which they need a source of funds. The only source, for some employees, with an amount sufficient to assist with the need is retirement plan savings. Relaxation of the distribution rules to provide an employee with a current source of funds may negatively impact the individual’s financial position in retirement overall but may also help encourage participants to contribute to their retirement plans by alleviating fears that their funds are not accessible when needed under extenuating circumstances. The opportunity is available for an employee to restore their retirement account by re-contributing the distribution taken, but how many individuals will avail themselves of this opportunity? Employees contemplating one of these distributions should consider 1) other sources of income that may be available to assist with the financial need, 2) the current tax ramifications of the withdrawal, and 3) how the reduction to their account balance will affect them in retirement.

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This article was written by Christy Fillingame, Lauren Sanchez and originally appeared on 2024-04-30.
2022 RSM US LLP. All rights reserved.
https://rsmus.com/insights/services/business-tax/new-retirement-plan-distribution-options-introduced-by-secure-2-0.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:

House Ways & Means Committee Chairman Jason Smith (R-MO)  and House Tax Subcommittee Chairman Mike Kelly (R-PA) recently announced the formation of 10 “Committee Tax Teams”.  Each team will address key tax provisions from the 2017 Tax Cuts and Jobs Act (TCJA) that are set to expire in 2025 and identify legislative solutions that seek to help many taxpayers.

Tax policy and potential legislation will be top of mind for many as we move closer to the expiration of many TCJA provisions.

The journey to 2025 tax reform begins

Last week, House Ways & Means Committee Chairman Jason Smith and House Tax Subcommittee Chairman Mike Kelly announced the formation of 10 “Committee Tax Teams”. Each committee is comprised of Republican Ways and Means Committee members tasked with identifying legislative solutions to various policy areas that will be part of discussions as we approach the expiration of several provisions from the 2017 Tax Cuts and Jobs Act (TCJA) at the end of 2025.

While not unexpected, the announcement loosely resembles a similar action taken in 2017 as Congress began deliberations leading to the enactment of the TCJA. It is noteworthy that there are no Democratic members assigned to these teams.

It is important to keep in mind that the advancement of Republican and Democratic priorities will be largely dependent upon the results of the upcoming presidential and congressional elections later this year. While policymakers will face pressure to reach a consensus on extending the sunsetting provisions, the outcome of the election will significantly determine how both the process moves forward and the outcome of that process.

Key TCJA-related provisions that are scheduled to change after 2025 going into 2026 include:

• An increase in the top individual tax rate from 37% to 39.6%
• A decrease (by roughly 50%) in the standard deduction amount
• A decrease (by roughly 50%) in the estate tax exemption amount
• A return of personal exemptions for taxpayers and dependents
• Changes to various itemized deductions and the alternative minimum tax – including the elimination of the $10,000 State and Local Tax (SALT) cap
• Expiration of the Section 199A pass-through deduction (allowing for a 20% deduction of qualified business income)
• An increase in the Base Erosion and Anti-Abuse Tax (BEAT) rate from 10% to 12.5%
• The research credit no longer being a benefit for any BEAT taxpayers
• An increase in the Global Intangible Low-Taxed Income (GILTI) tax rate
• The Foreign-Derived Intangible Income (FDII) benefit becoming less generous.

It is important to realize that the TCJA enacted a number of permanent tax law changes, such as a reduction in the statutory corporate tax rate, and substantive changes to the way international corporations are taxed. Even though those provisions are permanent, they will be part of the upcoming tax reform debate and are subject to change as part of the upcoming tax reform process. There are also a number of other non-TCJA extenders that have either expired or are due to expire, as well as a broad array of tax proposals that were part of the Build Back Better deliberations a few years ago but which did not ultimately become enacted into law. All of these provisions are on the table, as are the tax provisions that were enacted as part of the Inflation Reduction Act – including the corporate alternative minimum tax, the stock buy back excise tax, and numerous alternative energy tax incentives.

Attached below are the Tax Team Assignments. We will continue to monitor events as they evolve. For more information, see the Ways and Means Committee Press Release.

Attachment: Tax Team Assignments

Area of Focus	Chair	Members
American Manufacturing	Rep. Buchan	Rep. Murphy* Rep. Arrington Rep. Tenney Rep. Malliotakis
Working Families	Rep. Fitzpatrick	Rep. Malliotakis* Rep. Moore Rep. Steel Rep. Carey
American Workforce	Rep. LaHood	Rep. Carey* Rep. Wenstrup Rep. Smucker Rep. Fitzpatrick
Mainstreet	Rep. Smucker	Rep. Steube* Rep. Buchanan Rep. A. Smith Rep. Arrington Rep. Van Duyne
New Economy	Rep. Schweikert	Rep. Van Duyne* Rep. Murphy Rep. Tenney Rep. Steel
Rural America	Rep. Adrian Smith	Rep. Fischbach* Rep. Feenstra* Rep. Kustoff Rep. Steube
Community Development	Rep. Kelly	Rep. Tenney* Rep. LaHood Rep. Moore Rep. Carey
Supply Chain	Rep. Miller	Rep. Kustoff* Rep. Wenstrup Rep. Ferguson Rep. Fishbach Rep. Feenstra
Innovation	Rep. Estes	Rep. Steel* Rep. Schweikert Rep. Ferguson Rep. Hern Rep. Murphy
Global Competitiveness	Rep. Hern	Rep. Moore* Rep. Kelly Rep. Estes Rep. Miller Rep. Feenstra

*Denotes Vice-Chair

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This article was written by Fred Gordon, Tony Coughlan and originally appeared on 2024-04-29.
2022 RSM US LLP. All rights reserved.
https://rsmus.com/insights/financial-reporting/the-journey-to-2025-tax-reform-begins.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: Credits for retirement plan sponsors

Continued concerns by congressional leaders for employees to attain retirement security have led to legislative changes intended to make it more affordable for certain employers to sponsor a retirement plan. Non-refundable credits were already in place to help employers offset the administrative cost of implementing and maintaining a retirement plan, but the SECURE 2.0 Act of 2022 (SECURE 2.0) enhanced an existing credit and introduced new start-up and military spouse credits to incentivize plan sponsors to maintain plans and make their setup and operation more feasible. SECURE 2.0 also provides plan sponsors the ability to use de minimis financial incentives to entice employees to elect to defer. The IRS provided additional guidance on these credits and financial incentives in Notice 2024-2.

Startup plan tax credits

Small employer pension plan startup cost tax credit

SECURE 2.0 expanded the already available small employer pension plan startup cost tax credit to make implementing a retirement plan more attractive to a small employer. A small employer in this context is an employer with 100 or fewer employees who earned at least $5,000 in the prior tax year. Employees of employers related to the sponsoring employer under the controlled and affiliated service group aggregation rules are considered for this purpose. Historically, small employers could claim a nonrefundable credit for 50% of the cost to set up and administer a retirement plan, up to a maximum of $5,000. Costs paid by the employer, not the plan, are considered for purposes of the credit. The credit has been increased to 100% for employers with 50 or fewer employees earning at least $5,000 in the prior tax year, beginning in 2023. The 50% credit still applies for employers with 51 to 100 employees. Generally, the credit can be claimed for the first three years the plan is in operation. Amounts claimed towards the credit cannot also be deducted as an expense on the employer’s return. The employer can elect whether it takes the credit each year, so if an employer does not claim the credit for a given year, the costs may be deducted. Since the credit is nonrefundable, it is not beneficial for tax-exempt and governmental employers.

Additional credit for employer contributions

Small employers who meet the criteria of the small employer pension plan startup cost tax credit also have the opportunity to receive an additional credit for employer contributions (e.g., profit-sharing or match) made to a new defined contribution plan, for taxable years beginning after Dec. 31, 2022. The credit, which is available for up to five years, is 100% of employer contributions (up to $1,000 per eligible employee) in the year a plan is established and the next, 75% in the third year, 50% in the fourth year, and 25% in the fifth year. For an employer with more than 50 employees in the prior year, the credit is reduced two percentage points for each employee in excess of 50 (i.e., if the employer had 60 employees, the credit would be reduced by 20%). Contributions to employees with more than $100,000 in compensation cannot be taken into account for the credit. Even with the limitations on this credit, it provides a potentially significant tax savings opportunity for small employers.

Auto-enrollment credit

Although not new with SECURE 2.0, another credit to keep in mind is the auto-enrollment credit, which allows a $500 credit for a three-year period, beginning in the year a small employer implements an auto-enrollment provision in their retirement plan. Auto-enrollment is a provision that enrolls eligible employees into a retirement plan at a specific deferral rate, unless the employee elects a different deferral rate or not to defer.

Summary

To conceptualize the credits potentially available, consider a 401(k) plan with an auto-enrollment provision effective in 2022 by an employer with less than 50 employees in every year.

	Tax year	Credit for Startup Costs	Credit for Eligible Employer Contributions	Credit for Auto Enrollment
1st Credit Year	2022	50% up to $5,000	n/a	$500
2nd Credit Year	2023	100% up to $5,000	100%	$500
3rd Credit Year	2024	100% up to $5,000	75%	$500
4th Credit Year	2025	n/a	n/a	50%
5th Credit Year	2026	n/a	25%	n/a

Military spouse credit

A new credit, effective for taxable years beginning after Dec. 29, 2022, was born out of concern for military spouses who may not be able to participate in a retirement plan or may not become vested in their employer account within a retirement plan due to the need to frequently relocate. During each of the first three years in which a non-highly compensated military spouse participates in a defined contribution plan, SECURE 2.0 provides a tax credit of $200 for the military spouse’s participation plus an added credit of up to $300 for employer contributions made to the plan on behalf of the military spouse, subject to certain conditions. Conditions that must be met to qualify for the credit are:

• The military spouse must be allowed to participate in the plan within two months of employment.
• The military spouse must be immediately eligible for employer contributions at a rate at least as favorable as an employee who is not a military spouse would receive after two years of service.
• Employer contributions to the military spouse are immediately fully vested.

Small employers should keep in mind that the credit is based on each military spouse’s first three years of plan participation. Since each spouse could have a different three-year period, tracking the credit available for each year will require appropriate administrative measures.

Financial incentives for participants

Employers of all sizes often look for ways to increase the number of employees who elect to defer to a retirement plan. Historically, this has been in the form of targeted communication campaigns and financial literacy education of eligible employees. Beginning in 2023, SECURE 2.0 provided a new tool employers can use to entice employees to elect to defer. A de minimis financial incentive (not paid for with plan assets) can be offered to eligible employees who make a deferral election, provided they do not already have an election to defer on record.

In Notice 2024-2, the IRS noted a financial incentive will be considered de minimis if it does not exceed $250 in value. For example, as noted in the guidance, “if an employer announces on Feb. 1, 2024, that any employee for whom an election to defer under a CODA is not in effect on that date and who, within the next 90 days, makes an election to defer, will receive a $200 gift card, then the gift card is a de minimis financial incentive…”

Unless an exception is provided under the Internal Revenue Code, the financial incentive is considered includable in an employee’s wages and is subject to applicable employment tax withholding and reporting. For example, a gift card is a cash equivalent and considered to be a taxable fringe benefit. Therefore, no exception is available in this example and the value of the gift card is taxable compensation to the employee.

Takeaway

SECURE 2.0 expanded opportunities for employers to establish and operate retirement plans, especially for small employers. There are nuances involved in determining whether the credits are available and how the credit amounts are calculated. For example, specific criteria are applied to determine who is an eligible employer, how compensation is determined for the thresholds discussed, and to which years the credits can apply. RSM US can assist in evaluating credits or financial incentives available to employers sponsoring retirement plans, as well as for consulting on other retirement plan matters.

Stay tuned for other retirement plan topics each month and check out our previous article, Retirement plan audit and contribution considerations.

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This article was written by Christy Fillingame, Lauren Sanchez, Toby Ruda and originally appeared on 2024-03-25.
2022 RSM US LLP. All rights reserved.
https://rsmus.com/insights/services/business-tax/credits-and-incentives-available-to-retirement-plan-sponsors.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.

Inflation is receding and the labor market is as healthy as it has been since the 1950s. Wages are higher in inflation-adjusted terms. Everyone who wants a job either has one or can find one quickly.

And with the economy growing at a healthy rate over the past year, one would think that Americans would be celebrating a boom.

Yet in September, a poll by Sawyer Business School and USA Today found that 70% of Americans believed the economy was getting worse, not better.

Why are consumers so unhappy?

To begin with, it depends on their point of comparison.

If comparing today’s economy to 2019, before the pandemic, the view is bound to be negative. Since 2019, the economy has endured a pandemic, a shutdown in global supply chains, price shocks on the oil and commodity markets, and global turmoil.

But if comparing today’s economy to a year ago, then the view is bound to be positive given the strong labor market, easing inflation and overall growth.

In addition, there is also a sense that consumers, who by most measures are in healthy financial shape, have a dimmer view of the overall economy even though they themselves are doing just fine.

As the saying goes, “It’s a recession for thee, not for me.”

The same disconnect applies to businesses. The fourth-quarter RSM US Middle Market Business Index showed a similar concern for the economy overall, even as executives in the survey had a positive outlook for their own businesses.

The basis for this outlook is the disconnect between what the data shows and what consumers, and businesses, feel. As economists and strategists point to slowing inflation, consumers still feel the sting of higher prices overall. Prices, after all, do not usually decline.

Consider the price of eggs, which has fluctuated wildly over the past two years. Along with a select number of other goods and services, the price of a dozen eggs illustrates why public sentiment is currently sour. But that sour view is likely to improve as supply conditions continue to improve, inflation growth eases and real wages rise.

The price of eggs

The inability of supply to meet demand during the pandemic shutdown was an obvious reason for staples like eggs to increase in price. For instance, from December 2019 to February 2022, the price of a dozen eggs rose from about $1.50 to $2.00, an increase of 30% over 26 months.

But an avian flu took hold in early 2022 and grew into the largest outbreak in American history. What followed was a widespread culling of the national chicken stock, sending the price of eggs even higher. By January 2023, egg prices had more than doubled, to $4.80 a dozen, in less than a year.

In December, another outbreak of avian flu resulted in an 8.9% increase in the price of eggs on a monthly basis, even as the cost of that good declined 23.8% on a year-ago basis.

If using December 2019 as a starting point, the egg component of the consumer price index was up 36% compared to the recent disinflation in that good of roughly 24% from a year earlier.

The grocery store is not the only place the increase in egg prices is being noticed. Many prepared food items, from hamburger rolls to meatballs to brownies, include eggs as an ingredient.

So the rapid increase in the cost of eating at your favorite burger or Italian joint since 2020 is due in part to the increased cost of eggs and other staples—not just higher labor costs.

The good news is that by the middle of 2023, the average price of a dozen eggs had dropped to $2.21 before moving back up to $2.50 in January.

Whether that disinflationary trend continues will depend on whether another outbreak of the bird flu occurs.

Without a severe drop in demand for goods and services caused by a deep recession, one should anticipate further modest disinflation in the goods sector and price stickiness in the service sector because of a tight labor market and rising nominal and real wages.

Overall, price levels are higher than they were before the pandemic. While the worst of inflation is behind us, it will take more time for consumers to change their spending patterns or to better absorb those additional costs as wages move higher in nominal and inflation-adjusted terms.

The pricing dynamics in the following sectors are similar to those of eggs and other food staples, underscoring consumers’ sour sentiment.

Energy

For many Americans, inflation is defined by the gasoline prices they see on their way to work every day.

In November, the price of regular gasoline stood in the $3 a gallon range, down from the high of $5.06 on June 13, 2022. That plunge should be a net plus in consumers’ evaluation of the current economy, but for some it is not.

Why is that?

The average price of gas dropped below $2 a gallon in 2020 because of a plunge in demand associated with the move to work at home and the shutdown of global supply chains.

Inflation might seem like a pressing issue if comparing 2020 gasoline prices to prices today.

But those 2020 gas prices need to be viewed in the context of Trump-era emergency policies and the price shocks that followed.

The price of gasoline between 2015 and 2020 averaged $2.44 per gallon, so November’s price in the $3 range after adjusting for inflation does not seem out of line.

As of mid-February, the national average price of gasoline was in the range of $3.25 a gallon but remained 22% higher than before the pandemic. Gas prices declined at an average rate of 9.7% per year last year.

The cost of diesel fuel, a key part of the supply chain, remains 28% higher than before the pandemic but is falling at a rate of 16% per year.

The price of heating your home with fuel oil remains 24% higher than at the end of 2019 but is falling at a rate of 18% per year. The cost of electricity is 30% higher than 2019 and is increasing by 3.4% per year.

Transportation

Trends in the cost of used cars and trucks are nearly identical to those in the overall cost of transportation commodities, which allows us to use used cars and trucks as a proxy for transportation costs.

The shortage of computer chips during the pandemic delayed the production of new vehicles, which created a surge in demand for used vehicles. As such, the inflation rate for used vehicles peaked at 45% per year in 2021.

Prices of used vehicles remain 31% higher than at the end of 2019 but fell at an average rate of 7.4% per year in 2023.

The shortage of chips also had knock-on effects that included a sell-off of rental vehicles during the pandemic. That resulted in a vehicle shortage once the pandemic ended, which increased the cost of rentals.

Housing

The tight housing market is a constant reminder of how housing preferences changed during the pandemic, and the end of low-for-long interest rates. This is especially true for young people looking to buy their first home.

Using the housing component of the consumer price index, housing costs are 22% higher than before the pandemic and in January continued to increase at a rate of 4.9% per year.

That the rate of growth is decelerating can be attributed in part to the saturation of demand for housing and to the pause in monetary policy tightening. The prospect of lower interest rates gives prospective buyers the incentive to wait out the eventual easing of long-term interest rates.

Mortgage rates appeared to have finally peaked, but there is no guarantee that the market won’t pick up again in the spring. 

Discretionary spending

Electronics: The cost of cellphone services plunged in 2017 and has pretty much flatlined since then. The cost of cell service was falling at an average rate of 2% per year in the fourth quarter of last year. The cost of buying a television has also continued to drop. In fact, TV prices are 2% lower than before the pandemic and by January were falling at a rate of 9.8% per year.

Airline fares: Finally, the price of taking a vacation has returned to earth. Airline tickets are 2% lower than before the pandemic and by January were falling at a rate of 9.3% per year. We can surmise that the decreased cost is because of a leveling off of demand, with revenge travel having run its course, and as fuel prices have eased.

The takeaway

Prices of most goods and services remain higher than before the pandemic.

Despite a thriving economy, the public has not yet adjusted to the price level shock, and that will simply take time.

While inflation continues to recede, higher prices continue to affect household finances, causing the public to evaluate the economy as sour.

We think that by midyear, many if not most Americans will begin to reshape their evaluation of the economy based on low unemployment, rising real wages and falling interest rates as inflation recedes toward our forecast of 2% by the end of the year.

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This article was written by Joe Brusuelas and originally appeared on 2024-03-05.
2022 RSM US LLP. All rights reserved.
https://rsmus.com/insights/economics/the-price-of-eggs.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.

The U.S. economy proved resilient following a sluggish close to 2023. At its final meeting last year, the Federal Reserve signaled rate cuts of at least 75 basis points in 2024, which will likely provide conditions for the U.S. Treasury yield curve to normalize.

But will rate cuts be enough to bring stability to commercial real estate (CRE) valuations and increase transaction volume? Only time will tell; however, a wave of refinancings set to come due over the next few years, a sustained higher cost of capital, and the need for increased equity investment will present challenges and potential opportunities for the industry.

Impact on cap rates if the 10-Year Treasury normalizes

Now, with inflation receding and the economy operating at nearly full employment, the Fed has signaled its intention to lower its policy rate, which RSM projects will target 4.6% this year, 3.6% next year and 2.5% over the longer term. As the central bank shifts to a less restrictive monetary policy, RSM expects the yield curve to normalize in 2024, moving to a range of 4% to 4.25%. That would mark an approximate 100 basis point increase from 3.13% at the end of the second quarter of 2022, when the CRE market came to a sudden halt.

Transaction volume in 2023 was 31% lower than in 2022, according to CoStar data, as the CRE market continued to navigate fluctuating valuations. However, the 10-year Treasury yield signals where investors’ risk premium will price commercial real estate. According to CBRE, historical data suggests that a 100 basis point increase in the 10-year Treasury results in a 60 basis point rise in capitalization rates. The average U.S. national index cap rates for retail real estate ended 2023 up 52 basis points compared to the second quarter of 2022, while office was up 71 basis points over the same time period. These increases may be a hopeful sign that we are close to closing the gap between buyer and seller pricing in these core sectors. Quality is proving to hold strong, as Class A office properties saw only a 40 basis point increase in cap rates for the same period.

However, multifamily and industrial—both red-hot sectors in the post-pandemic period—may now experience further compression. According to CoStar data, multifamily cap rates rose 121 basis points since the second quarter of 2022. The sector ended 2023 with an average cap rate of 6.8%, in line with 6.6% at the close of 2019, directly ahead of the pandemic; this indicates multifamily is now resetting from temporarily low cap rates. The industrial sector, by comparison, has seen a rise of only 27 basis points during the same period, attributable to strong fundamentals from inflated cash flows and demand for last-mile logistics centers. We are likely to see further cap rate increases in certain industrial markets and subsectors as inflation eases and tenant leases turn over.

While increasing stability in both monetary policy and yields will help ease the cost of borrowing, costs will remain high, keeping cap rates elevated despite further drops expected in the 10-year Treasury yield through 2026. A larger spread between long-term yields and CRE cap rates will draw investors back into all commercial sectors as their risk appetite returns and likely boost transaction volume beginning in the second half of 2024 following interest rate cuts. However, compression of valuations poses a greater concern for owners looking to refinance and avoid distressed asset sales.

Commercial debt maturities

Falling 10-year yields over the four decades preceding the pandemic created conditions for CRE to borrow and refinance at lower rates upon debt maturity, reducing costs at every refinance period. The rapid rate increases since 2022 have changed the sector’s dynamics, creating much more challenging conditions for properties with debt coming due.

Commercial properties have approximately $5.82 trillion in outstanding debt, of which $2.8 trillion is scheduled to mature in the next five years, according to Trepp data. These maturing loans will generally face higher interest rates than at origination, as debt yields have doubled since early 2022, compressing returns. Lower-performing assets, which include much of the outdated office space across the country and in metro areas with lower return-to-office rates, may not be able to refinance or bear the higher cost of capital.

Private debt market

Private debt is well positioned to continue expansion during the structural shift in lending: Investors seek diversification in capital positions within CRE to protect the equity downside risk as cap rates rise. The yields on gap funding, such as mezzanine loans and preferred equity, come at a price as institutional investors seek returns of 10% on private debt, according to Preqin’s June 2023 survey. Still, borrowers have been more receptive to securing additional financing to execute riskier plays in this market. Doing so also brings flexibility in structuring, increases the certainty of funding and builds a long-term relationship for future deals.

Mezzanine fundraising was a standout in 2023, with $40.6 billion raised as of the third quarter of 2023 compared to 26.2 billion in the full year of 2022, Preqin data shows. Mezzanine positions come with higher returns than direct lending, but also carry additional risk due to their subordinate position in the capital stack. While $536.90 billion of debt matured in 2023, delinquencies for most asset classes, excluding office, remained relatively low and stable over the trailing 12-month period ending December 2023.

Not surprisingly, the commercial office sector had the highest year-over-year increase in delinquencies, jumping to 5.82% in December 2023 from 1.58% in December 2022. In the near term, we expect to see more delinquencies as office debt continues to come due; however, we are optimistic this trend will level off amid increased clarity around property valuations and longer-term corporate plans for office expansion. Some 46% of middle market executives plan to increase their organization’s number of physical workspaces over the next two years, according to data from the Q4 2023 RSM US Middle Market Business Index survey.

The takeaway

As the market continues to adjust to higher borrowing costs and compressed valuations in the face of significant maturing debt, we are certain to see the basics of real estate return. Location and asset class will play a major role for institutional investors seeking quality assets that will hold their value. Hotel, retail, industrial and storage properties have been standouts for banks due to their solid fundamentals and less volatile underwriting. But as returns decline in core sectors, niche assets such as data centers, senior housing, storage and suburban single-family rentals will be attractive areas for private debt and opportunistic equity investment.

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This article was written by Lauren Gerdes, Crystal Sunbury and originally appeared on 2024-02-29.
2022 RSM US LLP. All rights reserved.
https://rsmus.com/insights/industries/real-estate/commercial-real-estate-faces-new-financing-landscape.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.

Executive Summary:

As the Jan. 31 deadline for filing IRS forms 1099 rapidly approaches, filers are reminded of several small but important changes that have been published in the last few weeks that might affect your ability to file timely and may necessitate changes to your systems and processes. Specifically: 

• On Jan. 8, 2024, the IRS published a new version of the 2023 Form 1099-NEC, Nonemployee Compensation, which is now a continuous use form, so make sure that you are using the latest version of the form.
• In November 2023, the IRS published new Form 15397, which must now be faxed to the IRS to request additional time to furnish recipient copies of Forms 1099. An extension of time to file 1099s can still be requested by filing Form 8809 but form 15397 must be faxed as well to avoid penalties.
• Starting Jan. 1, 2024, filers of 10 or more forms 1099 must file the forms electronically and may be subject to penalties if paper forms are filed unless a waiver is requested. 
• To file 1099 forms electronically this year, filers must request a new IR-TCC code from the IRS, which can take up to 45 days to obtain. Old TCC codes issued prior to September 2023 are no longer valid, so filers should plan accordingly and may need to outsource the filing of forms. See prior alert here for details.
• In December 2023, the IRS announced a one-year delay in implementation of the lower $600 filing threshold for third party settlement agents, including payment processors, ride share platforms, and others to file forms 1099-K. Instead, the filing threshold remains at $20,000 and 200 transactions for 2023 returns which means that filers may need to revise systems and processes to properly flag 1099-K reportable payments for 2023 and avoid over reporting. See prior alert for details. 

Additional details on new requirements appears below.

Deadline for filing 2023 forms 1099 is near but beware of important changes

IRS releases revised final continuous use Form 1099-NEC

On Jan. 8, 2024, the IRS published a revised version of the 2023 Form 1099-NEC. Form 1099-NEC is used for reporting compensation (such as fees, commissions, and other payments) made to U.S. persons who are not the filer’s employees. The January 2024 version of the form incorporates several changes from the previous draft 1099-NEC released in September 2023 and follows the IRS announcement to move the Form 1099-NEC to a continuous use basis, instead of single year forms updated each year.

Key changes are the following:

1. The “2nd TIN Not” field which was removed from the September 2023 draft at the bottom of the form was added back to the form
2. The tax year field was changed from “20__” where filers only needed to enter the last 2 digits of the year to just a blank line “____”

Additionally, the instructional note/preamble that is attached to the official form was updated to clarify that filers of 10 or more information returns are now required to file them electronically.

Companies that are filing Forms 1099-NEC in house should build in sufficient lead time and budget to address these changes to Form 1099-NEC. There are potential system errors that may arise for taxpayers/filers if the above changes are not made prior to preparing the 2023 forms 1099-NEC. Filers using third parties to prepare and file their forms 1099-NEC should also confirm that their software vendors have updated their systems for the latest version of the form published this month.

IRS publishes new Form 15397 for requesting extensions for recipient copies

The IRS recently published new Form 15397 in November 2023 which should now be used to request an extension of time to furnish recipient copies of information returns including forms 1099-NEC to each respective recipient. Filing form 15397 will extend the time to furnish recipient copies of Form 1099 to recipients by 30 days.

The deadline for furnishing recipient copies of 2023 Forms 1099-NEC to recipients is Jan. 31, 2024, while the deadline for furnishing recipient copies of Forms 1099-B, and 1099-S, and 1099-MISC (if amounts are reported in boxes 8 or 10) is Feb. 15, 2024.

If form 15397 is completed correctly and signed, and successfully transmitted to the IRS, the extended due date for furnishing the 2023 Forms 1099-NEC Recipient copies will be March 1, 2024, and the extended due date for filing Forms 1099-NISC, 1099-B, and 1099-S will be March 15, 2024. The form 15397 must be faxed to the IRS on or before January 31 each year at:

Internal Revenue Service Technical Services Operation

Attn: Extension of Time Coordinator

Fax: 877-477-0572 (International: 304-579-4105)

Please contact us if you have questions regarding your 1099 filing obligations and the impact of the changes discussed.

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This article was written by Aureon Herron-Hinds, Paul Tippetts, Dustin Freeman and originally appeared on 2024-01-24.
2022 RSM US LLP. All rights reserved.
https://rsmus.com/insights/tax-alerts/2024/deadline-for-filing-2023-forms-1099-is-near-but-beware-of-import.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.

Businesses with an eye on compliance know that the Department of Justice’s (DOJ) Criminal Division has recently released an update to the Evaluation of Corporate Compliance Program (2023 Guidance). Although this update is meant to assist prosecutors in evaluating and determining the adequacy and effectiveness of a corporation’s compliance program, the 2023 Guidance should be considered by in-house counsel, corporate compliance leaders and auditors as they administer and oversee their own programs, including their response to allegations of noncompliance, both in design and practice. For instance, recent regulation regarding clawback of management compensation due to noncompliance has been top of mind for executives and attorneys alike.

The importance of a robust compliance program cannot be emphasized enough in today’s complex regulatory and legal environment. The financial impact of settlements, fines and penalties for compliance violations are continually on the rise—and often on the front page of the news. All things considered, your company’s reputation, as well as current and future profitability, will be better protected when you have integrated compliance and investigations teams.

The case for integrated compliance and investigations teams

A sophisticated compliance program recognizes that (1) proactive compliance and (2) any resulting investigations into alleged noncompliance can each influence, complement and strengthen the other.

1. A strong and effective compliance program lays the foundation for a healthy and ethical business operation. However, even the most robust ethics and compliance programs cannot eliminate all fraud and corruption risk. As such, while the occurrence and magnitude of misconduct can be minimized, it cannot be fully eliminated. When allegations of misconduct and noncompliance occur, companies can quickly determine the who, what, when, where, how and potentially why through deploying leading practices in conducting investigations.
2. After misconduct or noncompliance is alleged or identified, well-executed investigations should be conducted that include root cause analyses to provide valuable feedback on required internal control and compliance program remediation, further enhancing the effectiveness of the corporate compliance program. The integrated cycle of identify—investigate—report—remediate across the compliance and investigations functions demonstrates the organization’s earnestness regarding its obligations toward compliance and legal issues.

What should companies focus on?

Compliance programs are not one-size-fits-all. Your organization should tailor your program to fit your needs and circumstances. However, based on recent cases resolved under the DOJ guidance, your company should consider how well your programs are designed to address four key elements critical to compliance programs. Addressing these issues will increase the chances of a more positive outcome when faced with compliance issues:

1. Risk mitigation: Compliance frameworks are designed to identify and mitigate risks so corporations can adhere to relevant laws and regulations. Understanding the existing legal and regulatory landscape (both domestically and globally) facing your organization, coupled with a focus on communication and engagement, as well as conducting periodic risk assessments shaped by the evolving environment in which you operate, will increase your organization’s preparedness and reduce harm.
2. Know and use your data: Understanding the information and data available to you, including where it resides and its limitations, is imperative to both assess compliance and respond to allegations of misconduct or noncompliance. In more mature compliance programs, the same data and technology utilized by management to make strategic decisions can be leveraged to identify key issues with compliance. Regulators have now come to expect continuous monitoring of key risk areas to mitigate the severity of compliance issues and limit their frequency.
3. Investigation management drives reputation management: The rigor with which a business investigates misconduct allegations can demonstrate a company’s commitment to ethical conduct. Organizations that do not disclose all facts may lose credibility with regulators, enforcement agencies and their employees. By enhancing employee awareness of confidential reporting hotlines and other resources, including whistleblower protection rights, reputational harm can be mitigated by all employees within the organization.
4. Consequence management: Finally, the objectives of any compliance and investigation effort should include limiting financial and reputational impact on the business. If a violation occurred, swift and meaningful action, based on the severity of the conduct and the pervasiveness of the issue, illustrates the thoughtful and strategic manner in which your organization has created an environment of compliance in spirit and practice.

Help to integrate

There are a variety of ways your organization can look to mature your compliance and investigations efforts with the help of external experience and insight.

Compliance program review and continuous improvement

An effective compliance program should evolve and adapt to the changes in the business, industry and any other relevant external circumstances. To that end, companies may periodically engage with external advisors to independently review and update their existing compliance program. Experience from outside your organization brings lessons learned from competitors, other industries and geographies to leverage against the specific compliance needs at issue, limiting risks of noncompliance with new industry standards, regulations and laws.

Third-party risk management (TPRM) and international compliance

Third-party resellers, vendors, suppliers, agents and contractors play vital roles in organizations in the global business environment. However, the use of third parties and their relationships introduces certain risks. In some cases, external entities can affect your company’s compliance status and its brand reputation. Risk mitigation begins with establishing and monitoring a TPRM program led by trained compliance advisors to ensure effective due diligence, mitigating potential risks associated with higher-risk external parties.

For companies operating globally, navigating the complexity of international regulations and laws of foreign countries could be challenging. External advisors with a global network can help your company comply with diverse regulatory requirements and form law-abiding strategies abroad.

Investigation support

Without timely and thorough investigations of allegations of noncompliance, the effectiveness of a compliance program can be significantly diminished. Your organization should maintain relationships with experienced law and investigative firms to provide appropriate global subject matter experience when required. Your organization may lack well-established procedures, personnel or resources; the necessary tools and technology to conduct a thorough investigation; or sometimes, the stakes may simply be too high to go at it alone.

Post-investigation analysis and remediation recommendation

As part of the conclusion of any investigation, a thorough root cause analysis of noncompliance incidents is essential to address the underlying financial or operational issues. Internal controls and process management advisors have deep insights into the types of noncompliance activities and control failures in specialized industries. Advisors can perform the appropriate analyses, determine remediation efforts, assess the adequacy of your data and technology, and develop a prioritized, actionable work plan to remediate control deficiencies.

The risks, the expectations and the stakes for compliance and response have never been higher.  When you establish a team of integrated compliance and investigative professionals that deploy the right technology and outside resources when needed, you are positioned for future success reputationally and financially.

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This article was written by RSM US LLP and originally appeared on 2024-01-23.
2022 RSM US LLP. All rights reserved.
https://rsmus.com/insights/services/financial-management/protecting-value-with-your-compliance-and-response-program.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.

Executive summary 

Momentum continues to build towards a potential tax agreement that would couple an expanded child tax credit with a temporary reinstatement of certain TCJA-related business tax benefits, including:

1. Research and development (R&D) expensing (section 174)
2. Less stringent business interest limitations (section 163(j))
3. Continuation of 100% bonus depreciation

To that end, proposed legislation H.R. 7024, the “Tax Relief for American Families and Workers Act of 2024” key tax writers in the Senate and the House, building upon a framework agreement released Jan. 16, that would further advance these provisions toward potential enactment. However, significant obstacles remain, including the need for buy-in from senior lawmakers, as well as the support (and vote) from enough lawmakers in both the House and the Senate to ensure passage. The framework also includes disaster relief provisions, enhanced section 179 expensing benefits, expansion of the low-income housing tax credit, and relief from double taxation for Taiwan residents. The proposals would be completely paid for by barring new employee retention credit (ERC) claims after Jan. 31, 2024. 

Discussion

Senate Finance Chairman Ron Wyden and House Ways and Means Chairman Jason Smith have proposed legislation that would temporarily postpone certain scheduled tax increases for the “big 3” business provisions that were enacted as part of the 2017 Tax Cuts and Jobs Act (TCJA) in exchange for an expanded child tax credit. The Tax Relief for American Families and Workers Act of 2024 represents the culmination of a months-long negotiating process between key lawmakers, and the measure must now navigate a tricky political environment where Congress is faced with several competing priorities, and where action before the impending tax filing season is critical. The House Ways & Means Committee marked up, and ultimately approved by a 40-3 vote signifying strong bipartisan support, the legislative text on Friday Jan. 19, and the full House will likely take up the measure when they return from recess on Jan. 29, if not sooner. ?

Both the legislative text as well as the Joint Committee on Taxation’s summary of the measure provide additional details of the initial proposals, which may change as the bill advances through Congress. A summary of those initial proposals, as set forth in the framework, as well as our preliminary observations, is provided below. Further changes or modifications will be addressed as needed in subsequent insights from RSM. 

Deduction for research and experimental expenditures.?The framework delays the date on which taxpayers must begin capitalizing their domestic research or experimental costs and amortizing them over a five-year period, as required under the TCJA. Under the proposal, taxpayers would be able to deduct currently (rather than capitalize) domestic research or experimental costs that are paid or incurred in tax years beginning after Dec. 31, 2021, and before Jan. 1, 2026. Foreign research and experimental costs would continue to be capitalized and subject to amortization over a 15-year period.

Observation: Hope for restoration of full expensing for qualifying R&E expenditures under section 174 has been at the top of the wish list for many impacted businesses since the law change became effective in 2022 and is considered a critical component to the package. 

Less stringent business interest deduction limitation.?Under the framework, deductibility of business interest would increase for many taxpayers. The limitation or cap on business interest would revert to an amount based on an EBITDA approach (i.e., earnings before interest, taxes, depreciation, and amortization) , in place of the current more-stringent EBIT (i.e., earnings before interest and taxes) calculation. The provision would take effect for taxable years beginning after Dec. 31, 2023 (and, if elected, for taxable years beginning after Dec. 31, 2021), and before Jan. 1, 2026, thus allowing for potential retroactive treatment.

Observation: How a taxpayer would elect retroactive application for taxable years beginning after Dec. 31, 2021 is not specified in the legislation. Should this bill become enacted, taxpayers wishing to make the election would need to wait for additional procedures from the Treasury and IRS that specify how to make the election.

Observation: Where control of a business entity has changed in a sale (or other transaction), the framework’s retroactive aspects may give rise to business issues. Additional tax deductions retroactively available for either interest or for research and experimental expenditures can still provide tax benefit for the business after the sale. However, the transaction documents for the sale may restrict who can make the tax filings needed to pursue the tax benefit and may dictate whether the additional tax benefit could result in a purchase price adjustment, Taxpayers engaging in merger and acquisition activity should consider the provisions of their transaction documents prior to pursuing any retroactively available tax benefits.

Extension of 100% bonus depreciation. The provision extends 100% bonus depreciation for qualified property placed in service after Dec. 31, 2022, and before Jan. 1, 2026 (Jan. 1, 2027, for longer production period property and certain aircraft.)

Increased expensing of depreciable business assets. The provision increases the maximum amount a taxpayer may expense under section 179 for qualifying property to $1.29 million, reduced by the amount by which the cost of qualifying property exceeds $3.22 million. The $1.29 million and $3.22 million amounts are adjusted for inflation for taxable years beginning after 2024. The proposal would apply to property placed in service in taxable years beginning after Dec. 31, 2023.

Child tax credit. As currently proposed, the framework would expand and extend the child tax credit for three years and would modify the calculation of the refundable child tax credit to enable more families with multiple children to claim a larger credit before running into limits based on earned income. The framework would increase the current child tax credit of $2,000 per child for inflation in tax years 2024 and 2025. In determining their maximum child tax credit, taxpayers would be able to use earned income from the prior taxable year to the extent it exceeds the current year’s amount. The provisions on the child tax credit would be effective for tax years 2023 through 2025.

Observation: It remains to be seen whether proponents of an expanded child tax credit will view these changes as sufficient to meet their demands for a COVID-era equivalent credit, including full refundability, and whether proponents of adding work requirements to the credit will support this provision, or require additional modifications. ???? 

Increasing global competitiveness. The framework provides targeted and expedited relief from double taxation on US-Taiwan cross border investment through changes to the U.S. tax code Notably, it would provide certain treaty-like benefits for income from US sources that is earned or received by qualified residents of Taiwan, contingent on reciprocity to U.S. persons with income subject to tax in Taiwan. Such benefits would generally include (i) reduced withholding tax rates on interest, dividends and royalties; (ii) an increased permanent establishment threshold, and (iii) favorable tax treatment on certain wages of qualified residents of Taiwan that are performing personal services in the U.S. (subject to certain exclusions). The framework includes a provision that would authorize the President to consult with Congress and negotiate an agreement with Taiwan, as none currently exists. 

Observation: In broad brush, these provisions would allow the Biden Administration to negotiate and conclude an executive agreement that would contain provisions similar to those contained in a tax treaty that the U.S. might conclude with a new treaty partner. We expect that the agreement would contain provisions that would grant relief from double taxation including access to the U.S. competent authority.?It remains to be seen whether any future agreement(s) would provide benefits more advantageous than those available under the U.S.-China double tax treaty. Presumably, the agreement will include information reporting/exchange provisions as well.?

Assistance for disaster-impacted communities 

Casualty loss relief for certain disasters

The framework extends the rules for the treatment of certain disaster related personal casualty losses passed in the Taxpayer Certainty and Disaster Tax Relief Act of 2020, including the elimination of the requirement that casualty losses must exceed 10% of adjusted gross income (“AGI”) to qualify for the deduction, to a potentially large amount of disasters. While the AGI limitation would be removed, each separate casualty would still be subject to a $500 floor (a very small limitation in the grand scheme). Further, the taxpayer would be able to take this casualty loss “above the line”, meaning even if they don’t itemize their deductions, they are allowed to claim the casualty loss in addition to the standard deduction. 

Observation: It is our understanding that this provision would relate to many, if not all, of the disasters listed on the IRS website, Tax relief in disaster situations | Internal Revenue Service, starting with the ones listed in 2020 through 2023 and any that occur within 60 days after the date of enactment of this proposal – so a significant amount of disasters. Any future disasters within this 60-day period must still be declared a major disaster by the President. This proposed legislation would provide much needed relief to Taxpayers who experienced casualty losses, especially those victims of Hurricane Ian, Hawaii Wildfires, California Storms and Wildfires, among many other disasters. 

Qualified wildfire relief payments

The framework also includes relief in the form of an exclusion from gross income for compensation for losses or damages resulting from qualified wildfires relief payments. Qualified wildfire relief payments mean any amount received as compensation for losses, expenses, or damages (including compensation for additional living expenses, lost wages (other than compensation for lost wages paid by the employer which would have otherwise paid such wages), personal injury, death or emotional distress) as a result of a qualified wildfire disaster that were not compensated by insurance or otherwise. A qualified wildfire disaster is defined as any federally declared disaster as a result of any forest or range fire. This provision applies to qualified wildfire relief payments received by the individual during taxable years beginning after Dec. 31, 2019 and before Jan 1, 2026. It should be noted that this provision is clear that no double benefit is allowed and as such, no deduction or credit shall be allowed for any expenditure to the extent the amount was excluded from income. Further, if the taxpayer uses these qualified payments on any property they shall not be allowed to increase their basis in the property. 

East Palestine (Ohio) disaster relief payments 

This provision provides necessary relief from the victims of the East Palestine Ohio train derailment insofar that relief payments will be treated as qualified disaster relief payments as defined in section 139(b). Section 139(b) allows these relief payments to be excluded from gross income. East Palestine Train Derailment Payments means any amount received by an individual as compensation for loss, damages, expenses, loss in real property value, closing costs with respect to real property (including realtor commissions), or inconvenience (including access to real property) result from the East Palestine train derailment if such amount was provided by (1) a Federal, State, or local government agency, (2) Norfolk Southern Railway, or (3) any subsidiary, insurer, or agent of Norfolk Southern Railway. East Palestine train derailment means the derailment of a train in East Palestine, Ohio on Feb. 3, 2023. This provision applies to payments received on or after Feb. 3, 2023.

More affordable housing. This provision of the framework seeks to increase the supply of affordable housing by increasing the ceiling on the state housing credit (for purposes of the low-income housing tax credit) for calendar years 2023 through 2025. This would allow states to allocate more credits towards affordable housing projects. In addition, the framework would lower the bond-financing threshold (as part of the tax-exempt bond financing requirement) to 30% for projects financed by bonds with an issue date before 2026, subject to a transition rule for certain buildings that already have bonds issued.

Employee retention credit. The framework would end the period for filing ERC claims for both 2020 and 2021 as of Jan. 31, 2024 and would beef up penalties on a “COVID-ERTC promoter” (as separately defined) who is aiding and abetting the understatement of a tax liability or who fails to comply with certain due diligence requirements relating to the filing status and amount of certain credits. While these changes would stop any claims from being filed before the standard period for filing ERC claims ends (April 15, 2024 and April 15, 2025), it would not have any retroactive effect for claims filed prior to Jan. 31, 2024. However, the framework would extend the statute of limitations period on assessment for all quarters of the ERC to six years from the later of the original filing or the date of the claim. This could potentially allow, for example, a claim filed on Jan. 1, 2024, for the second quarter of 2020, to be examined and adjusted until Jan 2, 2030. This would enable the IRS to examine and seek the return of ERC refunds for years to come. 

The proposed legislation also provides for an extension on the period of time to amend corresponding income tax returns on which employers may have reduced wage deductions to account for the prohibition on claiming ERC on wages deducted from income; however as currently drafted this additional extension seems to only apply to individual and corporate returns and not partnership returns. This proposal would bring parity to the period for making an adjustment to the wage deduction with the period of time the IRS has to make adjustments to the ERC claimed, correcting a mismatch between the limitations period currently in existence on the third and fourth quarters of 2021. 

Next steps

As indicated above, the House Ways & Means Committee marked up the bill on Friday, Jan. 19, where the measure passed by a very strong vote of 40-3 in favor. According to the House’s calendar, a recess is planned for the week of Jan. 22, with members returning Monday, Jan. 29 which happens to coincide with start of the tax filling season, as announced recently by the IRS. The next step would be for the full House to consider the measure on the floor, and if passed, would be sent to the Senate for consideration. Timing will be tight, however, as many lawmakers view Jan. 29 as a deadline for House passage. It is possible that timing could shift beyond this date somewhat to the extent significant progress has been made. There are no guarantees, however, and additional timing and procedural constraints could similarly surface in the Senate, where leading Republican Senators have expressed reservations, particularly around the child tax credit and have called for changes. This could further inject uncertainty into the process.  

It is important to keep in mind this is a very fluid and evolving development, and that ultimate passage of a tax bill is far from certain. Moreover, the provisions (and accompanying observations) described above are subject to potential change as the negotiation process moves forward. 

RSM US LLP’s Washington National Tax and Tax Policy team members are actively monitoring developments and will be issuing additional insights as warranted.

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This article was written by Matt Talcoff, Ryan Corcoran, Fred Gordon, Tony Coughlan and originally appeared on 2024-01-19.
2022 RSM US LLP. All rights reserved.
https://rsmus.com/insights/tax-alerts/2024/tax-framework-agreement-sets-direction-potential-business-individual-tax-relief.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:

Employee Retention Credit Voluntary Disclosure program

On Dec. 21, 2023, the IRS announced the details of an anticipated employee retention credit Voluntary Disclosure program (ERC-VDP) for employers who claimed and received an ERC refund for a quarter but were not eligible. The program allows claimants to repay ERC at a reduced rate of 80% of the credit.  In addition, the program waives penalties and interest on the full amount, not just the 80% returned. The IRS is only accepting applications for the program until March 22, 2024. Accepted applicants will be required to execute a closing agreement stating they are not entitled to ERC and must provide the name and contact information for any preparer or advisor who assisted in claiming the ERC. The IRS has also published a set of FAQs relating to the ERC-VDP.

The IRS also announced that they are issuing another round of letters proposing adjustments to tax issued to 20,000 employers that claimed an erroneous or excessive amount of ERC.

IRS announces details for ERC Voluntary Disclosure program 

ERC VDP continuation of ongoing IRS initiative to combat dubious ERC claims

Following the October announcement of the ERC withdrawal process, the IRS has released the details of the new ERC-VDP which will allow ERC claimants who have already received the refund or credit against employment taxes to apply to repay the ERC at a reduced rate of 80% of the claim, without penalties or interest. The ERC-VDP was developed mostly for employers who were induced into claiming ERC and now realize they were not entitled to the credits. In particular, the reduced amount required to be repaid was designed to allow employers who paid a contingency fee to a promoter to repay the improper credit at a lower financial cost. The required disclosure about preparers who assisted in filing the claim will help the IRS gather information on promoters who took aggressive positions in advising taxpayers to claim ERC.

Eligibility for ERC-VDP

Taxpayers who claimed ERC and have received the refund or the credit against their employment taxes are eligible to participate in the program. (Taxpayers who have not yet received an ERC credit or refund but no longer believe they are entitled to ERC can use the withdrawal process to withdraw their claim). Taxpayers are not eligible for ERC-VDP if any of the following apply:

• The taxpayer is under criminal investigation or has been notified that the IRS intends to commence a criminal investigation;
• The IRS has already received information alerting it to the taxpayer’s noncompliance;
• The taxpayer is undergoing an employment tax examination for the period for which it is applying; or 
• The taxpayer has already received a notice and demand for repayment of all or part of the claimed ERC.

Employers who claimed ERC using a third-party payer, such as a professional employer organization (PEO) or payroll agent, are eligible for ERC-VDP, but the third-party payer must submit the application on the employer’s behalf.  The announcement provides some guidance for third-party payers assisting with such applications.

In order to use the program for a given quarter, the taxpayer must give up the full amount of ERC that was applied for on the Form 941 X for that quarter.  Taxpayers who want to reduce only a portion of the ERC claimed in a quarter are not eligible for ERC-VDP or the withdrawal process; these taxpayers must file an amended return to adjust the ERC claimed.

Terms of participation in ERC-VDP

Employers who are approved to participate in the program (’participants’) will be required to execute a closing agreement which provides that they are not eligible for, or entitled to, any ERC for the tax period(s) at issue. The participant will repay 80% of the claimed ERC to the Department of Treasury. Participants will also be excused from repaying overpayment interest received on any issued ERC refund. Underpayment interest will not be required if the participant makes full payment prior to executing the closing agreement.

The program also provides for the possibility of repaying the ERC amount through an installment arrangement.  If the IRS approves repayment under an installment agreement, interest will only accrue prospectively from the agreement date. The IRS will not assert civil penalties against participants that make full payment of the 80% of claimed ERC prior to executing the required closing agreement.

For many taxpayers, the ERC impacted their income tax obligations as well. Because ERC cannot be claimed on wages that are claimed as a deduction against income, recipients of ERC were expected to reduce wage deductions for the 2020 and/or 2021 tax years equal to the ERC amounts. If participants had not already amended their income tax returns to reduce their wage deduction by any claimed ERC, they will not need to file amended returns or Administrative Adjustment Requests (AARs) to reduce their wage deduction. Participants who already reduced their wage deduction by the claimed ERC may file an amended return or AAR to reclaim the previously reduced wage expense. No income will be attributed to participants as a result of participating in the program.

If a return preparer or advisor assisted the participant in claiming the ERC, the participant must provide the name, address, and phone number of the preparer or advisor as well as a description of services provided.

Under the new application form, a taxpayer can provide a power of attorney to allow another person to represent the taxpayer in making the VDP application.

Applications for ERC-VDP due by March 22, 2024, 11:59 pm local time. 

Taxpayers apply to participate in ERC-VDP by completing Form 15434, Application for ERC-VDP and submitting it via the IRS Document Upload Tool by March 22, 2024. Form 15434 must be signed by an authorized person under penalties of perjury. Taxpayers applying for ERC-VDP for a period ending in 2020 must include a completed and signed statute extension Form ERC-VDP SS-10.  Form 15434 will help calculate the payment required to participate in ERC-VDP. Paying the balance via Electronic Federal Tax Payment System (EFTPS) at the time of applying for ERC-VDP is encouraged and could speed up the resolution of the case. However, as discussed above, participants who are unable to pay the entire balance may be considered for an installment agreement.

The IRS FAQs state that ERC-VDP applications will be handled on a first come, first serve basis. The FAQs indicate that most cases should resolve quickly but also provide there is no way to estimate how long the process will take. Applicants can call the ERC-VDP hotline at 414-231-2222 and leave a voicemail to check on the status of their application or for assistance with the ERC-VDP process, including completing Form 15434.

If a taxpayer’s application is approved, the IRS will prepare a closing agreement under section 7121 of the Code and mail the closing agreement to the participant. Once a participant receives the ERC-VDP closing agreement package, they will be asked to review and return the signed agreement within 10 business days. Participants need to pay balances due prior to signing the agreement in order to receive all the benefits of the program. If the IRS denies a taxpayer’s application to participate in ERC-VDP, there is no method to review or appeal the denial. Further, a taxpayer’s participation in ERC-VDP does not preclude the IRS from later investigating any criminal conduct or provide any immunity from prosecution.

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This article was written by Anne Bushman, Alina Solodchikova, Karen Field , Marissa Lenius and originally appeared on 2023-12-22.
2022 RSM US LLP. All rights reserved.
https://rsmus.com/insights/tax-alerts/2023/irs-announces-details-for-erc-voluntary-disclosure-program-.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: IRS to target large partnerships and wealthy individuals

Large partnerships and high net worth individuals are the target of a sweeping enforcement effort that artificial intelligence will support, the IRS announced Sept. 8, 2023. The agency will prioritize enforcement against the largest and most complex partnerships, as well as individuals with annual income over $1 million and more than $250,000 in tax debt.

The IRS has worked in conjunction with experts in data science and tax enforcement to create machine learning technology to identify compliance issues in the areas of partnership tax, general income tax and accounting, and international tax.

IRS shifts its focus to large partnerships and wealthy individuals

On the heels of the Inflation Reduction Act, which increased the agency’s funding, the IRS has initiated a broad effort to crack down on partnerships and wealthy individuals at risk for noncompliance, specifically targeting the largest partnerships as well as individual taxpayers with income exceeding $1 million and tax debt exceeding $250,000.

Large partnerships

The Government Accountability Office in July 2023 released data that detailed a significant increase in the formation of large partnerships between 2002 and 2019. The report revealed a 600% increase in large partnerships, which it defined as partnerships with at least $100 million in assets and 100 or more partners.

The report further determined the audit rate for these large partnerships had dropped to less than 0.5% since 2007. The report revealed 80% of the audits conducted resulted in no changes to the partnership return, perhaps as a result of the IRS’ inability to properly target noncompliant partnerships.

In October 2021, the IRS initiated the Large Partnership Compliance (LPC) pilot program via its Large Business and International Division in response to the need for a coordinated approach to audits of partnerships under the centralized audit regime enacted as part of the Bipartisan Budget Act of 2018. The LPC successfully engaged in examinations of some of the largest and most complex partnerships in the U.S.

Building on the success of the LPC program, the IRS in September 2023 announced its intent to target 75 of the largest partnerships—those with at least $10 billion in assets—in fiscal year 2024.

Introducing AI to enforcement efforts

To accurately select partnerships for examination, the IRS will use an AI solution, which was developed through a collaboration of experts in data science and tax enforcement who have been working together to develop machine learning technology. The AI will “identify potential compliance risk in the areas of partnership tax, general income tax and accounting, and international tax in a taxpayer segment that historically has been subject to limited examination coverage,” according to the IRS’ news release.

The news release stated that the IRS has also identified balance sheet discrepancies involving partnerships with over $10 million in assets. Specifically, the IRS will target partnerships whose returns show discrepancies exceeding $1 million between end-of-year balances and the beginning balances for the following year.

The agency will mail compliance letters requesting explanations of the discrepancies to around 500 partnerships, and, depending on the responses, may add these partnerships to the audit stream for additional review.

Individuals

The IRS is also targeting high net worth taxpayers with annual income above $1 million who have more than $250,000 in recognized tax debt.

The agency will engage dozens of revenue officers to focus on these high-end collection cases in fiscal year 2024. Through the first half of November 2023, the agency contacted 1,600 high net worth taxpayers that owe hundreds of millions of dollars. Through this effort, IRS collected $122 million in the first 100 cases.

Actions taxpayers should take

Partnerships and high net worth taxpayers should be prepared for an increase in IRS audit activity in the coming months and years. Maintenance and retention of financial records, as well as documentation supporting tax positions likely to be challenged, will be critical. Working with your tax advisor to ensure accurate reporting and prepare for an examination in advance would benefit taxpayers who may be affected by the IRS’ increased enforcement efforts.

Partnerships should regularly update basis schedules for partners. Attempting to re-create them years after the relevant transactions can be difficult due to a lack of adequate records.

All taxpayers should take care to document certain deductions or positions taken on a tax return, including but not limited to:

• Any position that has been identified as a campaign issue by the IRS’ Large Business and International Division
• Any position identified as a listed transaction
• Any position for which a Schedule UTP (uncertain tax position) is required
• Any position with respect to which a Form 8275 (Disclosure Statement) is included with the relevant return
• Any positions claiming a research credit
• Any position on a sale of partnership interest or sale of other assets
• Any positions where the IRS can question capital vs. ordinary gain treatment of an item

With respect to any of these deductions, credits or positions, taxpayers should make sure they can readily substantiate them to the IRS during an audit. Written memoranda with legal citations supporting positions taken should be drafted as the relevant tax return is prepared. A research credit should not be claimed unless there is a completed research credit study justifying the credit.

Prudent taxpayers should ask their advsors to perform an audit readiness assessment that identifies tax return items that the IRS is likely to examine. This will enable taxpayers to further support those items.

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This article was written by Alina Solodchikova, David McNeely, Jackie Sullivan, Mike Zima and originally appeared on 2023-12-08.
2022 RSM US LLP. All rights reserved.
https://rsmus.com/insights/services/business-tax/irs-use-ai-help-target-partnerships-high-net-worth-individuals.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.