Tax Code update:Things you should know.

tysllpTax Accounting

New Tax Laws

Tax Law changes 

Well, 2022 was certainly an interesting year and the recent tax law changes are going to keep it interesting. Here are some of the changes and issues you need to know about.

Research and Development: Under the Tax Cuts and Jobs Act (TCJA), for taxable years beginning after December 31, 2021, specified research or experimental expenditures must be capitalized and amortized over five years (15 years for expenditures which are attributable to research conducted outside the United States). All research and development expenditures should be reevaluated to separate ordinary and necessary business expenses under IRC §162 from research and experimental expenditures under IRC §174.

The IRS defines research and experimental expenditures as research and development costs in the experimental or laboratory sense, which include all costs that are incident to the development or improvement of a product. (Treas. Regs §1.174-2(a)(1)).

The regulations do not provide an exhaustive list of what constitutes research and experimental expenditures. However, the regulations do provide an example and defines the following expenditures as research expenditures:

  • Salaries and wages;
  • Heat, light and power;
  • Drawings;
  • Models;
  • Laboratory materials;
  • Attorney fees; and
  • Depreciation. (Treas. Regs. §1.174-4(c))
  • In addition, the IRS has provided two Revenue Rulings, where it determined that overhead and other indirect costs that are connected to research are classified as research and experimental costs under IRC §174. (Rev. Rul. 73-20; Rev. Rul. 73-275)

The following expenditures are specifically excluded from the definition of research and experimental expenses under IRC §174:

  • The ordinary testing or inspection of materials or products for quality control;
  • Efficiency surveys;
  • Management studies;
  • Consumer surveys;
  • Advertising or promotion;
  • The acquisition of another’s patent, model, production or process; or
  • Research in connection with literary, historical, or similar projects. (Treas. Regs. §1.174-2(a)(6))

Inflation Reduction Act: The Inflation Reduction Act was passed into law late last summer and contained numerous green energy credit provisions, including extended credits for clean energy vehicles (new and used) and energy-efficient home improvements. However, there are many more limitations for these credits, including income limitations and manufacturer’s suggested retail price (MSRP) limitations in the case of the Clean Vehicle Credit.

green energy tax credits

Be sure to consult our office before making any purchase where a salesperson asserts that you are eligible for a tax credit. It’s very possible that your individual income tax situation, of which the salesperson has no knowledge, will limit your credit.

Please provide us with receipts and purchase contracts for energy efficient home improvements made during 2022, such as new windows, doors, and skylights. If you aren’t sure if a home improvement you made qualifies for the credit, please ask.

Insurance payments

Affordable Care Act: The IRS has issued new regulations that may allow more taxpayer to claim subsidies for purchasing health insurance through a state insurance exchange. These subsidies are also known as the Premium Tax Credit.

If you, as an employee, must pay any portion of your health insurance premiums or the health insurance premiums of your family members as payroll deductions, then we should discuss your options for purchasing health insurance through an exchange and whether you are eligible to claim the Premium Tax Credit for doing so.

Large inflation adjustments: Inflation was at its highest point in decades in 2022, which resulted in large inflation adjustments for the 2023 tax year for tax rate brackets, deductions, annual gift tax limitations, Social Security benefits, and retirement contribution limitations, just to name a few.

Be sure to provide your tax information to us as early as possible so that we can determine what effects these large inflation adjustments may have for you as we plan ahead for the remainder of 2023.

1099-Ks: The filing threshold for 1099-Ks has dropped to $600 for 2022. If you receive income through a third-party settlement provider (such as a credit card company or even a mobile phone app like Venmo or Apple Pay, among many others) then you may receive a 1099-K for that income even if you haven’t in the past.

Be sure to provide a copy of any 1099-Ks you receive and let’s discuss the source of the income. In the case of mobile phone payment apps, if you designated your account as a business account, but receive payments for non-business items, then you may receive a 1099-K for income that should not be taxable to you. Do not ignore the 1099-K. The IRS will expect you to report the income. If the income was not received in exchange for goods and services then we can report the 1099-K in a way that ensures you are not taxed on it.

Secure 2.0 Act: The Secure 2.0 Act of 2022 was signed into law on December 23, 2022, and makes numerous changes to existing retirement account rules.

Under the Act, the required minimum distribution (RMD) age increases from 72 to: (A) 73 beginning January 1, 2023 (for individuals who attain age 72 after Dec. 31, 2022, and age 73 before Jan. 1, 2023); and (B) age 75 starting on Jan. 1, 2033 (for individuals who attain age 74 after Dec. 31, 2032).

Beginning in 2025, the Secure 2.0 Act expands automatic enrollment in retirement plans. The Act requires 401(k) and 403(b) plans to automatically enroll eligible participants, who will then be able to opt out of participation, if desired. Automatic enrollment is not required for (A)SIMPLE 401(k) plans; (B) plans established before the Act’s enactment date; (C) governmental and church plans; (D) any plan maintained by an employer in existence for less than 3 years (including any predecessor employer); € any plan maintained by an employer that employs not more than 10 employees.

Starting in 2025, the Act increases the current catch-up limit to the greater of $10,000 ($5,000 for SIMPLE plans) or 50% more than the regular catch-up amount in 2024 (2025 for SIMPLE plan) for individuals who attain ages 60, 61, 62 and 63. The statutory dollar amounts are indexed for inflation commencing in 2026.

An individual who is disabled or blind may establish and become the designated beneficiary of an ABLE account under a state's program. Under pre- Act law, the disability or blindness must have occurred before age 26. The Act increases this age limit to 46, thus making more individuals eligible to establish an ABLE account. The amendment is effective for tax years beginning after Dec. 31, 2025.

Tax deduction on College fund

The Act permits beneficiaries of 529 college savings accounts to make direct trustee-to-trustee rollovers from a 529 account in their name to their Roth IRA without tax or penalty. This provides an option for 529 accounts that have a balance remaining after the beneficiary's education is complete. The 529 account must have been open for more than 15 years. The rollover can't exceed the aggregate amount contributed to the account (and earnings thereon) more than five years before the rollover. Aggregate rollovers under the provision can't exceed $35,000 over the beneficiary's lifetime. Rollovers are subject to the Roth IRA annual contribution limits, but the limit based on the taxpayer's adjusted gross income is waived. The amendments are effective for distributions after Dec. 31, 2023.

The Act reduces the Code Sec. 4974(a) penalty for failure of a payee under any qualified retirement plan to take required minimum distributions (RMDs) from 50% to 25% (10% if the failure to take the RMD is corrected in a timely manner).

The Act allows first responders (law enforcement officers, fire fighters, paramedics, or emergency medical technicians) to exclude from gross income certain service-related disability pension or annuity payments (from a Code Sec. 401(a), Code Sec. 403(a), governmental Code Sec. 457(b), or Code Sec. 403(b) plan) after they reach retirement age. The exclusion is effective for amounts received for tax years beginning after Dec. 31, 2026.

Please contact us with any questions you may have regarding the above changes to the tax law at [email protected].

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