The 2022 Federal Tax Year-in-Review
This has been an eventful year so far and, as of the date of this writing, there are still several weeks to go. This creates the potential for additional legislation that could affect 2022 federal taxes. With the mid-term elections producing a narrow Republican majority in the House of Representatives and the size of Democratic control of the Senate contingent on the run-off election in Georgia (as of publication), the direction of tax legislation, even in a lame-duck session, is uncertain.
This article will review some of the most significant legislative, judicial, and administrative changes that have happened during the tax year to date. Some of these items will be discussed in greater detail in other articles contained in this year-end guide.
Two major pieces of legislation were enacted this year, which contained tax provisions. These were the CHIPS (Creating Helpful Incentives to Produce Semiconductors) Act and the Inflation Reduction Act of 2022 (IRA 2022).
The summary of this law notes that currently only 12% of computer chips are manufactured in the United States, as opposed to 37% in the 1990s. Additionally, foreign competitors (most notably China) have invested heavily so as to dominate the industry. This new law intends to provide incentives to support chip manufacturing and research subsidies. Additional funds are provided for less advanced legacy chips.
From a tax perspective, the law also provides for an investment tax credit (the advanced manufacturing investment credit) equal to 25% of a qualified investment for any advanced manufacturing facility of an eligible taxpayer. Qualified property includes depreciable tangible property that is (i) constructed, reconstructed or erected by the taxpayer; (ii) acquired by the taxpayer if the original use of such property commences with the taxpayer; and (iii) integral to the operation of an advanced manufacturing facility. Qualifying costs can include buildings and structural components, except for the portion used for offices, administrative services, or other functions unrelated to manufacturing.
An eligible taxpayer excludes a foreign entity of concern (i.e., a foreign security threat) or one that has made certain “applicable transactions” (including an early disposition of investment credit property).
The law provides for a basis reduction for the creditable property and explains the interaction with the rehabilitation credit, to avoid a double benefit.
The Inflation Reduction Act of 2022
Due to Senators Joe Manchin’s (D-WV) and Kyrsten Sinema’s (D-AZ) opposition to many tax increase proposals that were part of the original draft of this bill, a noteworthy aspect of the final law is the tax provisions that were excluded. The most significant items missing from the law include these:
- There are no changes made to the estate and gift tax rules;
- There are no increases to the tax rates on high earners;
- There is no change to the tax rates applicable to individuals on long-term capital gains;
- There is no increase to the corporate income tax rate (which remains at a flat 21%);
- There is no change to the “carried interest” rules;
- There is no change to the qualified small business stock exclusion;
- There is no change to the like-kind exchange rules; and
- The current SALT limitation was not repealed.
With respect to any future changes to the “carried interest” rules, Senator Sinema indicated that she was willing to enter into separate discussions with Senator Mark Warner (D-VA). However, given the current Democrat-Republican split in the Senate, significant changes would seem unlikely.
The IRA guidance contains a number of important tax sections, including:
15% Minimum Tax on Large Corporations
This is similar to the provision proposed under the Build Back Better Act and imposes a tentative alternative minimum tax (AMT) of 15% of adjusted financial statement income over the corporate AMT foreign tax credit of an applicable corporation (which excludes an S-corporation, a regulated investment company, or real estate investment trust) that meets the Average Adjusted Financial Statement Income Test for one or more tax years, which (i) are prior to such tax year and (ii) end after December 31, 2021.
The Average Adjusted Financial Statement Income Test is satisfied if, over a 3-year period, the corporation has Average Adjusted Financial Statement Income exceeding $1 billion (or for a foreign-parented corporation, exceeding $100 million). Certain companies must be aggregated (using the rules under IRC sections 52(a) and (b)) in determining if this threshold is met. The final iteration of the law provides a special rule that benefits certain private equity companies.
Under the AMT computation, Adjusted Financial Statement Income is modified to permit the benefit of cost recovery deductions and bonus depreciation, and certain other adjustments.
This provision is effective for tax years beginning after December 31, 2022.
1% Excise Tax on Stock Repurchases
To compensate for the revenue loss due to the elimination of the proposed carried interest changes, the final version of the bill includes a 1% excise tax on stock buybacks by a covered corporation, which is generally a corporation traded on an exchange. It was estimated that this provision will produce more revenue than the changes to the carried interest proposals. It should be noted that last year, S&P 500 companies bought back a record amount of stock from shareholders.
The provision is effective for repurchases after December 31, 2022. This creates a window before the end of the calendar year, where a repurchase can be completed and this excise tax avoided.
There are some exceptions, including the ability to repurchase up to $1 million in a year without the excise tax being applied.
We are awaiting guidance from the Internal Revenue Service (IRS) to understand the scope of this new rule. Based on the statutory language, it would appear to be broad in scope and may apply to transactions that are arguably outside the intention of the law.
More Funding for IRS Enforcement
Funds are provided for a 10-year period to enhance taxpayer services, for enforcement, for operations and support, and for business systems modernization.
It is interesting that the Tax Summary of the bill indicates “no use of the funds is intended to increase taxes on any taxpayer with taxable income below $400,000.” However, this language is absent from the law.
This aspect of the law has received significant attention from conservative pundits. They estimate it will increase the IRS workforce by more than 87,000 people. However, it should be noted that IRS experienced a significant drop in personnel several years ago due to retirements and is anticipating another large loss of people over the next few years. Furthermore, with the current competition to find competent employees among accounting firms and businesses, it is unclear how IRS will be able to find the people to fill its needs.
The law includes modifications to existing tax credits and the creation of new credits to address climate change, including those related to the purchase of new and used electric vehicles.
Some of these provisions have a potential impact in 2022, including:
- The restoration of the clean energy production tax credit (which had lapsed for facilities whose construction had begun before January 1, 2022).
- The restoration of the IRC sec 45L for Energy Efficient Home Credit. All home developers and owners of multi-family structures should review the potential applicability of this credit.
Many of the clean energy credits and deductions utilize a two-tier structure where there is an increased base credit equal to five times the base amounts if Prevailing Wage and Apprenticeship Requirements are satisfied. The IRS is to issue guidance as to what constitutes compliance with the requirements. However, these rules will not be applicable for facilities where construction has begun before 60 days following issuance of this guidance. Facilities where construction has begun prior to this date are deemed to comply with these rules and are eligible for the higher credit or deduction amounts. This creates an incentive to begin construction before the new rules become effective.
Research and Experimentation Expenses under the TCJA for 2022
The Tax Cuts and Jobs Act (TCJA) of 2017 contains a provision with a deferred effective date eliminating the rule that permits an immediate deduction for research and experimentation costs, as defined under IRC section 174. Instead, for tax years beginning in 2022 and later, taxpayers are required to capitalize these costs and amortize them over a five-year period (15 years for research and experimentation costs that are foreign). Any unamortized costs are not permitted to be written off or applied against sales proceeds if a related asset is disposed of or abandoned. Instead, amortization must continue.
While there was a provision in the proposed Build Back Better Act that would have deferred the effective date until 2025, this did not pass. It is hoped that this will be addressed during year-end legislation, but a change could carry a large price tag in lost tax revenue.
Businesses should be addressing before year-end how research and experimentation costs will be separated from typical ordinary business expenses on their books. The definition of these expenses under IRC section 174 are more expansive than those that may be separated and used in determining a federal research and development credit.
Inflation Adjusted Amounts for 2023
The country has been experiencing significantly high inflation, which is generally a negative economic factor – unless you are a tax professional. High inflation produces significant increases to tax threshold amounts, and the IRS recently issued these figures for 2023. Among the most significant items are the following:
Federal Estate and Gift Tax
Annual Exclusion – increased to $17,000 for 2023 (up from $16,000 for 2022)
Basic Exclusion Amount – increased to $12,920,000 for 2023 per person (up from $12,060,000 for 2022)
Observation: The basic exclusion amount increased from $11.7 million in 2021 to $12.06 million in 2022. Some thought should be given to utilizing the increase in the 2022 exemption. This should be coordinated with the rather significant additional increase that will occur in 2023.
Cash Method of Accounting for Small Business under IRC sec 448
This statutory provision was written to address the ability of a C-corporation to use the cash basis of accounting. However, these rules also impact a number of other Code provisions including: (i) the exemption from the section 163(j) business limitation rules; (ii) alternatives to section 471 inventory rules; (iii) exemption from uniform cost capitalization rules under IRC section 263A; and (iv) allowance of options in the use of the percentage of completion method in certain situations.
A small business is permitted to elect the cash method (if a C-corporation) and to take advantage of the other Code provision benefits discussed above. A small business is one whose 2022 average annual gross receipts for the prior three tax years does not exceed $27 million (increased from $26 million for 2021). The threshold will increase to $29 million in 2023.
Observation: Small business status must be retested for 2022 and 2023 using the higher limitation. But remember that, under Rev Proc 2021-48, the IRS allows taxpayers a number of options to determine when to include nontaxable Paycheck Protection Payment (PPP) forgiveness, discussed below. The tax-exempt PPP loan income must be considered part of the gross receipts of the entity in determining gross receipts for the year. This may cause an adjustment to prior-year gross receipts for testing application of these rules for 2022, as well as 2023.
Excess Business Loss (sec 461(l))
The limit is increased to $289,000 ($578,000 for joint returns) for 2023 from $262,000 ($524,000 for joint returns) for 2022.
Qualified Business Income
Section 179D Deduction
The Inflation Reduction Act of 2022 (IRA) made changes to the deduction under section 179d for Energy Efficient Commercial Buildings. The IRA created a two-tier structure for the deduction. A base credit of $.50 per square foot is allowed if a 25% reduction threshold is satisfied. This base amount is increased to $1.00 per square foot for reductions of up to 50%. This additional amount is phased-in at a rate of $.02 per square foot for each 1% energy reduction over 25% achieved. These base amounts are increased to $2.50 and $5.00 (five times the normal base amount) if prevailing wage and apprenticeship requirements are satisfied.
For 2023, the maximum deduction is increased to $.54 (but not above $1.07) for each percentage point by which the power reduction exceeds 25% up to 50%. The increased base amount is $2.68, increased to $5.36 where the prevailing wage and apprenticeship requirements are satisfied for higher efficiency (up $0.11 for each percentage point efficiency increase).
The standard deduction is:
- Joint — $25,900 for 2022 and $27,700 for 2023 (increase of $1,800)
- Single/Married Separate — $12,950 for 2022 and $13,850 for 2023 (increase of $900)
- Head of Household — $19,400 for 2022 and $20,800 for 2023 (increase of $1,400)
The federal income tax brackets are:
|10%||$10,275 or less||$11,000 or less||$20,550 or less||$22,000 or less|
|12%||$10,276 to $41,775||$11,001 to $44,725||$20,551 to $83,550||$22,001 to $89,450|
|22%||$41,776 to $89,075||$44,726 to $95,375||$83,551 to $178,150||$89,451 to $190,750|
|24%||$89,076 to $170,050||$95,376 to $182,100||$178,151 to $340,100||$190,751 to $364,200|
|32%||$170,051 to $215,950||$182,101 to $231,250||$340,101 to $431,900||$364,201 to $462,500|
|35%||$215,951 to $539,900||$231,251 to $346,875||$431,901 to $647,850||$462,501 to $693,750|
|37%||Over $539,900||Over $578,125||Over $647,851||Over $693,750|
Head of Household
|10%||$14,650 or less||$15,700 or less|
|12%||$14,651 to $55,900||$15,701 to $59,850|
|22%||$55,901 to $89,050||$59.851 to $95,350|
|24%||$89,051 to $170,050||$95,351 to $182,100|
|32%||$170,051 to $215,950||$182,101 to $231,250|
|35%||$215,951 to $539,900||$231,251 to $578,100|
|37%||Over $539,900||Over $578,100|
Estates and Trusts
|10%||$2,750 or less||$2,900 or less|
|24%||$2,751 to $9,850||$2,901 to $10,550|
|35%||$9,851 to $13,450||$10,551 to $14,450|
|37%||Over $13,450||Over $14,450|
Maximum Long-Term Capital Gains Rate
|Joint||$83,350||$517,200||Over $517,200||$89,250||$553,850||Over $553,850|
|Single||$41,675||$459,750||Over $459,750||$44,725||$492,300||Over $492,300|
|Head of Household||$55,800||$488,500||Over $488,500||$59,750||$523,050||Over $523,050|
|Estates/Trusts||$2,800||$13,700||Over $13,700||$3,000||$14,650||Over $14,650|
Child Tax Credit
The amount used to determine the refundable amount of the credit for 2023 is based on $1,600, up from $1,500 in 2022.
Observation: The changes to the Child Tax Credit under the American Rescue Plan only applied for the 2021 tax year. There was an attempt to make the changes permanent in the proposed Build Back Better Act, but this proposed legislation did not pass. As a consequence, taxpayers may see a significant change in their child tax credit for the 2022 tax year, when compared to 2021.
AMT Exemption & Phase-Out
Qualified Transportation Fringe Benefit
Monthly limit on QTF (and monthly limit for qualified parking) increases to $300 for 2023 (up $280 from the limit for 2022).
Foreign Earned Income Exclusion
Will increase to $120,000 in 2023 (up from $112,000 in 2022).
Qualified expense amount is increased to $15,950 in 2023 (up from $14,890 in 2022).
IRS announced contributions limit increases for 2023 in Notice 2022-55, for contributions to certain tax advantaged plans. There are rather significant increases due to the current inflation level. The changes found in the Notice include:
Annual Benefit under a Defined Benefit Plan
Limitation for a Defined Contribution Plan
|Catch-Up Contributions (Age 50 and over)||$6,500||$7,500|
|Total with Catch-up Amount||$67,500||$73,500|
|Employee Compensation Used to Determine Contribution||$305,000||$330,000|
Section 401(k), 403(b), most 457 plans, and federal government’s Thrift Savings Plan
|Catch-Up Contributions (Age 50 and over)||$6,500||$7,500|
|Total with Catch-up Amount||$27,000||$30,000|
|Catch-Up Contributions (Age 50 and over)||$1,000||$1,000|
|Total with Catch-up Amount||$7,000||$7,500|
Note that for IRAs, the catch-up contribution is not subject to an inflation adjustment.
The income ranges for determining eligibility to make a deductible contribution to a traditional IRA are as follows:
- For single taxpayers covered by a workplace retirement plan, the income phase-out range for 2023 is $73,000 to $83,000 (increased from the 2022 range of $68,000 to $78,000).
- For joint filers where the spouse making the IRA contribution is covered by an employer retirement plan, the income phase-out range for 2023 is $116,000 to $136,000 (increased from the 2022 range of $109,000 to $129,000).
- For joint filers where the spouse making the IRA contribution is not covered by an employer retirement plan but the other spouse is, the income phase-out range for 2023 is $218,000 to $228,000 (increased from the 2022 range of $204,000 to $214,000).
The income ranges for a taxpayer making contributions to a Roth IRA are increased as follows:
|Single/Head of Household||$129,000 to $144,000||$138,000 to $153,000|
|Joint Filers||$204,000 to $214,000||$218,000 to $228,000|
|Married Separate||$0 to $10,000||$0 to $10,000|
Note that the income limits for married filing separate filers is not subject to an annual inflation adjustment.
Retirement Savings Contributions Credit (aka the Saver’s Credit) Income Levels
|Single/Married Separate||$20,500 | 50%
$22,000 | 20%
$34,000 | 10%
$34,001 | 0%
|$21,750 | 50%
$23,750 | 20%
$36,500 | 10%
|Joint Filers||$41.000 | 50%
$44.000 | 20%
$68,000 | 10%
$68,001 | 0%
|$43,500 | 50%
$47,500 | 20%
$73,000 | 10%
$73,001 | 0%
|Head of Household||$30.750 | 50%
$33,000 | 20%
$51,000 | 10%
$51,001 | 0%
|$32,635 | 50%
$35,625 | 20%
$54,750 | 10%
$54,751 | 0%
|Catch-Up Contributions (Age 50 and over)||$3,000||$3,500|
|Total with Catch-up Amount||$17,000||$19,000|
SEP Participation Requirement
An employer with a simplified employee pension plan must satisfy the participation requirements of IRC section 408(k)(2)(C) and contribute for each employee who: (a) has attained age 21; (b) has performed service for the employer during at least three of the immediately preceding five years; and (c) received at least $450 (as adjusted for inflation) in compensation from the employer for the year. The statutory amount is adjusted for inflation to $750 for 2023 (up from $650 for 2022).
Dobbs v Jackson Women’s Health Organization, No. 10-1392: The U.S. Supreme Court overturned Roe v. Wage and has moved the issue of legal abortion rights to the state legislatures. Some states will retain liberal abortion rights, while other states may outlaw abortion procedures entirely.
This creates issues for employers who operate in multiple states or who have remote workers in certain states. Among the considerations for tax purposes is the question of whether the provision of travel benefits and ancillary services (e.g., transportation, lodging, meals) will be considered taxable and, if so, how the employer will obtain the appropriate information from employees without violating medical privacy rules.
It is not clear that the federal Employee Retirement Income Security Act (ERISA), which covers employer-sponsored health plans and controls state rules, will protect employers on abortion-related expenses. ERISA protection would be limited under the “generally applicable” criminal laws rule. While this limit is intended to cover acts typically considered to be criminal (e.g., larceny), it is uncertain if this would apply to cover costs that may be legal in some states and illegal in others.
Charitable Contribution Denied Due to Substantiation Problems
The 5th Circuit Court of Appeals and the Tax Court issued decisions which affirmed IRS determinations that charitable deductions can be denied in full due to substantiation problems. This is a position the IRS commonly takes with respect to large charitable deductions, even if there is no question that a donation was made to the charity and even if the value of the donation is not at issue.
The Internal Revenue Code contains several documentation rules that must be satisfied in order to claim a deduction. Taxpayers and charitable organizations need to be aware of these substantiation rules and ensure that they are in compliance.
- Section 170(f)(8) requires the taxpayer obtain a contemporaneous written acknowledgment (CWA) by the donee organization for contributions of $250 or more. The CWA must (i) describe the amount of cash and/or give a description (but not value) of the noncash property contributed; (ii) state whether the donee organization provided any goods or services to the donor for the property; and (iii) provide a good faith estimate of the value of the goods or services described in (ii) above. To be contemporaneous, the CWA must be received by the taxpayer by the earlier of a) the date the return for the year of contribution is filed or b) the due date of such return (including extensions).
- Section 170(f)(11) contains the rules for situations covered under the normal Form 8283 scenario. It provides that a deduction of more than $500 can be denied if the taxpayer does not meet the documentation rules discussed in this section. This will generally require the completion of Section A, Part I of Form 8283. Special documentation applies for contributions of more than $5,000. For property for which a deduction of more than $5,000 is claimed, the taxpayer will need to obtain a qualified appraisal, and a properly completed and executed Form 8283 (Section B, Part I) must be attached to the tax return for the year of contribution. Under IRS regulations and the instructions to Form 8283, if the contribution is not entirely used in this year, the form must be attached to the filing for any subsequent year to which the contribution deduction is carried. Part IV must be signed by the Qualified Appraiser (Declaration of Appraiser), and Part V must be signed by the Donee Charity (Donee Acknowledgement). If the amount shown in Section B, Part 1 incudes items having a value of $500 or less, they must be listed, and Part III must be executed by the Donor.
There are some exceptions to these special documentation rules for contributions of cash, certain intangible assets, publicly traded securities, and for a “qualified vehicle” (this latter category is covered under section 170(f)(12), discussed below).
Non-property contributions of more than $500,000, artwork valued at $20,000 or more, easements on buildings in historic districts, and clothing and household items not in good used condition generally require the attachment of a copy of the qualified appraisal to the tax return.
- Section 170(f)(12) contains the rules for the donation of a “qualified vehicle,” which is defined to include motor vehicles, boats and airplanes whose value exceed $500. Under these rules the charity must provide a special CWA, the content of which differs depending upon whether the charity sells the property or not. The taxpayer must attach a copy of the CWA to its tax return. The charity generally provides this information using IRS Form 1098-C Contributions of Motor Vehicles, Boats and Airplanes.
In Izen v. Commissioner, 5th Cir, Docket No 21-60679, the court affirmed a Tax Court decision denying a charitable deduction for the contribution of an airplane due to the charity’s contemporaneous written acknowledgement not being attached to the tax return. This case has broader application since these special rules also apply to the donation of any specified motor vehicle with a claimed value of more than $500 (autos, boats and planes).
In Martha L. Albrecht v. Commissioner, TC Memo 2022-53, the Tax Court denied a charitable contribution deduction for the failure to have an adequate CWA. The Taxpayer donated 120 items from a collection of Indian artifacts to a charitable museum through a “deed of gift” under which:
- Page 1 stated the donation of materials described in an attached list. This page contained the museum’s logo, taxpayer address and donor’s TIN, and was signed by the taxpayer and a museum official.
- Page 2, titled Conditional Governing Gifts, stated that the donation was unconditional and irrevocable and that all rights, titles and interest held by donor were included, unless otherwise stated in the Gift Agreement – but no such agreement was included.
- Pages 3 through 5 listed the items contributed.
The IRS, on exam, claimed lack of proper substantiation since the absence of the gift agreement meant that the CWA did not contain the required statement concerning the goods and services provided by the charity and the deduction should be denied in full.
The court noted that an IRS determination in a notice of deficiency is presumed correct and the taxpayer bears the burden of proving the IRS is in error. In addition, since this case involves the right to a deduction, the taxpayer also bears the burden of proving entitlement to the amount claimed.
The court agreed with IRS that the absence of the Gift Agreement was fatal since its reference in the deed of gift creates an ambiguity as to whether there were any goods or services provided or additional conditions or terms related to the donation. The court rejected the taxpayer argument that the absence of such an agreement should create a presumption that there were no limitations.
Denial of Management Fees Paid to C–corporation Shareholders
The 8th Circuit Court of Appeals affirmed the IRS disallowance of a C-corporation’s deduction for management fees paid to its shareholders. This decision affirmed the Tax Court’s holding. This case highlights the need to have proper documentation to support amounts paid for services provided by shareholders.
The court noted that taxpayer bears the burden of its entitlement to a deduction taken. This creates a rebuttable presumption that the IRS is correct.
In this case, the C-corporation had three shareholders and had paid no dividends for many years; it received salary, director fees and bonuses; and all three shareholders (A, B and C) received management fees. There were no written agreements between the corporation and its shareholders for management services and no employment agreement with A. IRS disallowed the management fees as disguised dividends.
There were many deficiencies in this case: i) no definition of services provided; ii) no invoices or bills from the service providers; iii) payments were roughly in proportion to ownership; iv) no demonstration that the payments were reasonable; and v) the payments were generally made in a lump sum at year-end (for the years under audit).
Despite its backlog with respect to prior year returns and paper correspondence, the Service has continued to issue guidance in many areas of tax law, including the following:
Employer Deferred Social Security Taxes
Many employers deferred their share of Social Security taxes in 2020, with 50% of the deferred amount payable on December 31, 2021, and the balance on December 31, 2022. The Service noted that since both dates are New Year’s Eve, the first payment will be due on January 3, 2022, and the second payment will be due on January 3, 2023. These dates were additionally deferred under relief provisions that affect certain federally declared disaster areas.
These payments also apply to a self-employed taxpayer who deferred a portion of the self-employment tax.
Observation: It is important that these payments be made timely. If the employer misses either payment date, under prior IRS guidance the deferral of the employment tax is lost and IRS can charge a penalty for late payment of the tax extending from the original due date.
Paycheck Protection Plan (PPP) Loan Forgiveness
The IRS issued a number of statements dealing with the treatment of PPP forgiveness.
For S-corporations, issues arose involving the timing of the recognition of the tax-exempt forgiveness and the treatment of qualifying expenses.
- Should the tax-exempt income resulting from the forgiveness of the PPP loan be recognized on the date of actual loan forgiveness or on an earlier date? The answer could impact the shareholder’s stock basis, at-risk amount, and the utilization of losses or the taxation of distributions.
- For S-corporations, do the qualifying expenses funded by PPP awards reduce the Accumulated Adjustments Account (AAA) or Other Adjustments Account (OAA)? The answer affects those corporations that were previously C-corporations and had accumulated earnings and profits.
The draft and final instructions for the 2021 Form 1120-S S Corporation Income Tax Return states that qualifying expenses paid with PPP loan proceeds should reduce the Other Adjustments Account and not the Accumulated Adjustments Account. This treatment is not limited to the 2021 year and would permit amendment to prior year returns where a taxable dividend was produced for distributions in excess of the AAA account. If there was no tax impact on shareholders in a prior year, an adjustment to the AAA or OAA be made in the current tax year.
The IRS then issued Rev Proc 2021-48, which gives options as to the recognition date of the tax-exempt income due to PPP loan forgiveness: i) the date the related expense was paid or incurred; ii) the time of the application for loan forgiveness; or iii) the date of actual forgiveness.
In CCA 202237010, the IRS addressed the tax consequences where a PPP loan was improperly forgiven. It concluded that there was taxable income, despite the fact that the taxpayer still had a liability to repay the loan. In the facts of the particular situation under review, the taxpayer applied for and received a first-draw PPP loan in 2020 but did not use the loan proceeds for eligible expenses. The taxpayer subsequently applied for forgiveness as if she were eligible and did not present all facts that would have informed the lender and SBA that she was not eligible. Based on the application, she received forgiveness.
The Service states that the failure of a taxpayer to meet the conditions for loan forgiveness under the CARES Act causes the exclusion from income not to apply. The Service places the taxation event at the date of improper forgiveness under the “claim of right” doctrine. This springs from the U.S. Supreme Court decision in North American Oil Consolidated v. Burmet, which produces income where a taxpayer receives earnings under a claim of right and without restriction as to its disposition, even though it can be claimed that the taxpayer is not entitled to retain the benefit.
The CCA states that “…no implication is intended from the facts…that it limits the reasons why a particular forgiveness in not a qualifying forgiveness.” This suggests that this tax treatment would apply even where it was later determined that the taxpayer was not eligible for the loan.
Amended Claims for Research Credit
Chief Counsel Memorandum 2021410F provides additional requirements under interim guidance for amended claims for R&D tax credit. Additional guidance is provided in an IRS Memorandum for All Large Business & International and Small Business Self-Employed Employees (LB&J-04-0122-001, 1/3/2022) and in Frequently Asked Questions on the IRS Website.
Beginning on January 10, 2022, taxpayers filing R&D tax credit refund claims must include five essential pieces of information for the claim to be processed. Otherwise, the claim will be rejected for insufficient facts.
- Identify all business components that form the factual basis of the research credit claim for the claim year.
- All research activities performed by the business component.
- All individuals who performed each research activity by business component. This can be provided by a list, table or narrative.
- All information that each individual sought to discover by business component.
- The total qualified: i) wages; ii) supply expenses and iii) contract research expenses. For this element, a Form 6765 or its equivalent will be satisfied.
An amended return (e.g., Form 1040X or 1120X) acts as a declaration, signed under penalties of perjury,verifying the facts described above as being accurate.
The IRS will permit a perfection period (originally proposed to be 30 days) to correct defects. Until January 9, 2023, the correction period is extended to 45 days.
IRS personnel are instructed not to work on the merits of the claim for an improperly filed refund claim since they could undercut the IRS position that no valid claim had been submitted. If the claim is deficient, the IRS will issue Letter 6428 – Claim for Credit for Increasing Research Credit Activities – Additional Information Required.
This requirement only applies to research credit refund claims and not to timely filed claims for credit. If a taxpayer intends to claim a federal research credit, it is procedurally easier to do it on a timely filed return than after the fact.
Required Minimum Distributions under the SECURE Act
Early in 2022, the IRS issued proposed regulations involving Required Minimum Distributions (RMDs) from inherited tax advantaged plans under the Setting Every Community Up for Retirement Enhancement (SECURE) Act. The rules under the SECURE Act effectively restrict the ability to structure payouts under a “Stretch-IRA” approach, which defers distributions over the life of a much younger designated beneficiary (e.g., a grandchild). Longer payouts are eligible for certain “eligible designated beneficiaries.” For others, in most circumstances the plan assets must be paid out within 10 years from the year of the death of the participant.
However, the proposed regulations added a requirement (surprising to some) for a non-eligible designated beneficiary who inherits the account after the participant in the plan has reached the required beginning date. For years 1 through 9, distributions need to be made from the account based on the life expectancy of the original owner, with the balance paid out in year 10. All payments cannot be deferred until the tenth year.
In October, the IRS issued Notice 2022-53 announcing that it intends to finalize the previously issued proposed regulations dealing with RMDs, as adjusted by the 2019 SECURE Act, which will apply no earlier than the 2023 calendar year. Furthermore, the Notice provides penalty relief for failure to satisfy certain RMD rules for 2021 and 2022 in circumstances where a designated beneficiary of an account owner who died in 2020 or 2021 after reaching the required beginning date for distributions failed to receive lifetime or life expectancy distributions in 2021 or 2022.
Estate and Gift Tax
In addition to increases in the annual exclusion amount ($16,000 in 2022 and $17,000 in 2023) and the Basic Exclusion Amount ($12,060,000 in 2022 and $12,920,000 in 2023), the IRS also issued some important guidance relating to federal estate and gift tax.
Extension of Portability Relief
In Rev Proc 2022-32, the IRS extended automatic relief from two years to five years from date of death.
For federal purposes, where a spouse dies and has a taxable estate that is less than the Basic Exclusion Amount (BEA), the excess portion of the BEA can be passed to the surviving spouse. This excess is referred to as the Deceased Spouse Unused Exemption (DSUE). This rule is intended to avoid the loss of the deceased spouse’s exemption and to simplify the way married persons structure their estate plans.
However, in order to transfer the DSUE amount, a federal estate tax return Form 706 must be filed and the election made, despite the fact that the Form 706 is not otherwise required to be filed. For this reason, many estates may fail to make the election on a timely filed return.
The Service had been inundated with private letter ruling requests for relief and for an extension of time to make the election. In Rev Proc 2017-34, the IRS decided to provide for automatic relief for estates where the request was made within two years of death.
Rev Proc 2022-32 extends the relief period to five years from the date of death. This means that relief is now available for a broader group of estates that did not file a timely election, without the need to request a private letter ruling and pay a user fee.
The revenue procedure notes that an election made under this provision may impact a surviving spouse who made gifts following the deceased spouse’s death, since the DSUE amount is to be used prior to such spouse’s BEA. In this situation, the surviving spouse can file an amended gift tax return, but the IRS will not process it until the amended Form 706 has been filed.
Anti-abuse Regulations for the IRS’ Anti-Clawback Rule
IRS proposes regulations to avoid estate tax ”anti-clawback” abuse for the Basic Exclusion Amount (BEA).
BEA will increase annually until 2026, when the BEA is scheduled to return to $5 million, inflation adjusted. BEA was projected to be approximately $6.4 million (but with the current inflation rate, this threshold may be higher).
- 2018: $11,180,000 ($22,360,000 for a married couple)
- 2019: $11,400,000 ($22,800,000 for a married couple)
- 2020: $11,580,000 ($23,160,000 for a married couple)
- 2021: $11,700,000 ($23,400,000 for a married couple)
- 2022: $12,060,000 ($24,129,000 for a married couple)
- 2023: $12,920,000 ($25,840,000 for a married couple)
The IRS in 2019 issued regulations preventing a clawback of a BEA on prior gifts higher than the one currently in place. As an example, assume that T makes a taxable gift of $12,060,000 in 2022, which is fully covered by the current BEA. T dies in 2026 with an estate of $100,000 when the BEA is $6.4 million. The estate tax return at that time would show a taxable amount (including prior taxable gifts) of $12,160,000 ($100,000 of taxable estate plus the prior taxable gifts of $12,060,000). Since the BEA is only $6.4 million, does this make $5,760,000 taxable to the estate in 2026? The 2019 regulations avoid this by allowing the higher BEA previously used to cover the current estate. However, this leaves no exemption amount to cover the current $100,000.
The anti-abuse rule provides that the anti-clawback rule would not apply in situations where transfers are ultimately includible in the gross estate of the transferor. Among other scenarios, this would include: Transfers includible in one’s gross estate under section 2035; 2036 (retained life estate); 2037 (possession or enjoyment can be obtained only by surviving the decedent AND the decedent has retained a reversionary interest that, immediately before death, exceeds 5% of the value of the property, or such interest is relinquished within three years of death); 2038 (revocable transfers); and 2042 (life insurance where the decedent has incidents of ownership).
- Transfers made by an enforceable promise to the extent unsatisfied as of the date of death.
Once published as final regulations, the above will become effective for decedents dying on or after April 27, 2022.
Forgiveness of Student Loan Debt
President Biden announced a three-part plan that will impact student loans. The plan was summarized in a Fact Sheet issued by the White House and includes Targeted Debt Relief. This plan would have the Department of Education (DOE) provide up to $20,000 in debt cancellation to Pell Grant recipients and up to $10,000 for non-Pell Grant recipients. Eligibility for such relief depends upon income. Borrowers are eligible for relief if individual income is less than $125,000 ($250,000 for married couples).
To ensure a smooth transition, the pause of federal student loan repayments will be extended through December 31, 2022. The expectation is that borrowers will be able to sign up for debt forgiveness under an application yet to be created by the DOE. This will be available before the moratorium on paying student loan debt ends on January 1, 2023.
It has been reported that 22 million borrowers submitted applications for student loan forgiveness when the site was launched.
This program is currently on hold due to a number of court challenges. Several states have challenged the program, arguing that it threatened future tax revenues and the earnings by state entities that invest in or service such loans. Some of these cases have been dismissed on grounds that the parties prosecuting the suits cannot demonstrate legal standing. These states have appealed the lower court decisions.
Due to a provision in the American Rescue Plan, student loan forgiveness should not produce taxable income for federal purposes. However, these amounts may be taxable in states that do not conform to this federal rule.