Tax professionals and their clients are dealing with extra challenges this season from tax breaks that ended last year and have not yet been extended. While some provisions were related to pandemic relief and arguably intended to expire at some point, others are on the traditional list of “tax extenders” that get renewed by Congress, sometimes retroactively. Around forty tax provisions affecting individuals or businesses expired in 2021, six of which ended after the third quarter and thirty-four at the end of the year.

The Biden administration’s Build Back Better Act aimed to extend the beefed-up Child Tax Credit that was included in the American Rescue Plan last year. It provided monthly advance payments of $250 to $300 per child, depending on their age, while increasing the total amount per year from $2,000 to up to $3,000 or $3,600 per child, again depending on their age. But after the Build Back Better Act stalled in the Senate, the limit went back to $2,000 and the monthly payments went away. Phaseouts have been another complicating factor for the Child Tax Credit. With one phaseout dealing with the pre-2021 Child Tax Credit of $2,000 for kids and another dealing with the Additional Child Tax Credit.

Many parents are disappointed when they discover they may need to repay some of the advance payments of the Child Tax Credit, or their tax refund is smaller. Advisers have to explain to clients that the money was intended to aid them and the economy during the pandemic. Other parents have been distressed about the abrupt end of the monthly advance payments. A new study found that child poverty spiked by 41% in January, right after the expanded Child Tax Credit expired, leaving 3.7 million more children in poverty without the monthly CTC. The enhanced Child Tax Credit is probably the highest profile tax break that either ended last year or went back to its pre-pandemic size.

Congress may decide to extend some of the expiring provisions, perhaps even retroactively as it has in the past. However, with the midterm elections approaching in the fall, it may be difficult for Congress to agree until after the election on what to do with them, perhaps in a year-end package.

Talley’s team of tax professionals provide comprehensive tax compliance and consulting services so you can preserve, enhance, and pass on your assets and wealth to the next generation. We welcome the opportunity to discuss the current options available for you. For more information, contact us today.

On February 9, 2022, Senate Bill 113 (SB 113) was signed into law by Governor Newsom. This bill changes California tax law significantly as well as includes the reinstatement of the Business Tax Credit. This bill also includes net operating loss (NOL) deduction and the expansion of California’s pass-through unit (PTE) tax. Changes that are effective for the tax years beginning on or after January 1, 2021, include:

  • Allowing the pass-through entity tax credit to reduce the net income tax below the tentative minimum tax.
  • Guaranteed payments to consenting qualified taxpayers in the qualified entity tax base for purposes of computing the pass-through entity tax. 
  • Single member limited liability companies (“SMLLCs”) owned by individuals, estates, or trusts in the definition of a qualified taxpayer (allowing these SMLLCs to consent and for their owners to receive a pass-through entity tax credit).
  • Entities that have partnerships as partners in the definition of a qualified entity, allowing them to make the pass-through entity tax election. However, partnerships are not qualified taxpayers, which means their income is not included in the pass-through entity tax base and the partnership does not receive a pass-through entity tax credit.

Changes that are effective in tax years beginning or after January 1, 2022 are: 

  • Re-orders credit usage to allow for use of other state tax credits before the pass-through entity tax credit for tax years beginning on or after January 1, 2022, and before January 1, 2026.
  • Eliminates the $5 million business credit limit for tax years beginning on or after January 1, 2022.
  • Removes the net operating suspension for tax years beginning on or after January 1, 2022.

NOL Deduction and Restoration of Tax Credit 

Currently, the NOL suspension applies to California taxpayers with a net business income of $1 million or more. The number of business tax credits that could be used in a year was limited to $5 million for the tax years 2020, 2021, and 2022. With SB 113, NOLs are restored and the limit on business tax credits for the 2022 tax year has been removed, effectively shortening the longer suspension period for NOL deductions and use of tax credits under SB 85. These business tax credits include the R&D credit, The California compete credit, and insurance tax credit. 

Extension of Optional PTE Tax

SB 113 also modifies the state’s elective PTE tax law. Unless otherwise noted, the changes to the elective PTE tax law apply to tax years beginning on or after January 1, 2021, and before January 1, 2026. The changes include: 

  • Amending the definition of “qualified entity” to include a partnership as an eligible partner, shareholder, or member
  • Including guaranteed payments defined by IRC Section 707(c) as qualified net income so they qualify for the credit
  • Removing a provision that prohibits the credit for PTE tax paid from reducing the tax owed below a taxpayer’s tentative minimum tax, effective for tax years beginning on or after January 1, 2021
  • Requiring the elective tax credit to be applied against the net tax after credits for taxes paid to other states, effective for tax years beginning on or after January 1, 2022
  • Allowing a business owned by individuals using a limited liability company that is disregarded for federal income tax purposes and meets certain conditions to elect the PTE tax and credit

With these changes, the allowance of pass-through entities with partnerships and/or disregarded entities as partners to elect to pay the PTE tax will significantly expand the population of businesses that were not previously eligible and may eliminate the need to restructure business operations to create an eligible entity and/or taxpayer. Businesses that previously were ineligible may want to consider making an election for the 2021 tax year. The election must be made on a timely filed tax return, which includes extensions of time to file, and payment must be made on or before March 15, 2022. For cash-basis entities and accrual-based entities that did not have a fixed and determinable liability at their year-end, there may be a mismatch between the year in which the tax is deducted for federal income tax purposes and the year in which the credit is claimed on the California tax return.

Talley’s team of tax professionals provide comprehensive tax compliance and consulting services so you can preserve, enhance, and pass on your assets and wealth to the next generation. We welcome the opportunity to discuss the current options available for you. For more information, contact us today.

A report issued by the Government Accountability Office found that the Internal Revenue Service backlog is adding to long delays in processing carryback refunds of net operating losses claimed by companies during the pandemic. The 2020 pandemic relief law included expanded carrybacks for net operating losses and the acceleration of alternative minimum tax credit refunds. While the provision was supposed to help provide more liquidity to businesses during the financial downturn that year as COVID-19 spread across the country, delays in processing the refunds hampered those efforts.

While the CARES Act and the Tax Code generally required the IRS to issue the refunds within 90 days, the IRS suffered a backlog in processing applications for tentative refunds, which businesses submit through IRS Forms 1045 and 1139. Data indicated that the agency began to miss the 90-day statutory requirement for applications in September 2020 and missed it throughout the year. As of November 2021, the average time for the IRS to process all carryback refunds was 165 days.

Even with the IRS taking some remedial actions, it didn’t have effective preventative control activities or mitigation plans in place to detect or address the growing processing times for tentative refunds submitted on IRS Forms 1139 and 1045, such as an average processing time threshold to trigger activities to avoid missing refund deadlines. Thus, the agency didn’t take action to reduce the carryback backlog until April 2021, which was seven months after the agency began missing its statutory requirement. IRS officials attribute the delays to the pandemic and the sudden change by Congress with the rules that allowed businesses to file retroactive claims for refunds going back to 2018, as well as IRS employees being ordered to stay away from their offices for months.

Talley’s team of tax professionals provide comprehensive tax compliance and consulting services so you can preserve, enhance, and pass on your assets and wealth to the next generation. We welcome the opportunity to discuss the current options available for you. For more information, contact us today.

The U.S. Small Business Administration (SBA) has detailed a new process for borrowers to appeal decisions regarding their Paycheck Protection Program (PPP) loans that were only partially forgiven by the lenders.

Now borrowers can request, through their lender, an SBA review of their loan if they received a partial forgiveness decision from the lender they did not agree with, or if they were required by their lender to apply for forgiveness in less than the full amount of the PPP loan. However, the new process does not apply if the borrower applied for less than full forgiveness of their own volition.

For borrowers who had previously received partial forgiveness approval from the lender, or whose lender required a PPP forgiveness application that was less than the full amount of the PPP loan, lenders have 30 calendar days from receipt of the SBA’s procedural notice to notify borrowers of their right to receive an SBA review. Borrowers will then have 30 days from the receipt of the lender notification to submit their request through the lender for the SBA loan review. Lenders informing borrowers of SBA approval of a partial loan forgiveness must notify the borrowers that they have 30 calendar days from receipt of the notification to submit their request through the lender for the SBA to review the loan due to new SBA guidance. Even if the SBA selects the loan for review, the borrower must continue to make payments on the remaining balance of the loan, as the loan is not deferred. The lender will be required to refund those payments if the SBA rules that the loan should have received full forgiveness.

If the SBA’s review determines the borrower is entitled to forgiveness in an amount greater than the lender’s partial approval decision and the SBA has previously remitted a partial forgiveness payment to the lender, the SBA will remit an additional forgiveness payment to the lender to make up the difference and re-amortize the PPP loan to adjust for the difference. If the SBA loan review agrees with the forgiveness amount approved by the lender, the SBA will issue a payment notice within five business days to the lender that the forgiveness amount has been upheld. If the SBA loan review results in a lesser forgiveness amount, the SBA will issue a final loan review decision to the lender, which must then provide a copy of the Payment Notice and, if applicable, the final SBA loan review decision, to the borrower within five business days. The lender must then remit the excess amount of the loan previously forgiven to the SBA and re-amortize the PPP loan to adjust for the difference.

Talley’s professionals have spent hundreds of hours reviewing the law, regulations, and SBA PPP FAQs issued on an almost daily basis and we are happy to assist you in the process. We are available to simply answer a quick question or assist in the application and/or forgiveness audit process.

Erin M. Collins, a National Taxpayer Advocate, released her annual report to Congress, calling 2021 the most challenging year taxpayers and tax professionals have ever experienced. With lengthy delays by the IRS in processing tax returns and taxpayer correspondence, overwhelmed telephone assistance, shortcomings in the Service’s relatively new online taxpayer tools, and difficulties even for Collins’s own Taxpayer Advocate Service (TAS) in fulfilling its mission, all combined to make the year a historic ordeal.

As of late December 2021, the Service was processing a backlog of 6 million original paper individual returns; 2.3 million amended individual returns; 2 million Forms 941 and 941X, and about 5 million items of taxpayer correspondence. The report assesses the IRS’s performance in serving taxpayers and protecting their rights, identifies the most serious problems in federal tax administration, and highlights TAS’s operations. It discusses the 10 most serious problems taxpayers encountered and analyzes the most-litigated tax issues during the year.

Collins noted that unprocessed returns often delay refunds for low-income taxpayers who in some cases were depending on the earned income tax credit, child tax credit, and other tax benefits for basic subsistence. The correspondence backlog creates cascading problems. When a taxpayer has responded to a notice, but the IRS does not process the response, an automatic action can then be triggered, taking an adverse action or withholding a refund, she said. All told, the IRS took an average of 199 days during 2021 to process the 6.2 million taxpayer responses to proposed tax adjustments. In the fiscal year 2019, that average time was 74 days.

The IRS’s online tool “Where’s My Refund?” did not provide information on unprocessed returns or explain reasons for delays, where a return stood in the processing pipeline, or tell what actions taxpayers could take to expedite refunds. Their telephone service was the worst it has ever been with only about 11% of callers getting through to a customer service representative. The average time waiting for those successful calls to connect was 23 minutes.

To its credit, however, the IRS deployed new programs mandated by Congress, issuing 478 million economic impact payments totaling $812 billion and over $93 billion in advance child tax credits to more than 36 million families. Moreover, it did so while its workforce was 17% lower than in the fiscal year 2010. Collins recommends that the IRS use scanning technology to reduce its dependence on having staff type information from paper returns and correspondence into its systems and deploy a callback feature on its phones. She also suggested, as she has previously, that the Service improve its online taxpayer accounts and allow taxpayers to communicate by secure email with the IRS. And she recommended the IRS website feature a weekly dashboard on its performance and delays.

Talley’s team of tax professionals provide comprehensive tax compliance and consulting services so you can preserve, enhance, and pass on your assets and wealth to the next generation. We welcome the opportunity to discuss the current options available for you. For more information, contact us today.

Earlier this month, the IRS updated an announcement it made back in October about the information it will now require for a valid research credit refund claim. They issued new guidance and expanded the transition period from 30 to 45 days. To make sure the claims are valid, the IRS wants taxpayers to identify all the business components to which the research credit claim relates for that year. For each business component, businesses must identify all research activities performed, name the individuals who performed each research activity, along with the information everyone tried to discover, as well as provide the total qualified employee wage expenses, total qualified supply expenses, and total qualified contract research expenses for the claim year.

The IRS has allowed a one-year transition period during which taxpayers now have 45 days to “perfect” a research credit claim for a refund before the IRS’ final determination on the claim. In an updated FAQ page , the IRS explained that the term ‘perfecting’ means taxpayers are allowed to provide missing information that is required to process the Research Credit refund claim and that taxpayers will be notified of a deficient claim within 45 days to perfect. The date on which a taxpayer must provide the missing information will be on the letter sent to the Individual.

The IRS also issued interim guidance to its tax examiners on the procedures they should follow for determining whether a claim is valid. For claims that include a research credit claim filed during the transition period from Jan. 10, 2022, through Jan. 9, 2023, taxpayers will be given 45 days to perfect the claim that is filed on a timely basis but does not provide the five essential pieces of information: 

  1. Identifying all the business components that form the factual basis of the research credit claim for the claim year
  2. All the research activities performed by each business component
  3. All individuals who performed each research activity by business component
  4. All the information everyone sought to discover by business component
  5. The total qualified employee wage, supply, and contract research expenses.

The IRS has been beefing up the requirements for validating R&D credit refund claims ever since the agency issued a memorandum last September from its Office of Chief Counsel. The IRS has sometimes listed improper claims for the R&D tax credit among its Dirty Dozen tax scams, and the guidance appears to be an effort to crack down on bogus claims. However, the new requirements have also provoked an outcry among many tax professionals and taxpayers who have legitimate tax credits and tax refunds to claim for research their companies have performed.

Talley’s team of tax professionals provide comprehensive tax compliance and consulting services so you can preserve, enhance, and pass on your assets and wealth to the next generation. We welcome the opportunity to discuss the current options available for you. For more information, contact us today.

As California’s revenues are at an all-time high, Governor Gavin Newsom proposed a budget that would cut taxes while also promising to pay the health care expenses of all the state’s low-income adults who are living in the country illegally. California taxpayers already pay the health care costs for low-income immigrants 26 and younger and plans to cover people 50 and older this May are in development. Newsom’s proposal would cover everyone else starting in January 2024. Immigrant health advocates have been pushing for this since the federal Affordable Care Act took effect in 2014. Newsom’s plan, if it becomes law, would cover nearly 700,000 additional people.

It is predicted that Newsom’s budget will cost state taxpayers $2.2 billion per year to cover the cost of health care for the state’s low-income immigrants. Newsom’s tax cuts would also reduce revenue by more than $6.5 billion. Fortunately, the numbers still balance since California has a projected $45.7 billion surplus, driven by the incredible growth in tax collections from the top 1% during the pandemic. Although California has the highest unemployment rate in the country, it is on pace to collect at least $25 billion in capital gains taxes for 2021. 

The biggest tax cut would be for businesses. In 2020 California temporarily raised taxes on businesses to help offset what they thought would be a huge deficit. Instead, California posted record surpluses. That tax increase was scheduled to expire at the end of this year. Newsom wants to end it one year early, which would cost the state about $5.5 billion in revenue. The tax cut that will get the most attention is at the pump. California taxes gasoline at 51.1 cents per gallon. That tax is scheduled to increase on July 1 because of inflation. Newsom aims to halt that increase, at least for this year. Doing so would cost the state about $523 million in revenue for civil development such as roads and bridges. But Newsom says the state can cover that loss with its surplus.

Last year, California spent billions of dollars on stimulus checks, with most people getting about $1,000 in addition to the federal stimulus package. This year, Newsom wants to give $1,000 to every low-income family that has a child aged 5 or younger. The state did this last year, but families with no income were not eligible. This year, Newsom wants to also extend that money to families with no income. That would cost roughly $55 million a year. He also wants to give $1,000 to people who have come through the state’s foster care system but are still 25 or younger. That would cost an additional $20 million.

Newsom cautioned that the spending limit calculations are complex, saying the figure will change substantially by May when he updates his plan before lawmakers vote on it. Newsom’s proposal now heads to the state Legislature. Several law-making leaders issued statements on Monday praising Newsom’s plan but pledging to work with him over the next month on changes.

Talley’s team of tax and estate planning professionals provide comprehensive tax compliance and consulting services so you can preserve, enhance, and pass on your assets and wealth to the next generation. We welcome the opportunity to discuss the current options available for you. For more information, contact us today.

If you are happily married, healthy, and wealthy, a tax perk you should be talking about with your advisor is the spousal lifetime access trust, or SLAT. Its ability to whisk assets out of their taxable estates while still benefiting from them during retirement is a valuable benefit. However, a SLAT is not a simple add-water-and-mix move since it is easy to get the requirements wrong. That will void your arrangement and you could end up owing the IRS millions of dollars. When done right, some estate planners call it the perfect tax break for the perfect couple with the perfect lifestyle. The trusts are a form of so-called grantor trusts, in which a donor, or grantor, transfers assets but retains a degree of control. Last fall, grantor trusts were on the chopping block, now they are no longer in immediate danger. 

How SLATs work
A spouse sets up a SLAT for the benefit of their partner by transferring assets held in their name only. The idea is to transfer assets, including life insurance, into the trust so that your estate dips below the historically high federal exemption levels, currently $11.7 million and $23.4 million, above which the 40% gift and estate tax kicks in. The donor will pay tax on the trust’s taxable income when filing their personal return. A SLAT must have a trustee. That person cannot be the donor and can be the beneficiary only if their power to move money out of the trust is limited.

SLATs owe tax on the gains made since the original owner acquired them when the donor dies. This means that a beneficiary can owe big capital gains taxes when selling any of its holdings. However, there is a way around that hit: the donor can swap stock or property in the trust whose tax bill would be high for separate assets that have not appreciated as much. Meaning the low basis assets will now be a part of the donor’s estate and heirs would not owe gains on their appreciation while they were in the trust.

‘Not a personal checking account’
The donor spouse has effectively given the beneficiary spouse the assets. But the spouse who’s the beneficiary can request withdrawals from the SLAT to fund basic lifestyle needs and pursuits, like vacations, mortgages or home remodeling. Although, this is still not a personal checking account because the trusts are typically set up so that distributions are under what the IRS calls health, education, lifestyle maintenance or support guidelines. These so-called HEMS can get squishy come tax return time.

The IRS and children who are heirs can glom on to such potential abuses when the SLAT donor passes away, which causes the trust’s inner working and use to be detailed in the estate’s federal return. IRS employees read the trust document’s terms to see if a standard has been violated.

Divorce and death can ruin everything
If you get divorced, the donor spouse loses access to the trust. Because a transfer of assets into a SLAT is irrevocable, your ex continues post-marriage as the beneficiary, a likely bitter pill to swallow. A donor spouse whose partner dies can no longer access the trust. While there are certain ways a SLAT can be structured to allow money to be returned when a spouse dies and allow a new spouse to become the beneficiary, they can prove to be complicated.

Things get turbocharged when each spouse creates a SLAT for the benefit of the other. But even assuming our happy and healthy married couple stay that way, there are pitfalls to that twofer. Under what’s known as the reciprocal trust doctrine ban, the IRS deems to be abusive arrangements when two identical trusts are used by the same married couple to avoid estate taxes while remaining in the same economic position as beneficiaries of the trusts.

Talley’s team of tax and estate planning professionals provide comprehensive tax compliance and consulting services so you can preserve, enhance, and pass on your assets and wealth to the next generation. We welcome the opportunity to discuss the current options available for you. For more information, contact us today.

One obstacle taxpayers are facing as they get ready for this coming filing season is the potential for several tax provisions to expire before Congress can act on them. Currently, it is anybody’s guess whether some of them will in fact be allowed to expire without at least being retroactively renewed. 

The following are a few tax provisions set to expire at year’s end:

  • The Recovery Rebate Credit. Currently, there are no proposals to extend this credit. Many speculate that it will not be extended, even with the recent COVID-19 surge.
  • The paid sick and family leave credit. While this credit has been extended several times, there has not yet been a proposal to extend it currently.
  • The Enhanced Child Tax Credit. This credit expired at the end of 2021, but extensions are proposed in the Build Back Better bill. Unlike the economic stimulus payment, where if you get more than you are entitled to you can keep it, with this credit you have to repay any amount in excess of what you were entitled to.
  • The Employee Retention Credit. This was extended to the end of 2021 but then was retroactively made to expire on Sept. 30, 2021. This retroactive expiration has created problems for employers that were already reducing their payroll tax payments, assuming that the credit would be available. Looking at notice 2021-65, it told employers that if they repaid reduced payroll taxes by Dec. 31, 2021, they would not be assessed a penalty, and cannot continue to reduce their payroll taxes for the quarter after Dec. 20, 2021.
  • The enhanced Earned Income Tax Credit for childless individuals. This was enacted in March 2021 as part of the American Rescue Plan and scheduled to expire at the end of 2021.
  • The premium tax credit under the Affordable Care Act for individuals receiving unemployment compensation. There has been no talk of extending this credit.
  • The enhanced child and dependent care credit, and the enhanced employer-provided dependent care assistance exclusion. The American Rescue Plan enhanced both for 2021 but, neither appears to be extended in the Build Back Better bill.

Several provisions are specific to charitable contribution deductions:

  • The charitable deduction for non-itemizers. Taxpayers claiming the standard deduction may claim a deduction for 2021 of up to $300, or $600 for married filing jointly. 
  • The enhanced itemized charitable deduction. For itemized charitable deductions, the adjusted gross income limit was raised from 60% to 100% for 2020 and 2021. 
  • The enhanced corporate charitable deduction. The enhanced limit of 25% of taxable income is scheduled to revert to a 15% limit.

While the following list of regularly expiring provisions is shorter than in previous years, several expiring provisions were extended last year for longer periods of time, and a few were made permanent. Such as:

  • The treatment of mortgage insurance premiums as qualified residence interest.
  • The credit for health insurance costs of eligible individuals.
  • The credit for nonbusiness energy property.
  • The credit for alternative fuel cell motor vehicles.
  • The credit for newly qualified fuel vehicle refueling property.
  • The two-wheel plug-in electric drive vehicle credit.
  • Several business-focused energy credits.
  • Tax breaks related to Indian reservations.
  • The mine rescue team training credit.
  • The classification of certain racehorses as three-year property

Talley’s team of tax professionals provide comprehensive tax compliance and consulting services so you can preserve, enhance, and pass on your assets and wealth to the next generation. We welcome the opportunity to discuss the current options available for you. For more information, contact us today.

Elon Musk, the world’s richest person and CEO of Tesla Inc., could face a tax bill in excess of $10 billion for 2021, if he exercises all his options due to expire next year. While it is hard to say whether that would be a record since the Internal Revenue Service does not publicly reveal individual tax filings, it would certainly rank as one of the largest payments of all time. Not surprising to many who follow Musk, a $10 billion payment is just a fraction of his overall wealth. His net worth is a quarter of a trillion dollars on the Bloomberg Billionaires Index, having risen by $95 billion so far this year.

Elon Musk’s exercise of an unusually large number of options is boosting his claim that he will pay more taxes this year than any other American in history, as he spars with Senator Elizabeth Warren over wealth inequality. Musk’s latest Twitter spat with the Massachusetts senator began after Warren blasted the Tax Code for being “rigged” and asked to change it “so The Person of the Year will actually pay taxes and stop freeloading off everyone else.” In a reply, Musk tweeted, “If you opened your eyes for 2 seconds, you would realize I will pay more taxes than any American in history this year.”

Musk faces the unusually high tax bill after exercising almost 15 million options and selling millions of shares to cover the taxes related to the transactions. That was following a Twitter poll last month where he asked whether he should sell 10% of his stake in Tesla. Musk may end up saving a couple of billion dollars in capital-gains taxes he would have owed to California because of his move to Texas.

A report in June stated that Musk paid little income tax relative to his outsize wealth. He has pushed back against this characterization, saying he does not draw a salary from either SpaceX or Tesla, and pays an effective tax rate of 53% on stock options he exercises. He added that he expects that tax rate to increase next year.

Musk is not the only billionaire likely to pay a big tax bill this year. Many top U.S. billionaires have more than doubled their stock sale activity this year, as the richest Americans unload shares after a run-up in stock valuations and before a potential tax hike in 2022. So far this year, Jeff Bezos, the second-richest person in the world, has sold more than $9 billion in Amazon stock, while Mark Zuckerberg has liquidated $4.5 billion in shares of Meta Platforms Inc. Both men are likely to pay a lower tax rate than Musk, partly because their sales are designed to fund charitable endeavors, which allow tax deductions.

Talley’s team of tax professionals provide comprehensive tax compliance and consulting services so you can preserve, enhance, and pass on your assets and wealth to the next generation. We welcome the opportunity to discuss the current options available for you. For more information, contact us today.


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