• Proposed legislation extends TCJA provisions, including bonus depreciation and Section 199A, with new limits and credits affecting planning across industries. 

• Businesses should assess impacts of Section 174, 163(j), SALT cap changes, and energy credit rollbacks ahead of year-end to mitigate risk and optimize tax positions. 

• The evolving bill includes potential opportunities and challenges—taxpayers must model scenarios now to prepare for shifting rules and timelines. 

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The House Ways and Means Committee approved a sweeping tax bill early on May 14 that would make permanent most of the expiring provisions of the Tax Cuts and Jobs Act (TCJA) while paying for several new tax cuts through an aggressive package of revenue raising tax increases. Committee passage is an important step in the legislative process, but the bill is likely to continue to evolve as it moves forward. 

Ways and Means Committee Chair Jason Smith, R-Mo., released the full tax title on May 12, offering the first comprehensive view of the technical details and legislative language behind the Republican tax agenda. The committee passed the bill on a 26 to 19 partisan vote after dismissing scores of Democratic amendments, but changes are likely to be needed before the bill goes to the House floor. Republicans are seeking to combine the tax title with spending reforms from other committees and pass a unified reconciliation bill this summer.    

The tax package is estimated to cost $3.8 trillion, but that figure comprises approximately $6.8 trillion in extensions of favorable TCJA provisions and $1 trillion in other tax cuts. Those tax cuts are offset by extending approximately $3 trillion in revenue raising TCJA provisions and $1 trillion in new tax increases. The net effect of extending both the tax cut and revenue raising TCJA provisions is slightly under $4 trillion, with the other changes largely netting out.  

The legislation would essentially make permanent all the expiring TCJA provisions with some adjustments, including: 

• Increasing the Section 199A deduction from 20% to 23% 

• Increasing the lifetime exemption for the estate, gift, and generation skipping transfer taxes to $15 million in 2026 (indexed to inflation thereafter) 

• Increasing the cap on the state and local tax (SALT) deduction to $30,000 for taxpayers with income under $400,000 

• Limiting taxpayers’ ability to use state pass-through entity workarounds for the individual SALT cap 

• Changing the treatment of suspended losses under the active loss limit in Section 461(l)  

Takeaway 

The SALT cap provision is not final, and negotiations will continue as Republicans prepare for a House vote. An agreement is critical, as a handful of Republicans have threatened to block the bill unless they are satisfied with the level of SALT cap relief. With just a 220 to 213 House majority, Republicans can afford to lose only three votes. 

The bill would also reinstate 100% bonus depreciation for property placed in service after Jan. 19, 2025, and before Jan. 1, 2029. In a significant expansion of the provision, full expensing would be offered for buildings (including new and improved/retrofitted property) that manufacture, produce, or refine tangible personal property. The bill would also restore expensing of domestic research expenses under Section 174 for tax years beginning after Dec. 31, 2024, and before Jan. 1, 2030. The limit on the interest deduction under Section 163(j) would be amended over the same five-year period to add back depreciation and amortization expenses in determining adjusted taxable income.  

The bill includes $293 billion in new temporary tax cuts to fulfill four key promises made by President Donald Trump on the campaign trail: deductions for overtime pay, tips, seniors, and auto loan interest on domestic vehicles. The deductions would be in place from 2025 to 2028 and would be available regardless of whether taxpayers itemize their deductions. There are important limitations and income phaseouts for each provision, and employers and other entities would be required to provide new reporting. 

The bill would raise $1 trillion with a series of new revenue raising tax increases (not including extensions of the SALT cap or the repeal of personal exemptions). Many of these provisions could face resistance from business lobbyists and sympathetic Republican members. Key provisions include: 

• Repealing, phasing out, and restricting many of the energy credits created or enhanced by the Inflation Reduction Act (IRA)  

• Increasing the university endowment tax from a rate of 1.4% to a top rate of 21% 

• Increasing the tax rate on private foundations to a top rate of 10% 

• Making several changes to increase the unrelated business taxable income (UBTI) of tax-exempt entities 

• Creating a “floor” for corporate charitable deductions of 1% of taxable income 

• Imposing new reciprocal taxes for “unfair” foreign taxes 

• Adding new aggregations rules to the limit on deducting executive compensation under Section 162(m) 

Takeaway 

If any revenue raising provisions face resistance (or lawmakers push for deeper tax cuts), it could put pressure on Republicans to identify other tax savings options. The budget resolution gives Republicans a $4.5 trillion cap on tax cuts, but this cap is reduced by the amount that spending cuts fall short of $2 trillion. Because other committees are expected to achieve only the $1.5 trillion minimum in spending cuts, the Ways and Means Committee is anticipating a tax cap of just $4 trillion. As the process moves to the Senate, Republicans could gain relief by using the current policy baseline in the Senate reconciliation instructions. This baseline would allow Republicans to make the TCJA tax cuts permanent while scoring the nearly $4 trillion in extensions as having no revenue impact. The Senate instructions then allow for up to $1.5 trillion in new net tax cuts. Questions remain, however, over whether this could trigger procedural challenges or run into opposition from House deficit hawks. 

The tax title omits several key proposals that were under discussion. Some of these provisions could still be considered later in the process, including: 

• Reduced 15% corporate rate for domestic manufacturing 

• Limit on corporate SALT deductions 

• Increase in the top individual rate 

• Change in the taxation of carried interest 

• Increase in the 1% stock buyback excise tax 

The current tax title may be further refined before it is brought to the House floor. House Speaker Mike Johnson, R-La., is aiming to pass a bill through the House by Memorial Day, and Republicans have set a July 4 target date for enactment.  

Those deadlines may be ambitious and key Senators have indicated that enactment before the August recess may be a more realistic goal. The debt limit could give that deadline more urgency. Republicans are currently hoping to address the debt limit through reconciliation to avoid negotiating with Democrats. Treasury Secretary Scott Bessent recently told lawmakers that the federal government could default in August unless the debt limit is raised. The technical deadline for the reconciliation bill under the budget resolution is Sept. 30, when the government’s current fiscal year ends. 

Takeaway 

Republicans still face many challenges to enacting a reconciliation bill, including narrow majorities in both chambers, potential Senate procedural hurdles, and competing priorities between Republican moderates and deficit hawks. The tax title is far from final, but the current version makes clear that nearly all businesses and investors would be affected. With legislative language now available, taxpayers should begin assessing the impact and considering planning options both before and after enactment. The following is a more detailed discussion of the provisions and their outlook for enactment. 

Bonus Depreciation 

The bill would restore 100% bonus depreciation for property placed in service after Jan. 19, 2025, and before Jan. 1, 2029. There would be no phasedown beyond these dates, so property placed in service in 2030 or later would not qualify for any bonus depreciation amount. 

The legislation would also create a new elective 100% depreciation allowance under Section 168(n) for any portion of nonresidential real property that is considered “qualified production property.” Qualified production property must be original use depreciable property used by the taxpayer in the U.S. as an integral part of a qualified production activity. A qualified production activity includes the manufacturing of tangible personal property, agricultural production, chemical production, or refining. Qualified production property does not include any portion of building property that is used for offices, administrative services, lodging, parking, sales activities, research activities, software engineering activities, or other functions unrelated to qualified production activities.  

There is an exception for the original use requirement if the property was not used in a qualified production activity between Jan. 1, 2021, and May 12, 2025. There are special recapture rules if the property is disposed of within 10 years after it is placed in service. This provision would apply if construction began on the property after Jan. 19, 2025, and before January 1, 2030. The property is required to be placed in service by the end of 2032. 

The bill would also increase the Section 179 deduction to $2.5 million with a phaseout threshold of $4 million, indexed to inflation. 

Takeaway 

The ability for producers, refiners, and manufacturers to fully expense buildings rather than depreciate them over 39 or 15 years offers a significant benefit. Congressional staff told business representatives on a conference call that this provision is meant to fulfill the policy objective underlying Trump’s push for a 15% rate on domestic manufacturing. But taxpayers and the IRS may face challenges determining what fits under the provision’s definition of manufacturing. Taxpayers with buildings that house both qualified production activities and other administrative, office, or research functions will likely need to perform a cost segregation study or perform some type of reasonable analysis. 

Section 174 Research Expensing 

The bill would restore expensing of domestic research costs for tax years beginning after Dec. 31, 2024, and before Jan. 1, 2030. The legislation would not reinstate the expensing rules under Section 174  but would instead create temporary rules under new code Section 174A similar to the Section 174 rules before the TCJA changes. Taxpayers would retain the option of electing to capitalize domestic Section 174 costs and amortize such amounts over 10 years or the useful life of the research (with a 60-month minimum). Foreign research would still need to be amortized over 15 years. 

Transition rules would require taxpayers to implement the new treatment with an automatic accounting method change on a cut-off basis. The legislation would also address an issue with Section 280C by definitively requiring taxpayers to reduce their deduction for research costs under Section 174A by the amount of any research credit. 

Takeaway 

Before the TCJA, Section 280C generally required taxpayers to reduce their deduction for research costs by the amount of any research credit or reduce their credit by an equivalent amount. Under changes made by the TCJA, many taxpayers took the position that they were only required to reduce their Section 174 capital account to the extent the research credit exceeded their current year amortization deduction. For most taxpayers, this meant the amortization deduction was allowed in full. The legislation would reverse this “double-dipping” treatment for tax years beginning after 2024 when Section 174A is in effect. 

Section 163(j) Limit on the Interest Deduction 

The bill would reinstate the more favorable calculation of the limit on the interest deduction under Section 163(j) for tax years beginning after Dec. 31, 2024, and before Jan. 1, 2030. Section 163(j) generally limits the interest deduction to 30% of adjusted taxable income (ATI). For tax years beginning after 2021, current law requires ATI to include amortization and depreciation. The bill would once again remove depreciation, amortization, and depletion from the calculation of ATI. 

Takeaway 

The temporary nature of this provision and the changes to bonus depreciation and research expensing would create lingering uncertainty for multiyear tax planning. There is interaction between the provisions and taxpayers should model out various scenarios, particularly because some outcomes could result in a permanent impact to taxpayers. For taxpayers that may still face interest expense limitations even after enactment, there may be options to apply planning strategies such as interest capitalization to utilize tax attributes aggressively. 

Section 199A 

The bill would make the deduction for pass-through income under Section 199A permanent with several enhancements. The deduction rate would increase from 20% to 23% for taxable years beginning after Dec. 31, 2025. The bill would also adjust the phaseout of the deduction for taxpayers who do not meet the wage expense and capital investment requirements or who participate in a disqualified “specified trade or business.” The deduction would be reduced by 75% of the amount that taxpayer’s income exceeds the phase out threshold (if greater than the deduction allowed by applying the regular limits). The bill would also allow dividends from business development companies to qualify for the deduction. 

Takeaway 

The increase in the deduction from 20% to 23% would bring the top effective rate on qualifying income down from 29.6% to 28.5%. The effective rate cut is somewhat modest, but there may be rate arbitrage opportunities to accelerate deductions to 2025 and defer qualifying income to 2026. If the top individual marginal rate were allowed to revert from 37% to 39.6%, then increasing the deduction to 23% would reduce the top effective rate from 31.7% to 30.5%. 

SALT Cap 

The bill would effectively create a permanent SALT cap, but with several important changes. The legislation removes the temporary $10,000 limit on SALT deductions under Section 164, and instead creates a new permanent limit of $30,000 for both single and joint filers under Section 275. The $30,000 limit would begin to phase down to $10,000 when modified gross income exceeds $400,000. 

The Section 275 limit would apply to specified state income, sales, and property taxes (as well as foreign income taxes and taxes paid by cooperative housing corporations), and includes a provision designed to shut down state law pass-through regimes that allow “workarounds” to the SALT cap. The state laws generally allow pass-through entities to pay tax at the entity where it can be deducted in full, and then provide a credit or exclusion to the business owners so the income is not taxed again by the state at the individual level. 

The bill would deny partnerships and S corporations the ability to deduct specified taxes under Section 275, and instead would require the taxes to be passed through to owners as separately stated items. The separately stated taxes would be subject to a $30,000 cap at the individual level as “substitute payments” if made in exchange for tax benefits provided to individual owners. There would be an exception for property taxes paid at the entity level and income taxes paid by a partnership or S corporation if at least 75% of the gross receipts are derived in a qualified trade or business under Section 199A. 

Takeaway 

The rules are complex and potentially omit an exception for sales taxes paid by pass-through entities. The provision appears to largely shut down state law SALT cap workarounds, though it also offers an important exception for businesses qualifying under Section 199A. Several Republican members in blue states remain unhappy with the current SALT provision and could push for a higher cap, the removal of the income phaseout, or the preservation of current state workarounds. 

International 

The bill would make permanent the current rate for the Section 250 deduction, which had been scheduled to decrease in 2026. This would preserve the current effective rate on foreign-derived intangible income at 13.125% (which was set to rise to 16.4%) and the current effective rate on global intangible low-taxed income (GILTI) at 10.5% (which was set to rise to 13.125%). The bill would also exclude from the definition of GILTI tested income any “qualified Virgin Islands services income.” 

The legislation would also make permanent the current base-erosion and anti-abuse tax (BEAT) rate at 10%, preventing an increase to 12.5%. The bill repeals an unfavorable change to the BEAT treatment of credits that had been scheduled to take effect in 2026. 

The legislation also adds new Section 899, which would impose retaliatory taxes on residents of “discriminatory foreign countries” that impose “unfair foreign taxes.”  

The bill is based on H.R. 591 and H.R. 2423 with some modifications. The legislation would essentially raise the tax and withholding rates for affected foreign taxpayers on several types of income, including:  

• Fixed, determinable, annual, or periodical (FDAP) income and other income of a nonresident alien under Sections 871(a)(1), 871(a)(2), and 1445(a)  

• Effectively connected income (ECI) of a foreign corporation under Section 882(a) and a nonresident alien under Section 871(b) 

• FDAP and other income imposed on U.S.-source income of foreign corporations under Section 881(a) 

• Branch dividend equivalents under Section 884 

• U.S.-source investment income of foreign private foundations under Section 4948 

• Dispositions of U.S. real property interests under Section 1445(e) 

The legislation would also modify how BEAT applies to corporations that are more than 50% owned by affected foreign taxpayers. These corporations are treated as meeting the BEAT’s applicability thresholds (gross receipts and base erosion tests) and are subject to a 12.5% BEAT rate instead of the 10% BEAT rate. Additionally, these corporations lose the ability to reduce the BEAT liability using tax credits. The legislation would also eliminate the services cost method exception from base erosion payments and treat capitalized payments of corporations that are more than 50% owned by affected foreign taxpayers as base erosion payments. 

The definition of unfair foreign taxes is relatively broad and includes the undertaxed profits rule under Pillar Two, digital service taxes, and “any other tax with a public or stated purpose indicating the tax will be economically borne, directly or indirectly, disproportionately by United States persons.” The provisions also target “extraterritorial taxes” and “discriminatory taxes,” with fairly broad definitions for both.  

The additional rates imposed under the legislation would not replace treaty rates, but would impose additional incremental tax on top of treaty rates. 

Takeaway 

Lawmakers appear to be trying to avoid overriding treaties, but it is unclear whether other countries would consider these taxes a treaty violation or how they will react to the proposal in general. The taxes would be significant and punitive and don’t offer many mechanisms for compromise with foreign countries. The provision is essentially self-executing for tax years beginning after the later of 90 days after enactment, 180 days after a foreign country enacts an “unfair” foreign tax, or when the “unfair” foreign tax begins to apply. The provisions could also pose some administrability issues and could be unpopular with some moderates. 

Energy Credits 

The bill would raise $561 billion by repealing, restricting, and phasing out many of the energy credits enacted as part of the Inflation Reduction Act. Several credits would be repealed at the end of 2025, including: 

• Previously owned clean vehicle credit under Section 25E for purchases after 2025 

• Clean vehicle credit under Section 30D for purchases after 2025 unless the manufacturer has sold fewer than 200,000 clean vehicles since 2010, in which case the credit expires for purchases after 2026 

• Commercial clean vehicle credit under Section 45W for purchases after 2025 unless the vehicle was acquired pursuant to a written binding contract in place before May 12, 2025 

• Alternative fuel refueling property credit under Section 30C for property placed in service after 2025 

• Energy efficient home improvement credit under Section 25C for property placed in service after 2025 

• Residential clean energy credit under Section 25D for property placed in service after 2025 

• New energy efficient home credit under Section 45L for property acquired after 2025 unless construction began before May 12, 2025 

Takeaway 

Taxpayers and manufacturers would have a short runway to accelerate production, projects, and purchases before the end of 2025 to still qualify for the credits. 

The legislation would repeal taxpayers’ ability to transfer the credits for projects beginning construction two years after the date of enactment. The credit transfer regime was created by the IRA under Section 6418, and allows taxpayers to transfer many of the IRA credits to unrelated third parties for cash. The bill does not repeal or restrict the direct payment option under Section 6417, which is available for several credits and tax-exempt entities. 

Takeaway 

The repeal of transferability would take away an important monetization option for projects beginning construction more than two years after the date of enactment. If the provision is enacted, the credit transfer market is likely to remain robust in the short term, with more traditional tax-equity financing structures increasing in the future.  

The legislation would impose strict new restrictions on most credits for projects that accept “material assistance” from a “prohibited foreign entity” or make certain payments to prohibited foreign entities. 

Takeaway 

The language on material assistance is fairly broad and includes components, subcomponents, or applicable critical minerals that are extracted, processed, recycled, manufactured, or assembled by a prohibited foreign entity and directly acquired from the prohibited foreign entity. In some cases, a prohibited foreign entity could include an even lower threshold “foreign influenced entity.” If enacted, these rules could present challenges for some supply chains. 

The legislation would phase out the production tax credits under Sections 45Y and 45U and the investment tax credit under Section 48E over a series of years beginning in 2029. Taxpayers would receive only 80% of their credit for projects placed in service in 2029, 60% for 2030, and 40% for 2031, with no credit available for 2032 or later.  

The hydrogen production credit under Section 45V would be repealed for projects beginning construction after Dec. 31, 2025. The advanced manufacturing credit under Section 45X would be repealed for wind energy components sold after 2027 and for all other components sold after 2031.  

Takeaway 

The credit phaseouts could prompt the acceleration of projects, particularly for clean hydrogen. The IRS has long-standing and well-understood rules on how to establish that construction has begun. It is also possible that Republican supporters of energy credits push back against some of these changes and succeed in maintaining more of the existing credit rules. 

Deduction for Tip Income 

The bill would provide taxpayers a deduction equal to the amount of qualified tips reported on Forms W-2, 1099-K, 1099-NEC, or 4317. The deduction would be allowed from 2025 through 2028 without regard to whether a taxpayer itemized deductions. There is no cap on the deduction itself, but it is available only to taxpayers whose income does not exceed the threshold of a highly compensated employee under Section 414 ($160,000 in 2025).  

For tips to be deductible, they must be paid voluntarily in an occupation that “traditionally and customarily” received tips before 2025, as provided by the Secretary. The business in which the tips are earned cannot be a specified trade or business under Section 199A, and self-employed taxpayers, independent contractors, and business owners face additional limitations.  

Employers would be required to report qualifying tips to employees on form W-2. The provision applies only to income taxes, and generally does not affect the employer’s FICA tip credit except to extend it to certain beauty services businesses.   

Takeaway 

The bill gives Treasury several specific grants of authority to provide regulations on specific issues. The IRS would need to adjust withholding tables and write regulations defining which occupations “traditionally and customarily” received tips in the past. The IRS would also need to provide rules for determining when a tip is voluntary.  The impact of the provision on employers could be meaningful. Hospitality businesses would face new reporting requirements that depend on how the business and worker occupations are characterized. Employees’ ability to deduct tips could also depend on employer policies, such as mandatory tips, service charges, or other amounts that are not solely determined by the customer.  

Deduction for Overtime Pay 

The bill would provide a deduction equal to qualified overtime compensation. The deduction would be allowed from 2025 through 2028 without regard to whether a taxpayer itemized deductions. There is no cap on the amount of overtime that can be deducted, but it is available only to taxpayers whose income does not exceed the threshold of a highly compensated employee under Section 414 ($160,000 in 2025).  

Qualified overtime compensation is defined as compensation paid to an individual required under section seven of the Fair Labor Standards Act (FLSA). Employers would be required to provide new information reporting to separately report overtime pay. 

Takeaway 

The determination of whether compensation is qualified overtime pay would not be made using tax rules, but would depend on the employer’s characterization of the pay under the FLSA. 

Auto Loan Interest Deduction 

The bill would create an above-the-line deduction for up to $10,000 of interest on a qualified passenger vehicle loan from 2025 through 2028. The deduction would begin to phase out once modified adjusted gross income exceeds $100,000 for single filers or $200,000 for joint filers.  

The vehicle must be manufactured primarily for use on public streets, roads, and highways, and final assembly of the vehicle must occur in the United States. The deduction does not apply to lease financing and the loan cannot be to finance fleet sales, purchase a commercial vehicle, purchase a salvage title, purchase a vehicle for scrap or parts, or be a personal cash loan secured by a vehicle previously purchased by the taxpayer. 

Takeaway 

Auto loan financing companies would face additional reporting requirements and would be required to furnish a return with specific information on loans. 

Deduction for Seniors 

The bill would provide a $4,000 deduction for all individuals aged 65 and above. The deduction would be allowed from 2025 through 2028 without regard to whether a taxpayer itemized deductions. The deduction would phase out for taxpayers with modified adjusted gross income exceeding $150,000 for joint filers and $75,000 for all other taxpayers.  

Takeaway 

The deduction is meant to fulfill Trump’s pledge to remove tax on Social Security payments, but reconciliation rules preclude changes to Social Security. The provision instead provides a general income tax deduction.  

Transfer Taxes 

The bill would permanently set the lifetime exemptions for the gift, estate, and generation skipping transfer taxes at $15 million for 2026, indexing them for inflation thereafter. The change represents a modest increase from the exemptions under the TCJA, which were initially set at $10 million, but reached $13.99 million in 2025 with inflation adjustments. 

Active Business Losses 

The legislation would make the active loss limit under Section 461(l) permanent, with an important unfavorable change. The provision was created by the TCJA and was originally set to expire after 2025. It was suspended by the Coronavirus Aid, Relief, and Economic Security (CARES) Act for three years, but then extended through 2026 by the American Rescue Plan Act of 2021 and extended again through 2028 by the Inflation Reduction Act. 

The legislation would not only make Section 461(l) permanent, but would require taxpayers to include net operating losses (NOLs) created in prior years as a result of Section 461(l) into the calculation of Section 461(l) in subsequent years. Under current law, all NOLs are removed when the Section 461(l) limitation is computed in subsequent years. This allowed taxpayers to utilize an NOL that was created by Section 461(l) against other sources of income in a subsequent year, which effectively produced a one-year deferral on the utilization of a limited loss under Section 461(l). 

Takeaway 

This change was originally considered by Democrats as part of IRA negotiations, and could make it much harder for taxpayers to deduct suspended losses in future years. Under the proposal, a taxpayer’s NOL carryover would have to be bifurcated between NOL ‘dollars’ created under Section 461(l) from NOL ‘dollars’ unrelated to Section 461(l). The NOL dollars created under Section 461(l) remain limited under Section 461(l) in subsequent tax years. 

Individual TCJA Extensions 

The bill would make most of the TCJA provisions permanent without change, including: 

• Repeal of personal exemptions 

• Increased alternative minimum tax thresholds 

• Limits on the deductions for mortgage interest, personal casualty losses, wagering losses, and moving expenses  

• Repeal of miscellaneous itemized deduction and the Pease phaseout on itemized deductions 

• Exclusion for bicycle commuting reimbursements 

The legislation would also make permanent the increased standard deduction and child tax credit with enhancements. The standard deduction would be further increased by $1,000 for single filers and $2,000 for joint filers from 2025 to 2028. The child tax credit would increase by $500 from 2025 to 2028. It would be indexed to inflation after reverting to $2,000 in 2029. Social Security numbers would also be required. 

The bill would make permanent the individual rate cuts and bracket adjustments, while adding a slightly more favorable inflation adjustment for every bracket except the 37% bracket. 

Takeaway 

The legislation does not increase the top individual rate despite Trump reportedly pushing Republicans to revert the top rate to 39.6%. Trump’s public comments have been mixed. He initially said he opposed increasing the top rate because it would cause the wealthy to flee the country. In a subsequent interview, he said he liked the idea of raising taxes on the “wealthy” to “take care of the middle class,” adding, “I actually love the concept but I don’t want it to be used against me politically because I’ve seen people lose elections for less.” In a later social media post, he said he would “graciously accept” a tax increase on the “rich,” adding that “Republicans should probably not do it, but I’m okay if they do.” Influential conservative and House Freedom Caucus Chair Andy Harris, R-Md., has expressed interest in the idea, but the proposal has generally been unpopular with congressional Republicans, including Johnson. 

Opportunity Zones 

The bill would extend the deadline for making an opportunity zone investment from Dec. 31, 2026, to Dec. 31, 2028. The legislation would also modify the rules for designating opportunity zones, creating a new category of rural opportunity zones with more favorable rules. The mandatory recognition date for deferred gain for investments made in 2027 or 2028 would be Dec. 31, 2033, and taxpayers would receive a 10% increase in basis for holding onto the property for five years. Taxpayers could also designate up to $10,000 of their aggregate investments to offset ordinary income, with no recapture. The provision would impose new reporting requirements on taxpayers making investments. 

Form 1099 Reporting 

The bill would amend Section 6050W to reinstate the 200 transaction and $10,000 threshold for reporting third-party payment network transactions on Form 1099-K. The American Rescue Plan Act (ARPA) of 2021 repealed that threshold and required reporting when aggregate payments exceeded $600 without regard to the number of transactions. The IRS offered transition relief delaying the implementation of the change for two years, and then provided a $5,000 threshold for payments made in 2024 and a $2,500 threshold for payments made in 2025. The bill would restore the old threshold retroactively so that reporting would be required only if aggregate transactions exceeded 200 and aggregate payments exceeded $10,000.  

The bill would also increase the threshold for reporting payments under Sections 6041 and 6041A on Forms 1099-MISC and 1099-NEC from $600 to $2,000, indexing that figure to inflation. 

Tax Exempt Entities 

The legislation includes numerous provisions targeting tax-exempt entities, and colleges and universities in particular. Key provisions would: 

• Replace the endowment tax rate of 1.4% with graduated brackets based on the size of the endowment per student, reaching a top rate of 21% (while providing a new exception to the tax for certain religious universities)  

• Replace the 1.39% excise tax on private foundations with graduated brackets based on assets reaching a top rate of 10% 

• Expand the rules for determining unrelated business taxable income (UBTI) to include disallowed parking deductions, transportation fringe benefits, sales or licensing of names or logos, and income from research the results of which are not freely available to the general public. 

Employee Retention Credit 

The legislation would make several changes to the employee retention credit (ERC), including: 

• Barring ERC refund claims filed after Jan. 31, 2024 

• Extending the statute of limitation on ERC claims to six years 

• Increasing preparer and promoter penalties on ERC claims  

Takeaway 

The IRS has been slow to process claims filed after Jan. 31, 2024, in anticipation of these provisions resurfacing, which were included in a failed tax extenders bill from 2024. The provisions were originally proposed while the IRS had a moratorium in place suspending claims filed after Sept. 14, 2023. In August of 2024, the IRS began “judiciously” processing claims filed between Sept. 14, 2023, and Jan. 31, 2024. It is unclear how the IRS is currently treating claims filed after Jan. 31, 2024.  

Other Provisions 

The bill includes many other potentially important provisions for taxpayers, including 

• Increasing the threshold for certain taxpayers to use the cash method of accounting and other favorable accounting rules from $25 million in gross receipts to $80 million, but applying a more expansive aggregation rule 

• Amending numerous health care tax rules 

• Expanding the aggregation rules for the limit on executive compensation under Section 162(m) 

• Increasing and modifying the low-income housing tax credit for 2026 through 2029 

• Repealing the excise tax on indoor tanning services 

• Allowing taxpayers purchasing professional sports franchises to amortize only 50% of intangibles under Section 197 

• Creating new tax-preferred “money accounts for growth and advancement” for children, with a pilot program offering a $1,000 contributory credit for qualifying children 

Outlook 

House Republicans hope to vote on the bill the week of May 19, but changes to the language are possible before a vote. Republicans are continuing to negotiate over contentious issues such as the SALT cap, energy credits, and spending cuts. Significant changes are also likely once the bill reaches the Senate. Senate Republicans have not publicly scheduled any mark-ups and appear content for now to wait to see what the House can pass first.  

Next Steps 

The tax title is not final, but the current draft bill offers important insight into Republican priorities and the technical operation of various proposals. Taxpayers should assess the potential impact of major provisions when considering the tax efficiency of transactions and investments. There may be planning opportunities that should be considered now, such as accelerating energy credit projects or investments or modeling the impact of changes to the limit on the interest deduction under Section 163(j), bonus depreciation, and research expensing under Section 174. 

How MGO Can Help: Tax Reform Planning Services for Businesses and Investors 

As the legislative landscape shifts, MGO supports businesses and investors navigating complex tax reform developments. Our team closely monitors proposed changes, like the extended TCJA provisions, Section 174 amortization, 163(j) interest limitations, and SALT cap negotiations, to make sure you’re informed and prepared. Whether you’re evaluating bonus depreciation, energy credits, or pass-through deduction adjustments, our team can help you with your tax position, mitigate any surprises, and plan with confidence. We combine technical knowledge with practical tools to guide your decision-making in a fast-changing environment. Learn more at mgocpa.com. 

Written by Dustin Stamper. Copyright © 2025 BDO USA, P.C. All rights reserved. www.bdo.com 

Tax Reform Planning Services for Businesses and Investors 

MGO supports businesses and investors navigating complex tax reform developments. From Section 174 and SALT cap planning to bonus depreciation modeling and entity restructuring, our professionals deliver actionable insights to help you adapt. We combine technical knowledge with practical tools to guide your decision-making in a fast-changing environment. Learn more at mgocpa.com. 

The post Tax Writers Approve Massive Tax Bill with Important Implications  appeared first on MGO CPA | Tax, Audit, and Consulting Services.

• Pass-through entities are reassessing their structure due to potential changes in corporate tax rates and increased IRS scrutiny on partnerships.
• Pass-through entities should stay vigilant about audits and M&A due diligence so they can proactively improve internal controls and leverage tax technology to further mitigate pitfalls and risk.
• As pass-through entities are increasingly exposed to employment tax disputes — especially regarding partners’ self-employment income — they should evaluate their tax positions with a professional’s guidance.

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Pass-through entities, including partnerships, S corporations, and LLCs, can benefit from many tax advantages due to their structure, but they also encounter distinct challenges. BDO polled senior tax executives about their most pressing concerns and plans for the year ahead. It highlighted the specific tax risks and challenges they’re facing. You can read more here: 2024 Tax Strategist Survey.

Read more below to discover the top three takeaways from the data, as well as actionable steps your tax leaders can take to address these issues.

Takeaway 1: Changing Tax Policy May Motivate Pass-Through Entities to Reevaluate Structure

According to the BDO survey, tax executives cited expiring provisions in the Tax Cuts and Jobs Act (TCJA) and potential changes to the corporate tax rate as their top election-related tax concerns for pass-through entities. With the 2024 election behind us, tax leaders are closely monitoring potential tax policy shifts, such as a lower corporate tax rate.

The election outcome and subsequent tax policy changes may influence some pass-through entities to consider restructuring. Moreover, recently issued IRS guidance highlights an increased scrutiny of partnerships and the structuring of certain partnership transactions. Pass-through entities should watch tax policy developments closely to assess how they might impact choice of entity, and they should be prepared to run analyses as legislation moves through Congress.

Takeaway 2: Pass-Through Entities Are Preparing for Increased IRS Enforcement

52% of pass-through entities considered increased IRS funding a key issue to monitor in the 2024 election. Now that the election outcome is clear and the new president is in office, concerns about IRS enforcement may have waned, but pass-through entities should still be diligent about preparing for a potential audit which can come at any time. It’s possible that the new administration may seek to reduce IRS funding and/or unwind existing IRS guidance, including regulations. It’ll be important to monitor potential developments and be ready to quickly evaluate their potential impacts on your company’s tax position.
Your company may also face increased scrutiny if you are planning a transaction like an acquisition or sale. Due diligence during a transaction is essential and should be top of mind — it’s expected that M&A activity is anticipated to increase in 2025.

To prepare for an IRS examination or potential increased scrutiny during sell-side due diligence, pass-through entities should proactively address their tax vulnerabilities. This approach can include several different routes; they can include meticulously reviewing tax positions and reported amounts on tax return filings, improving internal controls to reduce risks and enhance accuracy and efficiency in return preparation, and adopting tax technology and automation to streamline processes. Collaborate with your service providers; they can help you proactively identify risks in returns and processes, enabling entities to potentially avoid or be better prepared for IRS audits or examinations. If faced with an audit, it may be strategic to outsource exam preparation.

Takeaway 3: Pass-Through Entities Grapple with Employment Tax Disputes

Tax disputes can impact any company, but BDO data reveals that pass-through entities are more susceptible to employment tax-related disputes compared to other business structures. In the past year, 32% of pass-through entities involved in tax disputes faced issues related to employment taxes.

Employment tax disputes have been a recurring challenge for pass-through entities, especially partnerships, since the IRS intensified scrutiny of how partnerships report partners’ self-employment income. Individuals actively participating in a partnership’s business may soon be unable to rely on the “limited partner” exception to avoid self-employment taxes. Consequently, pass-through entities should carefully evaluate their self-employment tax positions in anticipation of upcoming judicial guidance and consider collaborating with external professionals to help navigate the complexities of partnership tax.

How MGO Can Help

At MGO, we know the pass-through entity taxation landscape is evolving quickly. Our team of qualified advisors stays ahead of the curve, navigating advancements in tax technology, complex international tax regulations, global tax planning, and state and local tax intricacies. We take a proactive approach to make sure your business remains compliant with these changing regulations, so you can avoid costly issues and maintain long-term financial stability. Contact us for more.

The post Top Tax Issues Pass-Through Entities Should Consider in 2025 appeared first on MGO CPA | Tax, Audit, and Consulting Services.

• Louisiana adopted a 5.5% flat corporate income tax rate and a 3% flat individual income tax rate, replacing graduated rates.

• The corporate franchise tax will be repealed starting in 2026.

• The sales and use tax rate increased to 5% in 2025, with new rules clarifying taxation and exemptions for digital products, software, and services.

• Businesses and individuals can claim bonus depreciation and amortization deductions, but several tax credits will sunset in 2025. Voters will decide on further tax reforms in a March 2025 election.

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Louisiana Voters Reject Constitutional Amendments

On March 29th, the voters in Louisiana rejected changes to their state constitution. Amendment Number 2, related to the overhaul of Article VII: Revenue and Finance of the constitution, was opposed by 65% of voters. The 115 page amendment included the following revisions: requiring a two-thirds majority vote of the legislature to enact a tax exemption, exclusion, deduction, credit or rebate, or an increase in the amount of a tax deduction, credit or rebate; replacing of the graduated individual income tax rate with a flat rate of 3.75%; providing individuals who are 65 year old or older with an additional standard deduction equal to the amount applicable for a single individua;, and removing the minimum tax rate for Cigarette Taxes. In the wake of this defeat, some lawmakers are discussing revising the failed Amendment 2 and presenting it for another vote, while Governor Jeff Landry issued an executive order on April 2nd calling for a hiring freeze to save millions in state general funds this year.

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After completion of a special legislative session focused on tax reform initiated by Louisiana Governor Jeff Landry, he signed multiple tax bills leading to significant reforms in corporate franchise tax, corporate income tax, personal income tax, and sales tax. Governor Landry predicts these tax changes will make Louisiana more attractive to businesses and enable Louisianans to keep more of their income.

Corporate Franchise Tax

Corporate Franchise Tax is repealed for taxable periods beginning on or after January 1, 2026.

Corporate Income Tax

The graduated corporate tax rate was eliminated and a flat rate of 5.5% was imposed beginning January 1, 2025. The law also provides for a $20,000 corporate standard deduction, which corporations can deduct from their federal gross income. Corporate taxpayers can elect to immediately expense the cost of qualified property, qualified improvement property, and research and experimental expenditures in the tax year in which the property is placed in service, or the expenditure is paid or incurred.

Individual Income Tax

Similarly, the graduated rates for individual income tax were replaced with a flat 3% rate beginning January 1, 2025. The standard deduction for single individuals and taxpayers who are married and filing separately increased from $4,500 to $12,500. The standard deduction for those married and filing jointly or a qualified surviving spouse and head of household increased to $25,000. The standard deduction will be adjusted for annual inflation starting in 2026.

The annual retirement income exemption was increased from $6,000 to $12,000 and will be adjusted annually.

The graduated rates for pass-through entities that elect to be taxed as a corporation were repealed and the flat 3% individual income tax rate will apply beginning January 1, 2025. In addition, the income of an estate or trust will be taxed at 3%.

Individuals, S corporations and other pass-through entities, and trusts and estates will be permitted to take a bonus depreciation deduction and bonus amortization for research and experimental expenditures, similar to those permitted by corporations.

Sales and Use Tax

The sales and use tax (SUT) rate was increased to 5% effective January 1, 2025 — accomplished by imposing an additional levy of 0.55% and making permanent the temporary increase of 0.45%. The combined SUT rate will reduce to 4.75% effective January 1, 2030. The law also updated the definition of “sales price” to include delivery and transportation charges in the sales tax base.

The new law formalized the definition of “digital products” and provided clarification on the taxability and exemption of various digital products for the taxable periods beginning on or after January 1, 2025. Previously, the Louisiana statutes did not reference “digital products.” However, citing precedent from the Louisiana Supreme Court, the taxing authority provided administrative guidance that digital products were taxable tangible personal property.

The new legislation provides digital audiovisual works, digital audio works, digital books, digital codes, digital application and games, and digital periodicals and discussion forums are subject to SUT. Computer software, prewritten computer software access services, and information services are exempt from SUT provided these products are (1) purchased exclusively for commercial purposes, (2) used directly in the production of goods and services for sale to customers, and (3) the goods or services produced and sold are subject to SUT or insurance premium tax.

Licensed healthcare facilities and FDIC-insured financial institutions using digital products for storing or transmitting information are exempt from SUT. The new law eliminated the definition of “custom software” and subjects all software to SUT.

Recently, the Louisiana Department of Revenue clarified that certain exemptions of the SUT would continue to be recognized despite being repealed by the new legislation. These exemptions include certain sales by nonprofit organizations and admissions to athletic or entertainment events of educational institutions.

The vendor’s compensation, which is allowed if the SUT return is filed and paid on time, was reduced to a maximum monthly amount of $750 from $1,500.

Miscellaneous Taxes

The law established a sunset of June 30, 2025, for multiple incentive programs, including Louisiana Work Opportunity Tax Credit, Louisiana Quality Jobs Program, Angel Investor Tax Credit Program, Sound Recording Investor Tax Credit, and Enterprise Zone program. New applications for these credits cannot be submitted after the sunset date.

Constitutional Amendment

In addition, several tax changes require approval by the voters through a statewide election which will be held on March 29, 2025. Louisianans are being asked to vote for a state constitutional amendment modifying the income tax, property tax, severance tax, cigarette tax, motor vehicle license tax, and the power to tax. Specifically, the amendment would make the following changes:

1. Reduce further the individual income tax rate.

2. Increase the standard deduction for senior citizens.

3. Amend provisions for property tax.

4. Repeal the authorization and prohibition for levy of severance taxes.

5. Abolish the minimum rate for cigarette tax.

6. Change the authority, requirement and restrictions involving motor vehicles license tax.

How MGO Can Help

Decreases in the tax base created by an appreciative reduction in the corporate and individual income tax rates, repeal of the corporate franchise tax, and increase in the standard deduction are offset by the increase in combined sales and use tax rate and enlarging the sales tax base to include numerous services. These extensive changes will have a significant impact on businesses and individuals.

More guidance and clarifications are expected from the state to assist taxpayers in properly applying these modifications. We can help you evaluate these changes, take advantage of the new tax benefits, and assist in compliance with the expanded tax obligations. Reach out to our State and Local Tax team today to learn more.

The post Louisiana Enacts Significant Tax Changes appeared first on MGO CPA | Tax, Audit, and Consulting Services.

Because of these newly tightened conditions, companies may face challenges when raising capital, forcing them to adopt a more thoughtful approach to seek funding. Likewise, investors will want to ensure their priorities are protected and their returns met. The combination of a given borrower’s need for capital and a financer’s desire to seek favorable returns may lead to the creation of agreements that have characteristics of both debt and equity. As such, it is crucial for all parties involved to understand the resulting tax classification and the treatment of these arrangements, so all expectations are met.

The Taxation of Debt and Equity

For borrowers, the difference between debt and equity can be critical because interest payments are generally tax deductible and subject to certain limitations. Dividends or other payments related to equity would not be deductible for U.S. federal income tax purposes.

Enacted as part of the Tax Cuts and Job Act (TCJA) of 2017, one main limit on interest deductibility is the IRC 163(j) limit on the amount of business interest that can be deducted each year. This limit is calculated as 30 percent of adjusted taxable income, which prior to the 2022 tax year closely resembled earnings before interest, taxes, depreciation, and amortization (EBITDA). However, starting with the 2022 tax year adjusted taxable income excludes depreciation and amortization, becoming EBIT. This should result in a lower limit on the amount of interest expense that can be deducted each year. Any interest expense exceeding this annual limit can be carried forward to future years.

Determining if an Arrangement Is Debt or Equity for Federal Income Tax Purposes

Classifying an arrangement as debt or equity is made on a case-by-case basis depending on the facts and circumstances of a given agreement. While there is currently little guidance in this area beyond case law, the Internal Revenue Service (IRS) has issued a list of factors to consider when questioning whether something is debt or equity. (Keep in mind, however, that the IRS states not one factor is conclusive.) The factors include whether:

• An agreement contains an unconditional promise to pay a sum certain on demand or at maturity,
• A lender can enforce the payment of principal and interest by the borrower, and
• A borrower is thinly capitalized.

The courts have also established a broader — but similar — list of factors to consider when determining whether an instrument should be treated as debt or equity. Both the IRS and the courts have generally placed more weight on whether an instrument provides for the rights and remedies of a creditor, whether the parties intend to establish a debtor-creditor relationship, and if the intent is economically feasible. Some factors include:

• Participation in management (as a result of advances),
• Identity of interest between creditor and stockholder,
• Thinness of capital structure in relation to debt, and
• Ability of a corporation to obtain credit from outside sources.

For international companies, the characterization of debt or equity when considered in a cross-border funding arrangement is important, as withholding tax rates may apply to interest payments and may differ from tax rates applied to dividends. Further, withholding tax obligations occurs when a cash payment is made. If you have a cross-border arrangement, it is crucial to know if you have debt or equity on your hands.

Special Rules Related to Payment-in-Kind

Once it is determined that an agreement should be classified as debt for U.S. federal income tax purposes, some borrowers may prefer to set aside interest payments or pay interest with securities, which is often referred to as payment-in-kind (PIK). This is generally done to preserve cash flow for operations and growth of the business. When a borrower chooses this route, U.S. federal income tax rules will impute an interest payment to the lender.

While using a PIK mechanism will not automatically result in the debt being recharacterized as equity for federal income tax purposes, it can support viewing the instrument as equity.

Limits to Deductible Debt Interest

There are limitations that can apply to interest deductibility. As noted above, IRC 163(j) limits deductibility of business interest; for a corporation, this is deemed to be all interest regardless of use. Another provision that can result in interest deductibility limitation is IRC 163(l), which applies to certain convertible notes and similar instruments held by corporations.

For cannabis operators, it is important to consider that IRC 280E disallows interest deductions. Hence, it is highly detrimental for cannabis operators to issue debt from entities that are cannabis plant-touching.

How We Can Help

Due to the nature of the debt versus equity analysis, companies thinking about fundraising should plan on how they intend to perform the raise and whether to have the raise treated as equity or debt. If debt classification is desired, a borrower should take the steps needed to strengthen the facts of the transaction to support the arrangement as a debt instrument.

MGO’s dedicated tax team has extensive experience advising companies across industries on capital-raising, debt refinancing and restructuring, recapitalizations, and other tax transactions. If you are planning to fundraise, or you are currently in the process of conducting a debt versus equity analysis, contact us today.

The post Raising Capital: What You Need to Know About Debt Versus Equity Tax Implications appeared first on MGO CPA | Tax, Audit, and Consulting Services.

• Increasing Internal Revenue Service (IRS) budget
• Implementing a corporate tax minimum
• Instituting and increasing tax credits focused on investing in green technologies

Notable items that were not addressed in the IRA include removing the $10,000 SALT cap and mandatory capitalization of research and development (R&D) expenses, both provisions of the Tax Cuts and Jobs Act of 2017.

The bill is over 300 pages in length with a number of wide-ranging components. In the following summary we’ll provide the key points that will be affecting taxpayers in the coming years.

Additional Funding to the IRS for Tax Enforcement

One of the most talked-about provisions involves increased funding for the IRS.

Key Details:

• Approximately $80 billion in funding over the next 10 years for tax services, operations support, business system modernization, and enforcement
  • Enforcement – $46 billion
  • Operations support – $25 billion
  • Business systems modernization – $5 billion
  • Taxpayer services – $3 billion
• An estimated $124 to $200 billion will be generated from enforcement and compliance efforts
• Enforcement is focused on taxpayers – both corporate and non-corporate – with income greater than $400,000

Extension of the Business Loss Limitation of Noncorporate Taxpayers

The IRA extends the excess business loss limitation for noncorporate taxpayers.

Key Details:

• Two year extension on IRC Sec. 461(l) until December 31, 2028
• IRC Sec. 461(l) limits noncorporate taxpayers from deducting business losses above thresholds that are annually indexed for inflation
• These limits are $540,000 for married filing jointly and $270,000 for single and married filing single for the 2022 tax year
• Suspended amounts are converted to net operating losses and may be able to be used in subsequent years

Excise Tax on Repurchases of Corporate Stock

The IRA includes a 1% excise tax on stock repurchases by domestic public companies listed on an established securities market. The tax applies to repurchases executed after December 31st, 2022.

Key Details:

• 1% excise tax on the full market value (FMV) of stock repurchased by publicly traded US corporations
• Will impact redemptions and certain acquisitions and repurchases of publicly traded foreign corporation stock
• Not an income tax for purposes of ASC 740
• Includes special rules for “applicable foreign corporations” and “surrogate foreign corporations”
• Notable exceptions:
  • Stock is contributed to employer sponsored retirement plan
  • Stock repurchase is part of a corporate reorganization
  • Total value of stock repurchased during the taxable year does not exceed $1 million
  • Repurchase by securities dealer in ordinary course of business
  • If the repurchase qualifies as a dividend
  • If the repurchase is by a regulated investment company (RIC) or a real estate investment trust (REIT)

15% Corporate Alternative Minimum Tax

The IRA reinstates the corporate alternative minimum tax (AMT) for large corporations, which had been previously eliminated by the Trump Administration’s Tax Cuts and Jobs Act.

Two key elements to note is that this revised AMT only impacts corporations with annual profits exceeding $1 billion, and includes carve-outs for certain manufacturers and subsidiaries of private equity firms.

Key Details:

• 15% tax on adjusted financial statement income (i.e., this would be a book minimum tax)
• Affects tax years beginning after December 31, 2022
• Applies to corporations with profits over $1 billion based off adjusted financial income
• For US corporations with foreign parents, it would apply to income earned in the US of $100 million or more of average annual earnings in three prior years and where the overall international financial reporting group has income of $1 billion or more
• Treatment of split offs remains uncertain. Even though these are tax-free reorganizations for tax purposes, gain is recorded for financial accounting purposes
• Joint Committee on Taxation expects that this new tax would apply to only about 150 corporate taxpayers, approximately equal to 30% of the Fortune 500

Tax Credit Additions and Modifications

A significant number of provisions add or enhance credits and incentives that pertain to domestic research and green energy initiatives. Noteworthy changes include:

Increased Small Business Payroll Tax Credits for Research Activities:

• Qualified payroll tax credit for increasing research activities raised from $250,000 to $500,000
  • First $250,000 will be applied against the FICA payroll tax liability. Second $250,000 will be applied against the employer portion of Medicare payroll tax.
  • Applies for taxable years beginning after December 31, 2022
  • Limited to tax imposed for calendar quarter with unused amounts being carried forward
• Qualifying small businesses are required to have less than $5 million in gross receipts in current year and no gross receipts prior to the 5 year period ending with the current year

Green Initiative Tax Credits and Incentives:

• Credits for purchasing new and previously-owned clean vehicles
• Extension of IRC Sec. 45L – New Energy Efficient Home Credit – extended to qualified new energy efficient homes acquired before January 1, 2033. Increase value of available credit for single-family homes to $2,500 and modified the credit available for multi-family homes.
• Extension, increase, and modifications to IRC Sec. 25C nonbusiness energy property credit
• Extension and modification of IRC Sec. 25D residential clean energy credit
• IRC Sec. 48 energy credit for businesses and investors
  • Expansion of qualifying property, extension of credit including phasedown and phaseout rules, and introduction of incentives
• Credit for producing energy from renewable sources (IRC Sec. 45)
  • Retroactive for facilities placed in service after December 31, 2021
  • Extends beginning of construction deadline to projects beginning construction before January 1, 2025 including solar energy facilities
• Increased energy credit for solar and wind facilities in certain low-income communities
• New credit for clean hydrogen production
• New credit for zero-emission nuclear power
• Extension of incentives for biodiesel, renewal diesel, and alternative fuels
• Extension of biofuel producer credit
• New income and excise tax credits allowed for sustainable aviation fuel
• Modification of IRC Sec. 179D – Energy Efficient Commercial Buildings Deductions
  • Modification of building qualifications
  • Deduction increased from $1.88 per square foot to up to $5 per qualified square foot
• Changes in depreciation for certain green energy properties

Final Thoughts

The Inflation Reduction Act should have wide-ranging impacts on taxpayers, especially large corporations and high-net-worth individuals. In the coming weeks our tax leaders will dive into the specifics of the legislation, outline immediate and long-term impacts, and provide tax-planning strategies and considerations.

The post Key Tax Highlights from the Inflation Reduction Act appeared first on MGO CPA | Tax, Audit, and Consulting Services.

Employee Retention Tax Credit

The employee retention tax credit (ERTC) is a refundable tax credit created by the Coronavirus Aid, Relief and Economic Security (CARES) Act, to encourage businesses to keep employees on their payroll. For 2020, the credit is 70% of up to $10,000 in wages paid by an employer whose business was fully or partially suspended because of COVID-19 or whose gross receipts declined by more than 50%

For 2021, an employer can receive 70 percent of the first $10,000 of qualified wages paid per employee in each qualifying quarter. The credit applies to wages paid from March 13, 2020, through December 31, 2021. And the cost of employer-paid health benefits can be considered part of employees’ qualified wages.

It’s an attractive credit if you qualify.

Eligible Businesses

The credit applies to all employers regardless of size, including tax exempt organizations that had a full or partial shutdown because of a government order limiting commerce due to COVID-19 during 2020 or 2021. With the exceptions of state and local governments or small businesses that take Small Business Administration loans, this credit is available to almost everyone.

Of course, there is some fine print:

• To qualify, gross receipts must have declined more than 50 percent during a 2020 or 2021 calendar quarter, when compared to the same quarter in the prior year.
• For employers with 100 or fewer full-time employees, all employee wages qualify for the credit, whether the employer is open for business or shutdown.
• For employers with more than 100 full-time employees, qualified wages are wages paid to employees when they are not providing services due to COVID-19-related circumstances.

One bright point about the ERTC is that employers can be immediately reimbursed for the credit by reducing the amount of payroll taxes they would usually have withheld from employees’ wages. That was a nice touch by the IRS.

Retroactive Claims for the ERTC

Although it appears the IRS tried to make this as easy as possible, you may still need a tax professional to sort it out. For instance, if your business had a substantial decline in gross receipts but has now recovered, you can still claim the credit for the difficult period.

Retroactive claims for refunds will probably be delayed because currently everything is delayed at the IRS. The credit can be claimed on amended payroll tax returns as long as the statute of limitations remains open, which is three years from the date of filing. So you have some time to claim the credit, but why wait?

Keep December 2021 in Mind

The economy is in a state of change, and it is fair to say that we are once again in uncharted territory. On the positive side, there seems to be significant resources and support for businesses from both government and consumers. You and your tax professional should keep your eyes open for credits and benefits to make sure you don’t miss any opportunities.

The ERTC expires in December 2021. Though it may be difficult to think about year-end in the middle of the summer, you’ll want to figure out your position on this credit before December. A tax professional can help you understand the ERTC and help you decide on your next step.

The post Claiming the Employee Retention Credit Retroactively appeared first on MGO CPA | Tax, Audit, and Consulting Services.

SOX was established to provide additional auditing and financial regulations for publicly held companies to address the failures in corporate governance. Primarily it sets forth a requirement that the governing board, through the use of an audit committee, fulfill its corporate governance and oversight responsibilities for financial reporting by implementing a system that includes internal controls, risk management, and internal and external audit functions.

Governments experience challenges and oversight responsibility similar to those encountered by corporate America. Governance risks can be mitigated by applying the provisions of SOX to the public sector.

Some states and local governments have adopted similar requirements to SOX but, unfortunately, in many cases only after cataclysmic events have already taken place. In California, we only need to look back at the bankruptcy of Orange County and the securities fraud investigation surrounding the City of San Diego as examples of audit committees that were established in response to a breakdown in governance.

Taking Your Audit Committee on the Right Mission

Governments typically establish audit committees for a number of reasons, which include addressing the risk of fraud, improving audit capabilities, strengthening internal controls, and using it as a tool that increases accountability and transparency. As a result, the mission of the audit committee often includes responsibility for:

• Oversight of the external audit.
• Oversight of the internal audit function.
• Oversight for internal controls and risk management.

Chart(er) Your Course

Most successful audit committees are created by a formal mandate by the governing board and, in some cases, a voter-approved charter. Mandates establish the mission of the committee and define the responsibilities and activities that the audit committee is expected to accomplish. A wide variety of items can be included in the mandate.

Creating the governing board’s resolution is the first step on the road to your audit committee’s success.

Follow the leader(ship)

In practice we see a combination of these attributes, ranging from the full board acting as the audit committee, committees with one or more independent outsiders appointed by the board, and/or members from management and combinations of all of the above. While there are advantages and disadvantages for all of these approaches, each government needs to evaluate how to work within their own governance structure to best arrive at the most workable solution.

Strike the right balance between cost and risk

The overriding responsibility of the audit committee is to perform its oversight responsibilities related to the significant risks associated with the financial reporting and operational results of the government. This is followed closely by the need to work with management, internal auditors and the external auditors in identifying and implementing the appropriate internal controls that will reduce those risks to an acceptable level. While the cost of establishing and enforcing a level of zero risk tolerance is cost prohibitive, the audit committee should be looking for the proper balance of cost and a reduced level of risk.

Engage your audit committee with regular meetings

Depending on the complexity and activity levels of the government, the audit committee should meet at least three times a year. In larger governments, with robust systems and reporting, it’s a good practice to call for monthly meetings with the ability to add special purpose meetings as needed. These meetings should address the following:

External Auditors

• Confirmation of the annual financial statement and compliance audit, including scope and timing.
• Ad hoc reporting on issues where potential fraud or abuse have been identified.
• Receipt and review of the final financial statements and auditor’s reports
• Opinion on the financial statements and compliance audit;
• Internal controls over financial reporting and grants; and
• Violations of laws and regulations.

Internal Auditors

• Review of updated risk assessments over identified areas of risk.
• Review of annual audit plan, including status of the prior year’s efforts.
• Status reports of ongoing and completed audits.
• Reporting of the status of corrective action plans, including conditions noted, management’s response, steps taken to correct the conditions, expected time-line for full implementation of the corrective action and planned timing to verify the corrective action plan has been implemented.

Establish resources that are at the ready

Audit committees should be given the resources and authority to acquire additional expertise as and when required. These resources may include, but are not limited to, technical experts in accounting, auditing, operations, debt offerings, securities lending, cybersecurity, and legal services.

Taking Extra Steps Now Will Save Time Later

While no system can guarantee breakdowns will not occur, a properly established audit committee will demonstrate for both elected officials and executive management that on behalf of their constituents they have taken the proper steps to reduce these risks to an acceptable tolerance level. History has shown over and over again that breakdowns in governance lead to fraud, waste and abuse. Don’t be deluded into thinking that it will never happen to your organization. Make sure it doesn’t happen on your watch.

The post Why You Need an Audit Committee appeared first on MGO CPA | Tax, Audit, and Consulting Services.

1. The corporate tax rate was permanently reduced from 35 percent to 21 percent.

The top corporate tax rate has been permanently reduced from 35 percent to a flat rate of 21 percent, beginning in 2018. Unlike all other provisions in the new law, including tax breaks for individuals, the new corporate tax rate provision does not expire.

2. There’s a tax break for owners of pass-through entities.

The new law provides owners of pass-through businesses — which include individuals, estates, and trusts — with a deduction of up to 20 percent of their domestic qualified business income, whether it is attributable to income earned through an S corporation, partnership, sole proprietorship, or disregarded entity. Without the new deduction, taxpayers would pay 2018 taxes on their share of qualified earnings at rates up to 37 percent. With the new 20 percent deduction, the tax rate on such income could be as low as 29.6 percent. It should again be noted that certain service industries are excluded from the preferential rate, unless taxable income is below $207,500 (for single filers) and $415,000 (for joint filers), under which the benefit of the deduction is phased out.

3. There might be huge tax benefits to changing your company’s current choice of entity.

Taxpayers should consider evaluating the choice of entity used to operate their businesses. The 21 percent reduced corporate tax rate may increase the popularity of corporations. However, factors such as the new 20 percent deduction for pass-through income, expected use of after-tax cash earnings, and potential exit values will significantly complicate these analyses. The potential after-tax cash benefits ultimately realized by owners could make choice-of-entity determinations one of the most important decisions taxpayers will now make.

4. There have been significant changes to the international tax system.

In connection with these changes, some U.S. shareholders who own stock in certain foreign corporations will have to pay a one-time “transition tax” on their share of accumulated overseas earnings. Other changes include a “participation exemption,” which is a 100 percent dividend-received deduction that permits certain domestic C corporations to receive dividends from their foreign subsidiaries without being taxed on such dividends when certain conditions are satisfied. There is also a new requirement that certain U.S. shareholders of controlled foreign corporations (CFCs) include in income their share of the “global intangible low-taxed income” of such CFCs. Finally, there are new measures to deter base erosion and promote U.S. production.

5. The corporate AMT and DPAD are dead, but Research Tax Credits live on.

The law repeals the Section 199 Domestic Production Activities Deduction (DPAD) and the corporate Alternative Minimum Tax (AMT) for tax years beginning after 2017. The Research Tax Credit was retained and is now more valuable given the reduction of the corporate tax rate from 35 percent to 21 percent.

6. They’ve scrapped NOL carrybacks and limited the use of carryforwards.

Previously, businesses were able to offset current taxable income by claiming net operating losses (NOLs), generally eligible for a two-year carryback and 20-year carryforward. Now NOLs for tax years ending after 2017 cannot be carried back, but can be indefinitely carried forward. In addition, NOLs for tax years beginning in 2018 will be subject to an 80 percent limitation. Companies will have to track their NOLs in different buckets and consider cost-recovery strategy on depreciable assets in applying the 80 percent limitation.

7. Tax reform’s impact on accounting methods may change when revenue is recognized, but new provisions could also lead to temporary and permanent tax benefits.

Under the new law, accrual basis taxpayers must now recognize income no later than the taxable year in which such income is taken into account as revenue in an applicable financial statement.

However, new provisions also provide favorable methods of accounting that were not previously available. That, coupled with the reduction in tax rates, creates a favorable and unique environment for filing accounting method changes.

There are many method changes still available for the 2017 tax year. Taxpayers should evaluate current accounting methods to identify any actionable opportunities to accelerate deductions and defer income for the 2017 tax year, which could result in significant tax savings.

8. There are new rules for bonus depreciation and full expensing on new and used property.

The new tax law allows a 100 percent first-year deduction — up from 50 percent — for the adjusted basis of qualifying assets placed in service after Sept. 27, 2017, and before Jan. 1, 2023, with a gradual phase down in subsequent years before sunsetting after 2026. The definition of qualifying property was also expanded to include used property purchased in an arm’s-length transaction. Businesses should pay close attention to any qualifying asset acquisitions made during the fourth quarter of 2017, as the full expensing can be taken on the 2017 return if the property was acquired and placed in service after Sept. 27, 2017.

Additionally, under new tax law, taxpayers may now deduct up to $1 million under Section 179 for properties placed in service beginning in 2018 — double the previous allowable amount. The phase-out threshold is increased to $2.5 million and will be indexed for inflation in future years and the types of qualifying property has been expanded.

9. The availability of the cash method of accounting expanded for small businesses.

Beginning in 2018, the average annual gross receipts threshold for businesses to use the cash method increases from $5 million to $25 million. Additionally, small businesses who meet the $25 million gross receipts threshold are not required to account for inventories and are exempt from the uniform capitalization rules. The $25 million is indexed for inflation for tax years beginning after 2018.

10. Now is the time to assess total rewards strategies.

Tax reform significantly impacts various components of an employer’s total compensation program — namely the expansion of the $1 million deduction cap on pay to covered employees; disallowed deductions for transportation fringe benefits provided to employees; income inclusion for employer-paid moving expenses; further deduction limitations on certain meal and entertainment expenses; and a two-year tax credit for employer-paid family and medical leave programs. As the IRS releases guidance, employers must immediately modify their payroll systems to reflect tax reform changes impacting individual taxpayers.

For more information about the impact of tax reform on the Government Contracting industry, please reach out to us.

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