Year-end Planning

2022 is rapidly coming to an end.  The DBM team has a few final suggestions as well information for you to consider for 2023 planning.

Deducting bonus depreciation

You will want to consider taking advantage of bonus depreciation, which allows a business to take an immediate write-off of 100% of an asset’s cost, beginning with assets purchased and placed in service after September 27, 2017. Currently, this applies to new and used property. The deductible amount is reduced to 80% in 2023, 60% in 2024, 40% in 2025, and 20% in 2026 before disappearing in 2027.   

If you’re involved with a vineyard and have recently planted vines, the bonus depreciation rules can be applied when the vines are planted or placed in service.  The bonus depreciation election can only be made one time, at the time of planting or the time the vines are placed in service.

For all other business entities, bonus depreciation applies to equipment purchases and vehicles.  Some software and qualified leasehold improvements may qualify as well.

Limitation on Business Interest

Internal revenue code section 163(j) imposed a limitation on the deduction for business interest expense for years beginning after December 31, 2017.   This applies to taxpayers with gross receipts of $27 million in 2022.   The amount of interest expense cannot exceed the sum of the taxpayer’s business interest income, 30% of the taxpayer’s taxable income, depreciation expense and amortization expense.    Beginning in 2022, the limitation will exclude depreciation and amortization expense in the computation.   This change may limit your deduction for business interest even if you haven’t previously been subject to this limitation. 

California Pass-through entity tax election

The California pass-through entity tax (“CA PTET”), also known as the Small Business Relief Act, is effective for taxable years beginning on or after January 1, 2021 and will sunset on December 31, 2025.  The CA PTET is in addition to and not in place of any other tax or fee that may apply to the entity.  It is an elective tax made by the partners, shareholders, or other qualified members of a pass-through qualified entity allowing the entity to make the tax payment on behalf of the qualified members at a rate of 9.3% of the entities net income including guaranteed payments.   For 2022, an amount equal to the higher of $1,000 or 50% of the amount paid for 2021 was required to be paid on June 15, 2022.   If an additional payment is needed for 2022, the taxpayer may want to consider making the payment in December 2022 in order to receive the federal tax deduction for the state tax expense paid by the qualified pass-through entity.

Meal and Entertainment deduction

The taxpayer should consider reviewing their general ledger and chart of accounts to be sure meals are classified correctly.   Historically, the deduction for food or beverage expenses is limited to 50% of the otherwise deductible amount, but for 2022, 100% deduction is allowed for food and beverages provided by a restaurant.   Restaurant is defined as a business that prepares and sells food or beverages to retail customers for immediate consumption regardless of whether the food or beverages are consumed on business’s premises, but not a grocery store, specialty food store, beer, wine or liquor store, drug store, convenience store or vending machine.  For any questions regarding how these rules may apply to you, please call or send us an email.

2022 Year-end Reporting Deadlines

December 31, 2022 will be here soon.  Here are a few reminders to consider as we approach the end of the year.

Forms 1099:

Forms 1099 must be filed every year by businesses or by individuals who conduct business activities (including farming and rentals if you are real estate professional), and make payments for rent or for services.  If you answer “Yes” to the questions below, you may have to file a 1099:

  • Do you rent your business location?
  • Do you hire individuals who are not employees to provide services to your business?
  • Do you engage the services of an accounting and/or a legal firm?

1099s must be submitted by January 31 and must be filed electronically.  If you don’t have a completed W-9 from all your vendors, now is the time to request.   To avoid punitive penalties, file the 1099s on a timely basis.

Changes for 2022:

  • You can no longer deduct $300 for charitable contributions or up to $600 if your filing status is married filing joint, even if you do not itemize.  This was a special deduction available to taxpayers under the CARES Act that expires after the 2021 tax year.
  • Ensure that you requested the Required Minimum Distributions (RMD) from IRA and other retirement accounts. 
  • If you have received a settlement payment from PG&E for loss incurred in the California Wildfires, there are differing tax impacts for the payments received.  California recently passed CA AB1249 making the payments not taxable for California.  Payments still may be taxable for Federal income tax.
  • If you are owner of a small business and if you or your business made a “PTE” payment by the June 15, 2022 due date, you may make the election on your 2022 tax returns.  It may benefit you to make the second PTE payment by December 31 instead of the March 15, 2023 due date. Eligible owners of pass-through entities (partnerships, S-Corporations and LLCs taxed either as a partnership or an S-Corporation) may make an election to pay a 9.3% tax on their share of the income by the pass-through entity. The benefit to the owner is that the California tax paid on the pass-through income is not subject to the federal limitations of state and local taxes, and it will reduce federal Adjusted Gross Income. If you did not make the election for 2022, you may consider making the election for 2023 (first payment is due by June 15, 2023).

The Inflation Reduction Act

The Inflation Reduction Act (IRA) was passed on August 12, 2022. It contains several energy incentives, including:

  1. Expanded electric vehicle tax credits up to $7,500 for new electric vehicles or $4,000 for used electric vehicles purchased through 2033. The manufacturer limit is removed for vehicles purchased in 2022 and later.
  2. The credits for energy efficient homes and improvements are extended and expanded up to $5,000. The $500 lifetime limit for home energy efficient improvements is removed.
  3. The solar credit is increased to 30% of eligible costs for qualifying energy systems placed in service from 2022 to 2032.
  4. The amount of research credit that may be applied to a business’s payroll tax liability is increased from $250,000 to $500,000 starting in 2023.
  5. Clean energy credits are extended and expanded for businesses to increase domestic production and sale of components used in wind, solar, fuel cell, hydropower, and waste energy.

There are many other changes and provisions in the IRA, including new energy credits. Feel free to reach out to us to see how you or your business may benefit from energy incentives.

Other year-end questions and reminders:

  • If you own a business, is it time to purchase new equipment?  Equipment must be received, installed and in use by December 31, 2022 to take advantage of 100% depreciation. Equipment purchases placed in service January 1, 2023 or later are eligible for a maximum 80% bonus depreciation deduction.
  • Have you considered making gifts?  For 2022, the exclusion is $15,000 per donee. If you have been considering making a gift to a child, grandchild, or anyone else, you can do so until December 31.
  • Should you consider a charitable contribution made directly from your IRAs?  With the new tax law, this may be an alternative to help reduce your tax liability, as the donation can satisfy your required minimum distribution and is not subject to income tax.
  • Have you made any changes in employment such as becoming part of the GIG economy as an UBER driver or delivering for Door Dash?  If so, you may need to make estimated payments.  Please call us to help calculate 2022 estimated tax payments due.
  • As of 12/31/2022, reporting requirements for a 1099-K has changed.  If you received payments of $600 or more from a credit card company or electronic payment processor, you will receive a 2022 1099-K.  Income is reported on various schedules on your tax returns.  Include copies of the 1099-Ks with all your tax documents provided to prepare your tax returns to ensure proper recording of all your income.

Questions about your 2022 income and how tax laws may affect you?  Please give us a call.

2022 Update for PG&E Fire Victim’s Trust Fund Distributions

Effective September 30,2022 Governor Gavin Newsom signed AB1249.  The assembly bill declares that payments made by PG&E to victims of the California Wildfires from 2017 to 2020 are not subject to California income tax.  If we filed your tax returns prior to September 30th and reported any payments that you received from PG&E as California taxable income, please contact us so that we can discuss amending your tax returns.

As of today, no Federal legislation has been passed by Congress or has been signed by the President that exempts the disbursements from Federal income tax.  There are bills that have been introduced but they are still in discussion phases only.  All proceeds are still potentially subject to Federal income tax depending on how the payments are awarded.  Again, please contact us if you have any questions or concerns.

Accounting Updates for Nonprofits: Reporting on Gifts-in-Kind

The Financial Accounting Standards Board (FASB) periodically issues accounting standards updates (ASU) that improve the standardization of accounting issues. ASUs for the nonprofit industry are typically with the purpose to improve transparency and accountability of nonprofits’ financial reporting. The most recent industry-specific accounting guidance update is addressing the presentation and disclosures of contributed nonfinancial assets, commonly referred to as gifts-in-kind. This update (ASU No. 2020-07) is effective for nonprofits with annual periods beginning after June 15, 2021. In other words, nonprofits will need to implement this update in their financial statements for years ending June 30, 2022 or later.

Gifts-in-kind include fixed assets (such as land, buildings, and equipment), use of fixed assets or utilities, materials and supplies, intangible assets, services, and unconditional promises of those assets. While gifts-in-kind do not come in the form of cash, they are an essential part of public support that contributes to the success of many organizations in the industry. For some nonprofits, reporting of gifts-in-kind has often been overlooked due to the difficulties in tracking and determining the fair value of the contributed assets or services. ASU No. 2020-07 aims to level the playing field by requiring all nonprofits to follow the same standards when it comes to reporting gifts-in-kind.

Specifically, ASU No. 2020-07 requires nonprofits to disclose a disaggregation of the amount of gifts-in-kind recognized within the statement of activities by category that depicts the type of contributed nonfinancial assets.

For each category of gifts-in-kind, a nonprofit also must disclose the following:

  • Qualitative information about whether gifts-in-kind were either monetized or utilized during the reporting period. If utilized, a description of the programs or other activities in which those assets were used shall be disclosed.
  • The nonprofit’s policy (if any) about monetizing rather than utilizing contributed nonfinancial assets.
  • A description of any donor-imposed restrictions associated with the gifts-in-kind.
  • A description of the valuation techniques and inputs used to arrive at a fair value measure at initial recognition.
  • The principal market (or most advantageous market) used to arrive at a fair value measure if it is a market in which the recipient nonprofit is prohibited by a donor-imposed restriction from selling or using the contributed nonfinancial assets.

The nonprofits that receive contributed services must describe the programs or activities for which those services were used, including the nature and extent of contributed services received for the period and the amount recognized as revenues for the period. Nonprofits are encouraged to disclose the fair value of contributed services received but not recognized as revenues if that is practicable. The nature and extent of contributed services received can be described by nonmonetary information, such as the number and trends of donated hours received or service outputs provided by volunteer efforts, or other monetary information, such as the dollar amount of contributions raised by volunteers. Disclosure of contributed services is required regardless of whether the services received are recognized as revenue in the financial statements.

If a nonprofit doesn’t already have a formal policy to address the tracking and reporting of gifts-in-kind, now is a good time to start working on adopting such a policy. We will inquire about this policy when we work with our nonprofit clients’ year-end reporting in 2022. In the meantime, if you have any question about how this new ASU will affect you, please send an email to your trusted advisors at DBM!

Expect the Unexpected – a Note from Dave Dillwood

2020 was the weirdest year I have experienced in the tax profession.  Now, 2021 may be even more strange than 2020.  In 2020 we saw the impacts of the pandemic and the fire disasters on the filing of 2019 tax returns.  For the first time, we saw the actual due date for tax returns move during a year for everyone, but then we also saw the due date extended twice more in response to the Walbridge Fire, and then later to the Glass fire.  Complicating things, we saw new things added during the year including PPP loans applications and requests for forgiveness, EIDLs, employee retention credits and paid family leave provisions.  This all happened after we initially expected “two weeks to flatten the curve.”  Honestly, I never thought that it would be only two weeks, but I didn’t expect more than 2 months.  Here we are past the one year mark and still counting.

Some of the same issues continue in 2021, with stay at home and Zoom meetings still being the order of the day.  Now we have our first due date extension.  The new COVID relief act includes tax changes which are retroactive to 2020, and no one is prepared.  The IRS is scrambling and has probably invented some new curses to throw at Congress whose propensity is to shoot first and figure out the details later.  I received a newsletter last week from a tax education service recommending extending ALL returns to give time for the IRS to catch up with the implications of the new law and for the software providers to update software so the returns match what the IRS expects to see. 

For example, under the COVID relief act, if you received unemployment compensation in 2020 and your AGI is $150,000 or less, the first $10,200 is not subject to federal income tax. Unfortunately in the initial instructions, there was a circular argument resulting in households that had more than $139,800 of other income, or $129,600 if both spouses received unemployment compensation during 2020, not receiving the benefit of the provision.  This was not the intent of relief act, and no phase out was contemplated, so the poor taxpayer who has AGI of one dollar over the limit and unemployment compensation is not going to be happy.  Such is the craziness of poorly considered tax provisions that are hastily introduced.  Last week the IRS and Treasury updated the calculation so that the $150,000 AGI limitation is considered without the unemployment income. However, a phase out was not addressed.   

In further acquiescence to complexity, or maybe just self-preservation, the IRS has instructed taxpayers who have already filed their returns without claiming the exclusion for unemployment compensation are not to file amendments to correct their returns.  The IRS will correct the returns through their systems and automatically issue refunds to taxpayers.  It is no wonder they don’t want a flood of amended returns requesting refunds when they are still working on a backlog of correspondence from the initial shutdown last year.

So as we proceed into 2021, the order of the day should be “expect the unexpected.”


Filing 2020 Tax Returns

2020 was not in any way, shape, or form a normal, predictable year. COVID 19 and the governments’ responses to the pandemic altered personal and business realities in ways none of us anticipated.

The various acts passed by Congress and signed by the President offered numerous monetary support programs, some of which you have heard of or received benefits from, but there were many more programs with obscure benefits that you may not have heard about.  In addition, while some of the support opportunities provided by the government were managed by the SBA and administered through banking institutions, many more will be administered through tax filings with the IRS. These provisions may directly impact your 2020 tax return.

This year, you will see there will be more questions to answer regarding things that happened or did not happen during 2020. You will see these questions either in questions from the tax preparers or on your tax organizers. The questions are directed towards provisions/programs which may significantly affect your tax liability. Some of these provisions could even result in refundable tax credits.

Also, please note that to process and analyze the answers to these questions will increase the amount of time needed to complete your 2020 tax returns. There may be increased costs and almost certainly more processing time by DBM to properly complete your 2020 income tax filings. In many cases, this additional time will result in significantly less taxes and more cashback from the government.

Legislation continues to evolve as we continue to respond to the pandemic. DBM will continue to monitor the tax impact on our clients and keep you informed.

2020 Year-End Tax Update

This has certainly been an eventful year.  What an understatement!  Between the effects of the pandemic, including the tax law changes contained in the various Congressional actions taken during the year, the fires, the elections, (including the attack on Proposition 13), Dave can’ t remember there ever being a year in his career (in its 38th year) where there is more to consider.  We have a lot to discuss regarding winding up 2020, and moving into 2021.

With regard to tax law changes which happened during 2020, we saw significant changes within the stimulus packages which will affect some, if not all of you with regard to your 2020 taxes.  There were changes which reinstate the net operating loss carryback, the limits on deductible charitable contributions, the moratorium on the requirement to take a minimum distribution from your IRA or other retirement plans for people over 70 ½, as well as other changes contained in the bills enacted during the year.

The Payroll Protection Program loans which many of you may have accessed are confusing.  The subsequent changes meant to make the loans easier to be forgiven have made the calculations more confusing for most people.  The issuing banks are just now coming out with their applications for forgiveness.  Do not delay in getting your application in.  We can help answer any questions you may have about the PPP loan program as well as clarify the items that the forgiveness application is requesting.  Note that there are simplified procedures available to PPP loans under $50,000 as well as loans who will qualify for forgiveness on payroll costs alone without looking at other non-payroll costs.

However, with regard to the PPP loan forgiveness, Congress intended that getting a PPP loan forgiven was not supposed to be a taxable event.  However the IRS has taken a position that expenses paid with non-taxable income are not deductible, effectively making PPP funds taxable.  This position is clearly in conflict with the intent of Congress.  Suffice it to say that without a fix from Congress, there will be controversy regarding whether the PPP loan forgiveness will result in additional taxable income or not.  Congress did attach “fix” language to the various follow-on stimulus proposals to clarify their intent that PPP funds that qualify for forgiveness to be totally tax free, but unfortunately none of those bills have been able to pass.  Nevertheless, if you have not yet filed your forgiveness request with your bank, this will not be a 2020 issue, since there is little to no chance that the forgiveness request will be approved prior to the end of 2020.  The income potential identified by the IRS will only be triggered when the loan is actually forgiven, so for all intents and purposes, the PPP loan forgiveness issues will be a 2021 issue.  Given the fact that the elections are over and our representatives can now get back to the business of running the country, I expect the issue will be resolved shortly.

The elections will have consequences.  Unfortunately, at this point we are still up in the air whether the Senate will remain in Republican control, or whether the Democrats have wrested the control from the Republicans.  This is very significant for planning, since President Elect Biden has released his tax reform plan which contains significant structural changes to the way income in the United States will be taxed.  His promise to change things “from day one” is of particular interest since we may or may not have ample time to plan for changes prior to them becoming law.   While it is unlikely that the law will change “on day one” given that tax law proposals often take years to wind through congressional and senate committees prior to coming anywhere close to being signed into law, it is not impossible this may happen.  If the Republicans retain control of the Senate by winning one of the two remaining seats up for grabs in Georgia, the Biden plan has very little chance of becoming law within the first two years of his term. 

Mr. Biden has proposed significant changes to corporate taxation and very significant changes to estate taxation.  The current estate tax law is set to sunset (go away and be replaced by prior estate tax law) in 2025.  The proposed provisions include an increase in the tax rate from 40 to 45%, a reduction of the exempt estate from $11 million to $3.5 million, and instituting a “transfer tax” very similar to Canada’s “Exit Tax” in which appreciated assets held by a decedent incur income taxes at the death of the owner as if they were sold.  This is a new proposal that we have never had before and which will definitely change the way we consider family wealth planning and estate planning if it ever becomes law.

Prepare Now for Whatever Life Brings You in the Future

As we enter the second month of Coronavirus Social Distancing and Shelter in Place, there are many lessons that we have learned.  Some of these are affirmations of effective advance planning and preparation we thought may never have been necessary.  Others are reminders that no matter how much planning and preparation you do, there are always ways to improve – things that you could have done better, if you had a better crystal ball.

Now is the time to take stock of what went well (enough) during this crisis so far, as well as what can be done better.  Some of the necessary improvements may be able to be done now, to improve the situation at hand and to improve the potential outcome as we emerge from this situation in the coming weeks, months and possibly, years. 

We have been tested in many ways by fires, flooding and other natural disasters over the past several years leading up to this new, invisible enemy, which seems to be the worst of all.  There is no reason to believe that we will not be subject to future challenges of this nature.  The situation in California is particularly vulnerable.  We are prone to wildfires, which can lead to subsequent flooding.  And there is always the threat of a devastating earthquake.  We are also a hub of travel for commerce and leisure.  Our state welcomes millions of people each year from other countries to do business in our state (the fifth largest economy in the world) and our resorts and attractions bring in travelers from all over the world.  California is a great place to be, but our state has a certain fragility. 

We should plan for future disruptive events and have systems in place to mitigate the impact these events can cause.  It is imperative to our families, our employees, and our friends that we all do what we can to make sure that we each can do our part to be prepared.

Things that can be done to prepare for future challenges include:

  1. Examine your computer systems.  We are all so reliant on our networks for communication and commerce that it is imperative that we have back up plans, including the necessary equipment and procedures to survive in the event of a local or widespread power disruption, loss of access to a facility, etc.
  2. Review your insurance policy
  3. Determine if your essential information is protected and that you have redundant backup in an alternate location
  4. Do you have an acceptable method of communicating with the people who are important to you?  Do you have a secondary method?  A tertiary method?
  5. Are your files accessible in the event of a local disaster?  A widespread disaster?
  6. Do you have a plan to have mail forwarded to an alternate location?
  7. Do you have a method to transfer your telephone communications to an alternate source?  Are you able to do that remotely?
  8. Do you have the capability of moving your employees from working “on site” to working remotely?  Can it be done quickly from a remote location?
  9. Do your customers know how to reach you in the event of a disruptive event?
  10. Does your company have a plan to continue communication in the event of a disaster?  Is everyone aware of it?
  11. Do you have a plan to process mail?  Process deposits and maintain controls? Process accounts payable and pay your bills?  Have you cross trained your employees to make sure there is coverage?

These suggestions and questions may seem like common sense, but in this crisis which has tested us all, there have been moments in which everyone finds themselves questioning whether they could have planned better.  Prepare now for whatever life brings you in the future.

Recovery Advisory Services is Here for You

We at DBM are proud to be a part of this resilient community. As our community recovers from week-long disruptions from the fire evacuations to power outages, we want you to know that you have us here ready to help you.  

One of the top priorities of the recovery is to file your claims with your insurance companies.  Processing a claim can be a lengthy process if you cannot provide the requested documents and records timely.  Our consulting service team is here to help you facilitate recovery through a wide range of advisory services, such as preparation for insurance claims to calculating loss figures due to the fires/power outages/evacuations. We will translate the terminology and concepts that can be inherently confusing to you and coordinate assembling of the required documentation, in the manner consistent with the insurance carrier’s expectations. Through the same process, we can help you prepare for possible loan and other financing options if necessary.

The assistance we can provide includes but is not limited to the following:

  • For Businesses:
    • Overview of possible applicable insurance coverages with review of the Business Owners insurance policies
    • Help identify decreases in various revenue streams
    • Help identify increases in various costs
    • Help identify alternative business flows to position business owners to “get back into business” as soon as possible, and to lessen further damages for any subsequent event
    • Help develop a business operation plan for future emergency situations
  • For Individuals:
    • Overview of possible applicable insurance coverages with review of the Homeowner’s and Rental insurance policies
    • Help identify decreases in various income/wages sources  
    • Help identify increases in various additional living expenses

Subject Matter Expert: Dominic P. Bosque, CPCU, Director of Management Advisory Services

In addition to providing consulting services for financial service firms for over 35 years, Dominic has extensive knowledge in the insurance service industry. From the claim filing perspective, Dominic has direct experience in supporting businesses recover in post-disaster circumstances here in Sonoma County and across other disaster areas of the country.  From the insurance service providers’ perspective, he has years of experience training claims service professionals improving claims-handling procedures. With these insights of rebuilding, Dominic can successfully enhance a business’s core operational abilities to become stronger and more resilient to meet the next set of future challenges.

Also here are some links to some pertinent websites to help businesses and individuals navigate this process.

Sonoma County Business Recovery Resource Guide

Business Recovery Tools

Residential Property Claims Guide

Wildfire Resources

Top Ten Tips for Wildfire Claimants

Don’t Get Burned after a Disaster

Preparedness for Business

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