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Baker Tilly’s inaugural Tax Strategy Playbook discusses the outlook for the new year’s tax policy landscape, outlines how current tax policy impacts your business and discusses opportunities for tax planning and mitigating inherent risks. We delve into various areas within federal, global and state and local tax. Our Tax Strategy Playbook covers significant federal tax updates, such as the how to maximize energy credits, leverage IRA incentives and navigate the Inflation Reduction Act's benefits. Discover key strategies in our Tax Strategy Playbook.
The information provided here is of a general nature and is not intended to address the specific circumstances of any individual or entity. In specific circumstances, the services of a professional should be sought. Tax information, if any, contained in this communication was not intended or written to be used by any person for the purpose of avoiding penalties, nor should such information be construed as an opinion upon which any person may rely. The intended recipients of this communication and any attachments are not subject to any limitation on the disclosure of the tax treatment or tax structure of any transaction or matter that is the subject of this communication and any attachments. Baker Tilly US, LLP does not practice law, nor does it give legal advice, and makes no representations regarding questions of legal interpretation. 

Maximize energy credits, leverage IRA incentives and navigate the Inflation Reduction Act's benefits. Discover key strategies in our Tax Strategy Playbook.

ESG and sustainability 

Inflation Reduction Act Tax Credit Solutions

Actionable federal tax insights for energy credits and incentives in 2024

The IRS recently issued Notice 2023-38 (Notice), providing initial guidance on how taxpayers can satisfy the domestic content requirements and qualify for one of the bonus energy credit structures under the Inflation Reduction Act (IRA). The Notice additionally announces forthcoming proposed regulations (Regulations) the Treasury Department will release to expand on this guidance.  Key takeaways Up to an additional 10% “bonus” investment or production tax credit amount is available to taxpayers who certify that any steel, iron or manufactured product that is a component of their qualifying clean energy project was produced in the United States.  The Notice provides guidance on what parts or materials in the supply chain must be analyzed in order to determine if a project satisfies the domestic content requirement. Steel or iron is defined as construction materials made primarily of steel or iron that are structural in function. The cost of manufactured products and components is defined to include only direct materials and direct labor costs. The United States is defined as the several States, the District of Columbia and territories. There is no “foreign equivalent” as is found in the Buy American Act. The Notice provides several definitions, rules and related recordkeeping and certification requirements in advance of the Regulations’ release.  The IRS and Treasury anticipate the Regulations will apply to taxable years ending after May 12, 2023. Taxpayers can rely on the Notice in the interim. Background An annual per kilowatt hour production tax credit (PTC) under current section 45 and new section 45Y is available for electricity a taxpayer produces from renewable resources. Current section 48 and new section 48E provide an upfront investment tax credit (ITC) for the “energy percentage” of the basis of energy property a taxpayer places in service during a taxable year. The PTC and ITC amounts are determined using baseline figures that can be increased if taxpayers satisfy certain additional requirements, including the project paying prevailing wages, employing apprentices, using domestically produced content and being located within an energy community. Find out how your organization can leverage IRA tax credits to save as much as 50% or more on qualifying project costs. The PTC’s baseline amount of 0.3 cents per kilowatt hour is increased by 10% if the taxpayer certifies that any steel, iron or manufactured product that is a component of the qualifying facility at which the electricity is produced was made in the U.S. The ITC’s baseline percentage of 6% is increased by 2% if the taxpayer makes the same certification with respect to any steel, iron or manufactured product that is a component of the qualifying energy property (10% if the aforementioned prevailing wage and apprenticeship requirements, or a specified alternate requirement is met).  Manufactured Products, defined below, are deemed to have been produced in the U.S. if a percentage of the products’ total costs is attributable to manufactured products that are mined, produced or manufactured in the U.S. For projects which begin construction prior to 2025, this percentage threshold is 40% (20% in the case of an offshore wind facility). The percentage increases by 5% annually up to 55% in the case of projects which begin construction after 2026 (offshore wind facilities are covered by a separate interval increase). For purposes of testing whether this requirement has been met (a detailed discussion of the Manufactured Products Requirement follows), this percentage threshold is referred to as the Adjusted Percentage.       The Notice Qualifying for the domestic content bonus The Notice provides guidance on how to qualify for the domestic content bonus credit and how to certify compliance with the requirements. The Domestic Content Requirement applies to: “(1) a qualified facility under sections 45 and 45Y; (2) an energy project under section 48; or (3) a qualified investment with respect to a qualified facility or energy storage technology under section 48E (Applicable Project). To satisfy the Domestic Content Requirement, a taxpayer must certify to the Secretary of the Treasury for each Applicable Project that any steel, iron or Manufactured Product which is a component of the Applicable Project was produced in the United States.” To claim a domestic content bonus credit amount, a taxpayer must satisfy the Domestic Content Requirement for each Applicable Project and must timely submit certification to the IRS.  There are two overall requirements to satisfying the Domestic Content Requirement; the Steel or Iron Requirement and the Manufactured Products Requirement. Both the Steel or Iron Requirement and the Manufactured Products Requirement are defined below. Components Compliance with the domestic content bonus credit rules is determined by analyzing components of an Applicable Project. The relevant components include the project’s parts and its subparts. The analysis begins with the identification of the Applicable Project, defined above. The first subpart of the Applicable Project is the Applicable Project Component, defined as any article, material or supply, whether manufactured or unmanufactured, that is directly incorporated into an Applicable Project. An Applicable Project Component is what may qualify as steel, iron, or a Manufactured Product. The next subpart of an Applicable Project Component is a Manufactured Product Component, defined as any article, material or supply, whether manufactured or unmanufactured, that is directly incorporated into an Applicable Project Component that is a Manufactured Product.  Critically, the above instructs the taxpayer how far down the supply chain an analysis must be done. For example, if a contractor is constructing an Applicable Project, an analysis must be done of the products the contractor incorporates into the Applicable Project; these products are the Applicable Project Components. A further analysis must be done into the products acquired by the contractor from a supplier. The parts a supplier uses to construct a product sold to the contractor are the Manufactured Product Components. Applicable Project Components and Manufactured Product Components must be divided into one of two categories: (1) steel or iron or (2) Manufactured Products. The steel or iron group includes Applicable Project Components that are construction materials made primarily of steel or iron and are structural in function. The steel or iron group does not include steel or iron used in Manufactured Product Components or subcomponents of Manufactured Product Components. For example, items such as nuts and bolts are primarily made of steel or iron but are not structural in function, so they are not put into the steel or iron category. A Manufactured Product is defined as an item produced as a result of the manufacturing process. Manufacturing Process is defined as the application of processes to alter the form or function of materials or of elements of a product in a manner adding value and transforming those materials or elements so that they represent a new item functionally different from that which would result from mere assembly of the elements or materials. Definitions The Notice introduces several definitions, including those to cover the components of a project, the various stages of the production process, mining, and provides that the U.S. includes the several states, the District of Columbia, the Commonwealth of Puerto Rico, Guam, American Samoa, the U.S. Virgin Islands, and the Commonwealth of the Northern Mariana Islands. Steel/iron requirement All steel or iron must be manufactured in the U.S. in order to satisfy the Steel or Iron Requirement. Steel or iron components of a qualifying project will be considered manufactured in the U.S. if all manufacturing processes regarding the Applicable Project Components take place within the U.S., with the exception of metallurgical processes involving the refinement of steel additives.  Manufactured Products Requirement The Manufactured Products Requirement is met if all Applicable Project Components that are Manufactured Products are produced in the U.S. or are deemed to be produced in the U.S. All Applicable Project Components that are Manufactured Products are deemed to be produced in the U.S. if the Adjusted Percentage Rule is satisfied. A Manufactured Product is considered produced in the U.S. if: (1) all of the manufacturing processes for the Manufactured Product take place in the U.S. and (2) all of the Manufactured Product Components of the Manufactured Product are of U.S. origin. A Manufactured Product Component is considered to be of U.S. origin if it is manufactured in the United States, regardless of the origin of its subcomponents. This is key because it limits how far down the supply chain an analysis must be made. The Adjusted Percentage Rule compares a project’s Domestic Cost Percentage (defined below) to its Adjusted Percentage. If the Domestic Cost Percentage for an Applicable Project equals or exceeds the Adjusted Percentage that applies to qualify for the domestic content bonus credit, then the applicable project satisfies the Adjusted Percentage Rule. The Domestic Cost Percentage is a project’s Domestic Manufactured Products and Components Cost divided by its total Manufactured Products Cost. The Domestic Manufactured Products and Components Cost is the sum of:  (1) U.S. Manufactured Products that are Applicable Project Components, and  (2) Manufactured Product Components of non-U.S. Manufactured Products that are manufactured, mined or produced in the United States. A Manufactured Product Component that is manufactured is a U.S. Component if it is manufactured or produced in the United States, regardless of the origin of its subcomponents. A Manufactured Product Component that is not manufactured is a U.S. Component if it is mined in the United States. For determining the Domestic Manufactured Products and Components Cost, the cost of a U.S. Manufactured Product or U.S. Component includes only direct costs as defined in the Treasury Regulations covering uniform cost capitalization (specifically, section 1.263A-1(e)(2)(i)). This includes direct materials and direct labor costs. Direct costs, including direct labor costs, of incorporating the Applicable Project Components into the Applicable Project are not counted in the Domestic Manufactured Products and Components Cost. The Total Manufactured Products Cost for an Applicable Project is the sum of the costs of each Applicable Project Component that is a Manufactured Product. The same cost rules as for Domestic Manufactured Products and Components apply, only direct costs. Classification safe harbor The Notice provides a non-exhaustive list of common components that may be found in utility-scale photovoltaic system, land-based wind facility, offshore wind facility and battery storage technology projects and classifies them as needing to meet the Steel//iron or Manufactured Products Requirement to provide taxpayers with helpful clarity.  Retrofitted projects Leveraging previous IRS guidance, the Notice provides that retrofitted projects can qualify as having been originally placed in service despite utilizing used property, so long as the fair market value of the used property does not exceed 20% of the project’s total value (80/20 Rule). A project can in turn qualify for the domestic content bonus credit if it is placed in service after Dec. 31, 2022, meets the 80/20 Rule and the other requirements the Notice sets forth. Certification requirement A taxpayer will certify its qualifying project meets the Domestic Content Requirement by attaching a statement (signed by a person with legal authority to bind the taxpayer under penalty of perjury) to its tax return for the first year in which a domestic content bonus credit is claimed, and a copy of the statement must be attached to each subsequent year’s return on which the credit is claimed. The statement must include several additional items of information, including but not limited to: Whether the project is a qualified facility, energy project or energy storage technology The specific type of project The geographic coordinates and address of the project Substantiation requirement Taxpayers claiming the bonus credit amounts must follow the recordkeeping requirements under section 6001, by maintaining documentation necessary to substantiate that their project has met the domestic content requirements.   For more information on this topic, or to learn how a Baker Tilly specialist can help, contact our team. 
The information provided here is of a general nature and is not intended to address the specific circumstances of any individual or entity. In specific circumstances, the services of a professional should be sought. Tax information, if any, contained in this communication was not intended or written to be used by any person for the purpose of avoiding penalties, nor should such information be construed as an opinion upon which any person may rely. The intended recipients of this communication and any attachments are not subject to any limitation on the disclosure of the tax treatment or tax structure of any transaction or matter that is the subject of this communication and any attachments.

Notice 2023-38 provides initial guidance on how taxpayers can satisfy the domestic content requirements and qualify for one of the bonus energy credit structures under the Inflation Reduction Act.

Energy

Prevailing Wage & Apprenticeship Bonus Credit Solutions

Bonus energy credit domestic content requirements: Preliminary IRS guidance

Three separate credits may now apply to electric or alternative motor vehicles. The credits apply to electric vehicles newly acquired for personal or nonbusiness use; electric vehicles newly acquired for business use; new qualified fuel cell motor vehicles; and used clean vehicles.  New qualified plug-in electric drive motor vehicles (section 30D)  Although the electric vehicle tax credit for newly purchased cars existed prior to the enactment of the Inflation Reduction Act (IRA), the IRA made changes to the credit. Vehicles placed in service prior to Jan. 1, 2023, are referred to as new qualified plug-in electric drive motor vehicles and those placed in service after Dec. 31, 2022, are referred to as new clean vehicles.  The tax credit under section 30D is calculated in one of two ways. The first method will apply to all cars purchased and placed in service prior to the date the Treasury Department and Internal Revenue Service (IRS) issue guidance regarding the critical mineral and battery component requirements. The Treasury and IRS anticipate issuing this proposed guidance in March 2023. Under the first method, which applies until guidance regarding the critical mineral and battery component requirements are published, there is a base credit of $2,500 plus an additional credit amount of $417 for a car with a battery capacity of at least 5 kilowatt-hours (kWh) and an additional $417 for each kilowatt- hour of capacity in excess of 5 kWh. The maximum credit allowed based on the battery capacity is $5,000 for a total maximum credit of $7,500. Any car placed in service after Dec. 31, 2022, must have capacity of at least 7 kWh so the minimum credit for a qualifying car after Dec. 31, 2022, will be $3,751 ($2,500 + 3 * $417).  Once critical mineral and battery component requirements are published, the credit equals $3,750 for a car that satisfies the critical mineral requirements plus $3,750 for a car that satisfies the battery component requirements. The critical mineral and battery component requirements will apply to vehicles acquired after the date guidance is published by the Treasury and IRS. If a vehicle is purchased prior to the guidance being issued and is received from the dealer after guidance is issued, the critical mineral and battery component requirements will apply to that vehicle.  An electric vehicle eligible for a credit if placed in service prior to Jan. 1, 2023, is defined as a new qualified plug-in electric drive motor vehicle. Generally, a vehicle is treated as placed in service on the date the taxpayer takes delivery of the vehicle. A new qualified plug-in electric drive motor vehicle is a motor vehicle:  the original use of which commences with the taxpayer,  which is acquired for use or lease by the taxpayer and not for resale,  which is made by a manufacturer,  which is treated as a motor vehicle for purposes of Title II of the Clean Air Act,  which has a gross vehicle weight rating of less than 14,000 pounds,  which is propelled to a significant extent by an electric motor which draws electricity from a battery which has a capacity of not less than 4 kWh, is capable of being recharged from an external source of electricity, and  the final assembly of which occurs in North America.  An electric vehicle eligible for a credit if placed in service after Dec. 31, 2022, is defined as a new clean vehicle. Parts 1, 2, 4, 5 and 7 of the definition of a new qualified plug-in electric drive motor vehicle are the same for the definition of a new clean vehicle. In addition, for a new clean vehicle, the vehicle must be made by a qualified manufacturer and is a vehicle which is propelled to a significant extent by an electric motor which draws electricity from a battery that has a capacity of not less than 7 kWh and is capable of being recharged from an external source of electricity. Additionally, a new clean vehicle is a vehicle for which the person who sells any vehicle to the taxpayer furnishes a report to the taxpayer and to the Treasury Secretary containing specified information. Two items required to be in the report are the purchasing taxpayer’s taxpayer identification number and verification that the purchasing taxpayer is the original user of the new clean vehicle.  For any vehicle sold prior to Jan. 1, 2023, the eligible credit is phased out if the manufacturer of the vehicle sells at least 200,000 vehicles for use in the United States after Dec. 31, 2009. At a certain point the credit is completely phased out. This phase out rule applies only to vehicles purchased prior to Jan. 1, 2023. This rule is applied based on when the vehicle is purchased and not when the taxpayer takes delivery of the vehicle and places the vehicle in service.  Any taxpayer claiming the new clean vehicle credit for a vehicle placed in service after Dec. 31, 2022, will be subject to additional requirements. The taxpayer must report the vehicle identification number (VIN) on their tax return in order to claim the credit. The taxpayer may not claim the new clean vehicle credit if the taxpayer’s modified adjusted gross income (MAGI) for the taxable year in which the credit would be claimed or the immediately preceding taxable year exceeds a threshold amount (MAGI limitation). The threshold amount for taxpayers with a filing status of joint return or a surviving spouse return is $300,000. For taxpayers with a filing status of head of household, the threshold amount is $225,000, and for all other taxpayers, the threshold amount is $150,000. A new clean vehicle is not available for a credit if the manufacturer’s suggested retail price for the vehicle is in excess of the applicable limitation (MSRP limitation). The applicable limitation for vans, sports utility vehicles and pickup trucks is $80.000. The applicable limitation for any other vehicle is $55,000. The MSRP limitation is applied based on the manufacturer’s suggested retail price and is not dependent on the actual sales price.  The IRS issued frequently asked questions (FAQ) which can be found on the IRS’ website. The FAQ contains several helpful links, including: (1) a list of vehicles that manufacturers have indicated to the IRS meet the requirements to claim the new clean vehicle credit beginning Jan. 1, 2023, (2) a list of vehicles’ final assembly points that can be searched by VIN and (3) a list of qualified manufacturers.  The new clean vehicle credit may only be claimed to the extent of reported tax due by the taxpayer and cannot be refunded or carried forward. A taxpayer claiming the new clean vehicle credit must complete Form 8936 and attach the form to their federal income tax return. The VIN of the new clean vehicle must be included on Form 8936. The credit is available for vehicles purchased through the end of 2032.  A person selling a vehicle to a tax-exempt or governmental entity has the ability to claim a credit under section 30D. The seller will be treated as the taxpayer that placed the vehicle in service, but only if the seller clearly discloses to the tax-exempt or governmental entity the amount of any credit allowable with respect to such vehicle. The vehicle will be treated as of a character subject to an allowance for depreciation with regard to the seller. This rule applies only to vehicles placed in service before Jan. 1, 2024.  Credit for qualified commercial clean vehicles (section 45W)  A vehicle must be used in a trade or business to qualify as a qualified commercial clean vehicle. A qualified commercial clean vehicle is any vehicle which:  is made by a qualified manufacturer and is acquired for use or lease by the taxpayer and not for resale,  either: is treated as a motor vehicle for purposes of Title II of the Clean Air Act and is manufactured primarily for use on public streets, roads and highways, or is mobile machinery,  either: is propelled to a significant extent by an electric motor which draws electricity from a battery which has a capacity of not less than 15 kWh (or, in the case of a vehicle which has a gross vehicle weight rating of less than 14,000 pounds, 7 kWh) and is capable of being recharged from an external source of electricity, or is propelled by power derived from one or more cells which convert chemical energy directly into electricity by combining oxygen with hydrogen fuel and in the case of a passenger automobile or light truck, has received a certificate that the vehicle meets or exceeds certain emissions standards (new qualified fuel cell motor vehicle), and  is depreciable.  Generally, a car is depreciable if it is used in a trade or business. The credit for a qualified commercial clean vehicle is equal to the lesser of two amounts. First, 15% of the basis of such vehicle or 30% of the basis of such vehicle if the vehicle is not powered by a gasoline or diesel internal combustion engine. The second is the incremental cost of such vehicle. The overall credit cannot exceed $7,500 for a vehicle with a gross vehicle weight rating of less than 14,000 pounds or in the case of any other vehicle, the credit cannot exceed $40,000. The incremental cost of any qualified commercial clean vehicle is an amount equal to the excess of the purchase price for such vehicle over such price of a comparable vehicle. A comparable vehicle is any vehicle powered solely by a gasoline or diesel internal combustion engine and which is comparable in size and use to the qualified commercial clean vehicle. The Department of Energy analyzed the incremental cost for cars. Notice 2023-9 provides that the incremental cost of all street vehicles, other than compact car plug-in hybrid electric vehicles, that have a gross vehicle weight rating of less than 14,000 pounds will be greater than $7,500 in calendar year 2023. The incremental cost for compact car plug-in hybrid electric vehicles, which include minicompact and subcompact cars, is less than $7,500.  Several of the rules that apply to new clean vehicles also apply to qualified commercial clean vehicles. Exceptions are that the MAGI limitation and MSRP limitation do not apply to qualified commercial clean vehicles. No credit for a qualified commercial clean vehicle will be allowed for a vehicle acquired after Dec. 31, 2032.  Vehicles placed in service by a governmental entity, tax-exempt organization or an Indian Tribal government are eligible for the section 45W credit and do not need to be depreciable to qualify for the credit. The section 45W credit claimed by governmental entities, tax-exempt organizations or Indian Tribal governments are eligible for elective payment treatment. This means the credit will be treated as a tax payment by the entity to the federal government. This credit can also be transferred by the governmental entity or tax-exempt entity to the seller of the vehicle.  Previously owned clean vehicles (section 25E)  A previously owned clean vehicle is defined as a motor vehicle:  the model year of which is at least two years earlier than the calendar year in which the taxpayer acquires such vehicle,  the original use of which commences with a person other than the taxpayer,  which is acquired by the taxpayer in a qualified sale, and  which either: is made by a qualified manufacturer, is treated as a motor vehicle for purposes of Title II of the Clean Air Act, has a gross vehicle weight rating of less than 14,000 pounds, is propelled to a significant extent by an electric motor which draws electricity from a battery which has a capacity of not less than 7 kWh, and is capable of being recharged from an external source of electricity, and for which the seller provides the buyer a report; or qualifies as a new qualified fuel cell motor vehicle and has a gross vehicle weight rating of less than 14,000 pounds.  To be a qualified sale, the vehicle must be purchased from a dealer, for a sales price equal to or less than $25,000, and must be the first transfer since Aug. 16, 2022, other than to the original user of such vehicle. To be eligible for the previously owned clean vehicle credit, the buyer must:  be an individual,  purchase the vehicle for use and not for resale,  must not be claimed as a dependent on another taxpayer’s tax return, and  must not have been allowed a credit for a previously owned clean vehicle during the three-year period ending on the date the vehicle is purchased.  The credit allowed for the purchase of a previously owned clean vehicle equals the lesser of $4,000 or 30% of the sale price of the vehicle. Taxpayers are subject to a MAGI limitation similar to that for the purchase of new clean vehicles. If a taxpayer’s MAGI exceeds a threshold amount for the year of purchase or the immediately preceding tax year, then no credit for the purchase of a previously owned clean vehicle is allowed. The threshold amount for a taxpayer with a filing status of joint return or surviving spouse is $150,000. For a taxpayer with a filing status of head of household, the threshold amount is $112,500. For any other taxpayer, the threshold amount is $75,000.  In order to claim the previously owned clean vehicle credit, a taxpayer must attach Form 8936 to their tax return and include the VIN of the purchased vehicle on the form. The previously owned clean vehicle credit may only be used by a taxpayer to the extent the taxpayer has a reported tax due. The credit cannot be carried forward and the excess is not refundable.  To learn more about how these tax credits may affect you, please contact Chad Resner.
The information provided here is of a general nature and is not intended to address the specific circumstances of any individual or entity. In specific circumstances, the services of a professional should be sought. Tax information, if any, contained in this communication was not intended or written to be used by any person for the purpose of avoiding penalties, nor should such information be construed as an opinion upon which any person may rely. The intended recipients of this communication and any attachments are not subject to any limitation on the disclosure of the tax treatment or tax structure of any transaction or matter that is the subject of this communication and any attachments.

Explore how three different tax credits may apply to electric or alternative motor vehicles.

Electric vehicle tax credit update

For tax years beginning after Dec. 31, 2021, taxpayers may no longer take current deductions for research and experimental expenditures. Instead, these costs must be capitalized when paid or incurred.  As a result of this new research cost capitalization requirement, taxpayers will need to:  Identify costs requiring capitalization, and Change their tax accounting method for those costs. Additionally:  Companies preparing provisions for income taxes for their financial statements will need to account for the effects of capitalizing research costs.  Businesses with foreign subsidiaries will need to consider additional complications including potential changes to tax elections.  Taxpayers should consider state income tax implications of research cost capitalization, including reviewing state conformity to the federal capitalization requirement. Background For tax years beginning after Dec. 31, 2021, research and experimental expenditures must be capitalized when paid or incurred. Current deduction of these costs is no longer permitted.  Taxpayers now generally must deduct these costs ratably over a five-year period. Expenditures attributable to foreign research, however, must be amortized over a 15-year period. For this purpose, characterization of research as foreign research is based on the place activities are performed and not the residence of the party incurring the expense.  These newly effective rules were enacted by Congress back in 2017 with the Tax Cuts and Jobs Act (TCJA) revisions to section 174 of the federal tax code (the Code). Unfortunately, congressional initiatives toward delaying or repealing these changes in 2022 were fruitless. It does not appear likely that Congress will soon act to delay or repeal the taxpayer-unfavorable capitalization requirement, although repeal or deferral remains possible.  Identifying capitalized section 174 costs Taxpayers need to decide which of their costs are covered by the section 174 capitalization requirement. This process presents a challenge because (1) significant work may be required to make the determination, (2) many taxpayers have not previously established a process to track these costs, and (3) there are gray areas without clear guidance as to which costs must be capitalized.  Historically, taxpayers previously had little reason to categorize R&D costs as is now required. Consequently, many taxpayers do not have a methodology already in place.  Section 174 now specifies that no current deduction is allowed for research or experimental expenditures paid or incurred by the taxpayer in connection with the taxpayer’s trade or business. Regulations generally define those expenditures as representing research and development costs in the experimental or laboratory sense.  These are expenditures for activities intended to discover information that would eliminate uncertainty concerning the development or improvement of a product. Uncertainty exists if the information available to the taxpayer does not establish the capability or method for developing or improving the product or the appropriate design of the product. A product is defined as any pilot model, process, formula, invention, technique, patent or similar property, and includes products to be used by the taxpayer in its trade or business as well as products to be held for sale, lease or license.  Section 174 specifically identifies software development costs as research or experimental expenditures. Specific exclusions are provided for expenditures to acquire or improve land. Although expenditures for the acquisition or improvement of property subject to depreciation or depletion fall under another exception, the depreciation or depletion they produce is not excepted from the capitalization rule.  While there is limited IRS guidance outlining how to identify expenditures under section 174, taxpayers still need to calculate the amount to capitalize as well as document their efforts. Businesses should be prepared to allocate potentially significant time to those efforts. In addition to accounting and finance personnel, a company may need input from other personnel. For example, the participation of a company’s engineering, facilities, information technology and/or management personnel groups may be required.  A detailed analysis of both direct and indirect costs generally will be required. If the company has performed federal research credit calculations under section 41, those should be considered. To categorize an expenditure as included in the research credit calculation requires meeting tests generally more stringent than the section 174 standard. As a result, costs capitalized under section 174 are likely to exceed those included in the section 41 research credit calculation.   Research and development costs reported for financial accounting purposes should be considered as well. These costs may include direct and indirect costs. Note, however, that relevant financial accounting standards such as those under generally accepted accounting principles (GAAP) in ASC 730, Research and Development, differ from the standards set out for tax purposes in sections 41 and 174. For example, the GAAP rules do not rely on the tax rules’ “uncertainty” standard.  Once expenditures capitalized under section 174 have been identified, those expenditures must further be categorized as domestic or foreign in order to apply the appropriate five- or 15-year amortization period. This classification will be particularly relevant for third-party contract research. Accounting method change Complying with the newly effective section 174 capitalization rule requires a tax accounting method change. The IRS has granted automatic permission to make this change under a Revenue Procedure issued in December 2022 and modified in January 2023.  Timely action will be required to implement method changes under the new procedures. They require disclosure of the amount of capitalized expenditures, and computing the amount requires a potentially complex and time-consuming effort as discussed above. The accounting method change procedures do not provide guidance for determining which costs must be capitalized.  The newly required accounting method for research and experimental costs involves capitalization and amortization. The amortization period is five years for U.S. research activities and 15 years for foreign research activities. Amortization expense in the year the costs are incurred is determined using the midyear convention and ratable (straight-line) amortization over the relevant period. For example, this convention would result in a 2022 deduction of 10% of the capitalized U.S. research expenditures paid or incurred in 2022.  The filings required to make the accounting method change vary depending on the taxpayer’s circumstances. To change for the first tax year for which the capitalization requirement applies (i.e., beginning after Dec. 31, 2021), filing Form 3115 (Application for Change in Accounting Method) with the IRS is not required. Instead, a statement describing the types of capitalized costs must be filed with the taxpayer’s federal income tax return for the year.  To make the change in a later tax year would require filing Form 3115 with the IRS, even though the IRS’ consent to the method change would remain automatic. Additionally, special procedures are provided for taxpayers who have already filed a federal income tax return for a short taxable year beginning after Dec. 31, 2021 (e.g., a short taxable year beginning Jan. 1, 2022, and ending July 30, 2022).  Tax provisions – ASC 740 A corporation’s tax provision applies the tax rules in effect at year-end and is not based on subsequent changes made to the tax rules. Since Congress did not repeal or delay the research costs capitalization rule prior to Dec. 31, 2022 year-end, the tax provision for a corporation’s year ended Dec. 31, 2022, must consider the section 174 capitalization rule’s effects. Those effects may include, for example, recording deferred tax assets as a result of the newly required cost capitalization or utilization of a deferred tax asset recorded prior to 2022 due to the reduction in tax deductions for research costs incurred in 2022.  Under U.S. GAAP, if Congress subsequently repeals or changes the law, the impacts will be recorded in that subsequent period. This means that even if the capitalization requirement is repealed in 2023, a corporation with a Dec. 31, 2022, year-end will still need to record the impact of research cost capitalization in its Dec. 31, 2022, income tax provision and record the repeal’s effects in a subsequent period.   Foreign subsidiaries  The new capitalization requirements could have a pervasive impact on U.S. taxation of foreign subsidiaries’ activity. Research activities performed by controlled foreign corporations (CFCs) in particular may require a closer focus. When determining the U.S. federal tax liability of an owner of a CFC that is a “U.S. shareholder,” section 174 capitalization should be considered. U.S. rules imposing tax on a U.S. shareholder include the global intangible low-taxed income (GILTI) and Subpart F income rules. The capitalization requirement is anticipated to increase the number of U.S. shareholders who must report U.S. taxable income under these rules.  A CFC’s capitalization of research costs may have a number of effects on a U.S. shareholder. Favorable tax rules that may have been available in previous years — the GILTI high-tax exclusion and Subpart F high-tax exception elections — may no longer provide comparable tax savings. In addition, individual taxpayers may have a reduced benefit from any section 962 elections, which are U.S. deemed income inclusion elections to potentially take advantage of both a lower tax rate on GILTI (and Subpart F income) and different foreign tax credit computations.  Companies should carefully address the new capitalization requirement in the context of contract research activities. For example, if a CFC performs research services for its U.S. parent company, the new capitalization requirement may have unfavorable tax consequences that were not anticipated when the research service contract was established.  The new capitalization requirements might also result in changes in effective tax rate from a financial statement perspective. For example, consider a corporation that owns a CFC. Assume the corporation has elected period cost treatment for GILTI liability as permitted by a Financial Standards Accounting Board (FASB) Staff Q&A. The section 174 deferral of deductibility for the CFC’s research costs generally would not cause the corporation to record a deferred tax asset because that company is not providing deferred taxes with respect to GILTI. As a result, applying the capitalization rule could alter the corporation’s effective tax rate as reported on its financial statements.  State and local tax The research cost capitalization rule brings state and local income tax consequences too. For tax years beginning after Dec. 31, 2021, taxpayers need to consider state conformity to section 174 and incorporate state-specific modifications where applicable.   Most states conform to the section 174 capitalization rule. Companies subject to tax in these states may see an increase in state tax liability starting in 2022. Some states do not conform to the federal research cost capitalization rule. Here are three examples of states that do not yet require research cost capitalization.  California law conforms to the Code as of Jan. 1, 2015, and therefore has not adopted the section 174 capitalization rule added to the Code by TCJA in 2017. California allows taxpayers to immediately expense research costs or capitalize and amortize those costs over a five-year recovery period.  Wisconsin law conforms to section 174, but specifically to section 174 as it stood prior to TCJA’s enactment in 2017.  Tennessee specifically decouples from section 174 for tax years beginning on or after Jan. 1, 2022, allowing for the immediate deduction of research costs. Businesses should incorporate applicable changes for 2022 income tax extensions and continue to monitor for updates as state legislatures may take further action. Learn more To learn more about how capitalization of research costs affects your tax picture, please contact your Baker Tilly advisor. Specialists from our tax services team will discuss methods for identifying costs and how to file a change in method of accounting that must be capitalized under Section 174 during an upcoming webinar on Jan. 31. Registration and webinar details will be available soon.
The information provided here is of a general nature and is not intended to address the specific circumstances of any individual or entity. In specific circumstances, the services of a professional should be sought. Tax information, if any, contained in this communication was not intended or written to be used by any person for the purpose of avoiding penalties, nor should such information be construed as an opinion upon which any person may rely. The intended recipients of this communication and any attachments are not subject to any limitation on the disclosure of the tax treatment or tax structure of any transaction or matter that is the subject of this communication and any attachments.

For tax years after Dec. 31, 2021, taxpayers may no longer take current deductions for research and experimental expenditures. These costs must be capitalized when paid or incurred.

International Tax

Capitalizing research costs delays tax deductions

As the year draws to a close, our 2022 year-end business tax planning webinar series explored the latest regulations in federal, individual, international and state and local tax.    Federal tax update  Explore how recent legislative developments will affect businesses' tax situations and learn how to apply these changes.   play.vidyard.com/EhLbRcwShZgxfpKN8gZUpS
Individual tax update  Learn more about the latest tax law developments including up-to-date education on recent law changes, overview of the Inflation Reduction Act & SECURE Act 2022 and various rules that are new or are returning after brief delay.  play.vidyard.com/HtrXcz97KugMk4jhbY28ft
International tax update  Discover how to navigate through new and proposed tax law changes that will affect multinational operations, including a new book minimum tax under the Inflation Reduction Act of 2022, Build Back Better draft legislation roll forward and U.S. domestic final foreign tax credit regulations.  play.vidyard.com/XeugojeNidErjSEWG3oszj
State and local tax update  Obtain the latest information regarding the various pass-through entity tax elections, whether entity qualifies to make these elections and whether election is beneficial for owners.   play.vidyard.com/dfD7rzkFr7VZDcvHzXZ1SB
Visit our year-end tax planning page for other valuable resources or to find out how our tax specialists can help, contact our team.
The information provided here is of a general nature and is not intended to address the specific circumstances of any individual or entity. In specific circumstances, the services of a professional should be sought. Tax information, if any, contained in this communication was not intended or written to be used by any person for the purpose of avoiding penalties, nor should such information be construed as an opinion upon which any person may rely.  The intended recipients of this communication and any attachments are not subject to any limitation on the disclosure of the tax treatment or tax structure of any transaction or matter that is the subject of this communication and any attachments.

Tax service specialists explore the latest legislative and regulatory developments, plus the most common topics their clients are asking about.

Private Wealth

Individual Income Tax Planning & Compliance

Tax Advocacy & Controversy Services

Transfer Pricing

Coronavirus Recovery & Growth Resources

2022 year-end business tax planning

It has been a challenging year both economically speaking and in terms of tax planning. While we have seen some federal tax legislation, the changes have been far more limited than many expected. Additionally, the continuing tight labor market, worries over a possible recession and high inflation are dominating concerns. In this vein, the Federal Reserve increased the benchmark interest rate by 300 basis points to date in 2022. Recent comments by the Fed indicated it intends to further increase rates until the funds level hits a “terminal rate,” or end point, with a current target of 4.6% in 2023. This not only raises business borrowing costs, but also the correlating interest expense tax deduction, which is more likely to be reduced due to the limitations enacted in the 2017 Tax Cuts and Jobs Act (TCJA). A challenging economy, ever-changing tax rules and rising interest rates make tax and business planning more critical than ever. To date, 2022 has seen limited federal tax legislation in the Inflation Reduction Act (IRA) and United States Innovation and Competition Act of 2021 (USICA aka CHIPS-plus Act). The IRA contains a multitude of energy credits, an excise tax on stock repurchases and a new corporate alternative minimum tax (AMT). While the IRA is less expansive than the initial Build Back Better proposals, it does add numerous complexities to tax law requiring new guidance from the Treasury Department. Besides the IRA, taxpayers continue to wait on further guidance pertaining to the many other tax provisions enacted over the past five years. Finally, the CHIPS-plus Act includes over $52 billion for semiconductor facilities plus a 25% tax credit for semiconductor manufacturing. For additional discussion of the IRA, see our previous tax alert. As we head toward a post-election lame-duck congressional session, tax legislation may resurface that targets retirement plans, digital assets and the so-called tax extenders that either expired at the end of last year or will expire at the end of 2022. There are more than 40 temporary tax provisions that expired Dec. 31, 2021, including:  Extension of research and development expensing and/or a refundable research credit Refundable and/or enhanced child and dependent care tax credit Increased child tax credit Credit for qualified fuel cell motor vehicles Credit for construction of new energy-efficient homes Increase in exclusion for employer-provided dependent care assistance Extension of favorable formula used to compute business interest expense deduction under section 163(j) Charitable contribution deduction by non-itemizers Five tax extenders expiring at the end of 2022 that may be retroactively reinstated include the full deduction for business meals provided by a restaurant (otherwise limited to 50%) as well as incentives for biodiesel and renewable diesel fuel.  We expect any legislation in the lame-duck session to be centered around items with bipartisan support. While some may push for far-reaching provisions, being able to use reconciliation in the Senate and bypass the filibuster rules will still require the sign off of Sens. Joe Manchin (D-W.Va.) and Kyrsten Sinema (D-Ariz.). Sinema’s reluctance to raising tax rates or rolling back certain TCJA provisions coupled with Manchin’s concern that expanding social programming will further overheat an economy struggling with inflation derailed last year’s larger Build Back Better proposals. We do not expect the end of 2022 to be any different. With this in mind, look for potential legislation to include a continuation of fully expensing R&D expenses with certain retirement provisions of the Setting Every Community Up for Retirement Enhancement (SECURE) Act rolled in. Both of these enjoy strong support on both sides of the aisle. Things could get more interesting if Democrats attempt to continue the expanded child tax credit. Absent the inclusion of a work requirement, it is doubtful Manchin or congressional Republicans will support expanding the credit.  Following the midterm elections, any tax legislation is largely dependent upon the composition of the next Congress. House Republicans have offered a broadly stated policy proposal if they control the House in January. For tax policy, their statement includes a promise to “increase take-home pay, create good-paying jobs, and bring stability to the economy through pro-growth and deregulatory policies.” Actual provisions are not outlined but their statement suggests the GOP would extend TCJA tax relief provisions for individuals currently expiring at the end of 2025 as well as continuing bonus depreciation. Key individual tax elements expiring in 2025 include the top tax rate for individual taxpayers reverting to 39.6% from 37%, an end to the 20% section 199A qualified business income deduction, removing the $10,000 cap on the state and local tax (SALT) deduction and reinstating the personal and dependent exemption deductions.  If Democrats maintain control of the House and increase their majority in the Senate, they may pursue remaining policies from the original Build Back Better bill. Many provisions of the TCJA would be subject to change, such as increasing the corporate tax rate, raising individual tax rates on those earning over $400,000, and subjecting S corporation income to self-employment tax. Earlier administration proposals would raise the individual tax rate to 39.6% from 37%. Finally, long-term capital gains and qualified dividends would be taxed at 25%, up from the current 20%.  In a turbulent political year, we cannot predict the midterm election results. However, unless Democrats retain control of both houses of Congress, we expect little in the way of legislation for the next two years. Should Republicans gain control of both the House and the Senate, the Biden administration indicated any tax-related legislation passed would likely be vetoed. If one party controls each house, it’s an understatement to say compromise will be difficult. In this event, we expect extremely modest tax legislation, if any, before 2025.  One notable exception to our expectation of a stalemate in a split Congress is the possibility of a bipartisan bill addressing the regulation and taxation of digital assets. The need for clarity in the federal oversight and tax treatment of digital assets is rapidly escalating. The Infrastructure Investment and Jobs Act, a bipartisan bill passed in late 2021, made changes to reporting requirements for digital assets, including cryptocurrencies. In the intervening 12 months, several digital asset bills have been introduced, most with bipartisan sponsorship. For more details, please see our article on the ever-changing world of digital asset taxation.  Potential legislation notwithstanding, we also anticipate a multitude of regulatory guidance from the Treasury Department. For several months, we have expected the IRS and Treasury to issue additional regulations on the business interest expense deduction, cryptocurrency reporting, deferred compensation and noncompensatory options. Furthermore, we are awaiting a number of regulations dealing with partnerships taxation. Specific partnership areas we are watching include disguised sale rules, related parties, a host of basis and capital account guidelines and the fractions rule. Given the competing priorities of the IRS and Treasury, particularly considering the extent of guidance needed to implement the recently passed IRA, it remains to be seen whether any of this pending guidance will be issued in the near future. Regardless as to which regulations are published first, taxpayers can expect more compliance and documentation requirements. We remind you that tax planning should be addressed throughout the year as an integral part of overall financial health. To assist you in this endeavor, our year-end tax letter also includes articles on the evolving world of digital assets, happenings at the IRS, information reporting, new international tax issues and reporting as well as the latest in state and local taxation.  As always, we encourage you to contact your Baker Tilly advisor or visit bakertilly.com/contact to discuss how these issues impact your tax position.  
Visit the sections below for more information about the most pressing year-end tax issues: Projected 2023 bracket changes  Employee benefits and executive compensation update Four takeaways from the first year of CPAR The ever-changing world of digital asset taxation Beneficial ownership reporting – new FinCEN regulations Research credit changes bring good news and bad news Navigating through the world of state and local tax U.S. international tax and transfer pricing update Things to watch for at the IRS Substantially lower filing threshold for Form 1099-K Excess business loss limitation developments The future of the excess business loss limitation ACA reporting enforcement picks up steam 2022 accounting method issues and developments Inflation Reduction Act: energy provisions Federal issues surrounding state pass-through entity tax regimes Conclusion We will continue to keep you informed of the latest developments by sending updates to assist you with planning throughout the remainder of the year.  Take a look back on our 2021 year-end tax letter.
The information provided here is of a general nature and is not intended to address the specific circumstances of any individual or entity. In specific circumstances, the services of a professional should be sought. Tax information, if any, contained in this communication was not intended or written to be used by any person for the purpose of avoiding penalties, nor should such information be construed as an opinion upon which any person may rely.  The intended recipients of this communication and any attachments are not subject to any limitation on the disclosure of the tax treatment or tax structure of any transaction or matter that is the subject of this communication and any attachments. For more information on this topic, contact our team.

Baker Tilly’s 2022 year-end tax letter focuses on tax topics such as digital assets, happenings at the IRS, information reporting, new international tax issues and more.

Tax Transformation & Automation

2022 year-end tax letter

Changes to research and experimental expenditures  Prior to the Tax Cuts and Jobs Act (TCJA), taxpayers could deduct research and experimental expenditures as paid or incurred, thus receiving a current deduction. An election could also be made to amortize the expenditures over a period of not less than 60 months. A third alternative allowed the expenditures to be amortized over a 10-year period under section 59(e). The TCJA changed the rules for current deductions and amortization with a delayed effective date. For tax years beginning after Dec. 31, 2021, taxpayers may no longer take current deductions for research and experimental expenditures. For tax years beginning in 2022, they must deduct the expenditures ratably over a five-year period beginning with the midpoint of the taxable year in which the expenditures are paid or incurred. Expenditures attributable to foreign research must be deducted ratably over a 15-year period. The rules in effect for taxable years after Dec. 31, 2021, also apply to software development. According to the Ways and Means Committee, these provisions were enacted because the expenditures have a useful life beyond the year in which they are incurred. The changes to the treatment of expenditures is an accounting method change. The Treasury Department has not yet provided guidance on how the change will be made, although it has stated that it expects to issue guidance on an automatic change procedure.  Taxpayers in certain trades or businesses, such as software developers and technology companies, may be impacted more than others by these changes. Startups that depend on research for product development will also be impacted. Cash flow will need to take into account the reduced deductions related to amortizing the expenditures. Increased payroll tax credit  Qualified small businesses may elect to claim a certain amount of their research credit against their payroll tax liability. The election allows up to $250,000 of the credit to be applied against the employer’s portion of the Social Security taxes (but not the Medicare taxes) instead of against the income tax liability. For tax years beginning after Dec. 31, 2022, the Inflation Reduction Act increased the amount to $500,000 from $250,000 and also allows the election to offset the employer’s portion of both the Social Security and Medicare taxes.  In general, a qualified small business, with respect to a tax year, is one that has less than $5 million in gross receipts and had no gross receipts for any tax year before the five-tax-year period ending with the current tax year.  The provision is intended to benefit startup companies that may not have a tax liability sufficient to claim the credit as an offset to income tax. The election is important in industries such as life sciences and technology where substantial expenditures are made for research but there is often little taxable income to offset the credit. The cash savings from the payroll credit can provide a needed boost for additional investments in research.  For more information on this topic, contact our team.
The information provided here is of a general nature and is not intended to address the specific circumstances of any individual or entity. In specific circumstances, the services of a professional should be sought. Tax information, if any, contained in this communication was not intended or written to be used by any person for the purpose of avoiding penalties, nor should such information be construed as an opinion upon which any person may rely.  The intended recipients of this communication and any attachments are not subject to any limitation on the disclosure of the tax treatment or tax structure of any transaction or matter that is the subject of this communication and any attachments.

Discover how the Tax Cuts and Jobs Act (TCJA) affects research and experimental expenditures.

Research credit changes bring good news and bad news

Combination magnifies corporate tax and deepens tax talent coast to coast CHICAGO (Sept. 29, 2022) – Leading advisory CPA firm Baker Tilly US, LLP (Baker Tilly) announces its acquisition of tax consultancy firm True Partners Consulting, LLC (TPC), effective Nov. 1. Known for their high-end tax services, TPC is especially strong in corporate tax, serving public and private enterprises. This complements Baker Tilly’s strong corporate tax talent. The combination will also bring Baker Tilly a new capability in unclaimed property. 
Geographically, TPC deepens Baker Tilly’s tax presence in major markets across the U.S., including Chicago, Boston, Dallas, New York Metro, Silicon Valley and Los Angeles. The combination also expands Baker Tilly’s coast-to-coast footprint with locations in Tampa and Atlanta.  Allan D. Koltin, CEO of Koltin Consulting Group, who advised both firms on the combination, said, “TPC is well-known in the tax space: they know it inside and out. Baker Tilly’s strategy and client service philosophy combined with its purpose to unleash and amplify talent emerged as the natural choice to catapult TPC’s future-forward vision.” TPC’s 210 professionals will join Baker Tilly. Learn more about Baker Tilly’s tax services at bakertilly.com/services/tax.
About Baker Tilly US, LLP (bakertilly.com) Baker Tilly US, LLP (Baker Tilly) is a leading advisory CPA firm, providing clients with a genuine coast-to-coast and global advantage in major regions of the U.S. and in many of the world’s leading financial centers – New York, London, San Francisco, Los Angeles and Chicago. Baker Tilly is an independent member of Baker Tilly International, a worldwide network of independent accounting and business advisory firms in 148 territories, with 38,000 professionals and a combined worldwide revenue of $4.3 billion. Visit bakertilly.com or join the conversation on LinkedIn, Facebook and Twitter.  About True Partners Consulting LLC (tpctax.com) True Partners Consulting (TPC) is an independent tax and business advisory firm delivering technical expertise and exceptional service in the areas of tax and financial reporting to Fortune 1000 and middle market companies, both public and private, throughout the United States. TPC’s experienced team of premier industry professionals is committed to building a global practice rooted in a culture of respect, recognition, and reward. Learn more at tptax.com.

Combination magnifies corporate tax and deepens tax talent coast to coast

Unclaimed Property

Baker Tilly acquires True Partners Consulting

History repeating? As we write this year’s tax letter, we are reminded of our 2017 edition. While it is said history does not repeat itself, sometimes its events are awfully similar. In the fall of 2017, it was unclear whether the Tax Cuts and Jobs Act (TCJA) would be enacted. Provisions were being debated and there was no clear path to passage. The same can be said of 2021: The $3.5 trillion “human” infrastructure reconciliation package remains mired in debate between moderate and progressives within the Democratic Party. The bipartisan infrastructure bill is also ensnared in the same conflict, with the legislation’s future likely tied to the outcome of a successful budget reconciliation package negotiation. With little likelihood of Republican support, all but three Democratic votes will be needed in the House and all 50 Democratic senators will be needed for passage using the reconciliation process. What does this mean for you? At this time, it is difficult to say as the contents of the reconciliation bill are currently being fiercely debated. Whether the package’s top line is $1.5 trillion, $3.5 trillion or some amount in between, if Democrats are able to compromise and successfully pass a bill, it’s certain to include major tax changes. These changes could come in the form of a capital gains rate increase, corporate and individual rate increases, and modifications to the estate and gift tax. Based on the initial House Ways and Means Committee bill (see our previous tax alert), most of the provisions would not become effective until 2022, with the notable exception of capital gains (currently proposed for an effective date of Sept. 13, 2021). Consequently, we strongly recommend you monitor the progress of the ongoing negotiations carefully. Accelerating income into 2021 and deferring significant expenses until 2022 where practical may be the best planning strategy depending upon your tax bracket. With respect to capital gains, if a September effective date remains, the planning door may have closed; however, it is possible there will be a change in effective dates as negotiations progress, possibly to the date of enactment or even Jan. 1, 2022. Our focus in this year’s letter is on the tax code modifications being considered, critical issues in healthcare and employee benefits, state and local tax trends as well as important reminders of expiring taxpayer-friendly provisions enacted via previous COVID-19 stimulus legislation. Tax planning should be addressed throughout the year and be an integral part of financial planning. As always, we encourage you to contact your Baker Tilly advisor to discuss how these issues impact your tax position.
Visit the sections below for more information about the most pressing year-end tax issues: Reconciliation bill   Expiring tax provisions   Employee retention credit – eligibility under the suspension test   Excess business loss limitation effective for 2021    IRS enhances compliance enforcement   Updates in the world of virtual currency   Employee benefits and executive compensation update    Tax proposals provide accounting method planning opportunities for businesses in 2021                   Plan your estate before it’s too late  State and local tax news     U.S. international tax and transfer pricing update Conclusion We will continue to keep you informed of the latest developments by sending updates to assist you with planning throughout the remainder of the year.  Take a look back on our 2020 year-end tax letter.
The information provided here is of a general nature and is not intended to address the specific circumstances of any individual or entity. In specific circumstances, the services of a professional should be sought. Tax information, if any, contained in this communication was not intended or written to be used by any person for the purpose of avoiding penalties, nor should such information be construed as an opinion upon which any person may rely.  The intended recipients of this communication and any attachments are not subject to any limitation on the disclosure of the tax treatment or tax structure of any transaction or matter that is the subject of this communication and any attachments. For more information on this topic, contact our team.

Tax planning should be addressed throughout the year and be a vital part of financial planning. Baker Tilly’s 2021 year-end tax focuses on various tax topics, critical issues in healthcare and employee benefits, reminders of expiring taxpayer-friendly provisions enacted via COVID-19 stimulus legislation and more.

2021 year-end tax letter

As we write our annual tax-planning letter, we are constantly reminded that this is no ordinary year. The fall continues to be dominated by a highly partisan election, a second wave of COVID-19, an economy struggling to recover from the worldwide pandemic and a wildly fluctuating stock market. Adding to this mix of uncertainty is the ever-changing tax landscape. 2020 has seen not only continued guidance relating to the Tax Cuts and Jobs Act (TCJA), but also the passage of the Coronavirus Aid, Relief, and Economic Security (CARES) Act. The CARES Act contains numerous revisions to the TCJA, which in some cases require taxpayers to redo returns two years after the fact. The CARES Act also introduced the PPP loan program, the rules for which were written hastily and leave several important questions still unanswered.  All of this created a perfect storm for taxpayers — businesses and individuals alike. Besides continuing economic uncertainty, tax rates could be in play depending on the election results. The prospect for increasing rates could hinge on control of the Senate, especially if the Democrats win the White House. While a change in control of the House of Representatives is not anticipated, if Republicans retain their majority in the Senate, it is unlikely any meaningful rate changes would be enacted. In addition, the economic downturn, coupled with trillions of dollars of enacted stimulus legislation, has created a federal deficit exceeding $3 trillion annually. At the end of June (the close of the government’s third quarter), the deficit represented 13.1% of GDP, a level not seen since World War II. To reduce this amount, anticipate either higher tax rates or a combination of spending cuts and restrictions on deductions. In terms of limiting deductions, remember the business interest limitation using 30% of adjusted taxable income is temporarily increased to 50% through 2020 (returning to 30% in 2021). Furthermore, 100% bonus depreciation is set to expire for assets placed in service after Dec. 31, 2022. Congress may choose to limit other deductions in attempts to raise revenue. While many are facing difficult times, business does not stand still. Solid financial and tax planning is needed now more than ever. With our year-end letter, we have always urged readers to not only do their annual tax planning, but to use this period to conduct a full financial review of their portfolios and estate planning as well. This year, such a financial review is not just recommended, it is critical. In the coming weeks and months, managing cash and minimizing current taxes is even more important as the economy recovers. The CARES Act presents some one-time opportunities for taxpayers to reduce taxes and obtain refunds from prior years. For example, while the TCJA had repealed the net operating loss (NOL) carryback rules, the CARES Act reinstated them for 2018, 2019 and 2020 losses. If you have a taxable loss in 2020, careful analysis is needed to maximize the tax benefit of such loss since a 2020 loss can be carried back five years. However, losses incurred in 2021 will no longer be eligible for any carryback. As a result, this represents your last chance to recover tax payments made in 2015 through 2019. If you need cash currently, look into filing an NOL carryback return as soon as possible after year-end to expedite your refund. In addition to these NOL changes, our 2020 year-end tax-planning letter focuses on tax topics with the above economic and political backdrop in mind. We examine multiple pieces of CARES Act and TCJA guidance (including Paycheck Protection Program debt forgiveness, the employee retention credit and payroll tax deferral), analyze pass-through loss and cancellation of indebtedness strategies, summarize tax capital reporting, define the home office deduction as well as review a myriad of international and state and local tax changes.  As always, your Baker Tilly advisor is ready to assist you in meeting your financial and tax objectives. Contact an advisor
Visit the sections below for more information about the most pressing year-end tax issues: Business interest limitation rules (section 163(j)) – Where do we stand? Will refunds from losses become a lifeline for struggling businesses? Loan modifications: Take care of them so they don't take care of you Lease modifications: Beware of potential tax ramifications Tax issues created by PPP loan forgiveness Limited liability companies in a loss environment Carried interests in 2020 and beyond Final 2020 bonus depreciation regulations Partnership tax capital – 2020 reporting requirements loom Employee benefits and executive compensation update Proposed regulations issued to implement TCJA small business taxpayer simplified accounting methods Home office deduction Opportunity zones – reminder of COVID-19 relief and remaining areas of uncertainty Residency rules and state trust taxation – Beware the traps State and local tax update U.S. international tax update Conclusion We will continue to keep you informed of the latest developments by sending updates to assist you with planning throughout the remainder of the year. 
The information provided here is of a general nature and is not intended to address the specific circumstances of any individual or entity. In specific circumstances, the services of a professional should be sought. Tax information, if any, contained in this communication was not intended or written to be used by any person for the purpose of avoiding penalties, nor should such information be construed as an opinion upon which any person may rely.  The intended recipients of this communication and any attachments are not subject to any limitation on the disclosure of the tax treatment or tax structure of any transaction or matter that is the subject of this communication and any attachments. For more information on this topic, contact our team.

Baker Tilly’s 2020 year-end tax focuses on tax topics with the above economic and political backdrop in mind. Our professionals look at international, federal, state-and-local and compensation tax issues among other areas.

Accounting Methods

Lease Accounting (ASC 842 and GASB 87)

2020 year-end tax letter

Video link Client need Kothe Real Estate Partners, LLC, (Kothe) develops commercial properties throughout the Midwest.  As one of its primary projects, Kothe partnered with Great Lakes Management Group and KP Property Development (the Development Team) to revitalize a historically significant dormant Kansas City building into a new mixed-use development that would include a Hotel Indigo with 118 boutique hotel rooms and nearly 30 apartment units.  Due to the location, there was an opportunity to utilize a variety of financing programs to build the project’s financing package. Coordination of Historic Tax Credits, New Markets Tax Credits, Brownfield Tax Credits, Property Assessed Clean Energy (PACE) financing and a property tax abatement was needed to make the project possible. The Development Team partnered with Baker Tilly Capital to source financing and the tax credit investors to complete the complex capital structure for the development.  Our solutions The incentives advisory team within Baker Tilly Capital worked closely with the Development Team to develop and execute a comprehensive capital structure to bring the project to life. Utilizing specialists in each of the eligible financing areas, we were able to provide customized advisory in the areas of Historic Tax Credits, New Markets Tax Credits, PACE, tax abatements and structuring overall bank debt. Results Through a collaborative approach with the Development Team, we were able to provide a comprehensive financing package that utilized all eligible programs. Through this collective approach, the project’s capital structure benefited from more than $18 million in various credit and incentive programs. The new property brings life back to a historically significant dormant building in Kansas City and provides new opportunities for the local economy.
For more information on this topic, or to learn how Baker Tilly specialists can help, contact our team.

Real Estate

Lodging

Multifamily Housing

Capital Sourcing

Development Advisory 

Historic Tax Credits

Project Finance

Property Assessed Clean Energy (PACE) 

Bringing a Kansas City building back to life

Baker Tilly has an experienced team of research and development (R&D) professionals who have assisted many clients in a variety of industries in identifying, documenting and sustaining federal and state R&D credits through a comprehensive understanding of their business operations.

To increase market share and remain competitive, companies have to continuously develop new and improved products and processes. While the expense of such development can seem prohibitive, tax savings tools, like the research and development credit, can help alleviate those costs. 

The R&D credit provides an incentive for companies to invest in innovation in the U.S. and is available to companies in any industry that develop new products or processes or improve upon existing products or processes. Companies that qualify can claim wages, supplies and contract research costs associated with R&D projects and activities.

Our professionals can help you make the most of your R&D investments while minimizing the disruption to day-to-day operations.

Increasing and optimizing investment in new technology

Tax reform webinar series: accounting methods and tax credits

Read this article to learn how research and development (R&D) tax credits, available at both the federal and state levels, provide manufacturing and distribution companies with a dollar-for-dollar reduction in income and payroll taxes for qualifying expenses.

Strategic discussions can help manufacturers maximize the benefits of R&D tax credits

Many life sciences companies may not be aware of the research and  development activities they've undertaken that qualify for federal and/or state tax incentives.

Many life sciences companies may not be aware of the research and  development activities they've undertaken that qualify for federal  and/or state tax incentives.

R&D credit opportunities for life sciences organizations

A beef and pork product manufacturer never thought to try for R&D credits, but Baker Tilly professionals revealed qualifying activities that gave the company a good-sized credit as well as a process that may yield more in the future.

Meat manufacturer bites into R&D credits with Baker Tilly’s help

Baker Tilly's research and development credit professionals can help you find R&D activities in areas you may not have thought qualify.

Doron is a partner within Baker Tilly’s specialty tax team and specializes in performing research and development (R&D) tax credit studies.

Peter Noce is a partner with Baker Tilly’s commercial practice.

Brian J. Shin is a tax partner in our credits and incentives services group, a practice within Baker Tilly’s specialty tax team. He has more than 20 years of experience in performing innovation, or research and development (R&D), tax credit studies to an array of clients across a multitude of industries.

Contributing to clients’ success by accelerating tax deductions, increasing tax credits, reducing cash taxes and mitigating risks

Baker Tilly’s tax team contributes to clients’ success by accelerating tax deductions, increasing tax credits, reducing cash taxes and mitigating risks.

Baker Tilly offers specialized federal tax compliance and planning expertise to help businesses optimize value while minimizing their tax burden.

We take a comprehensive view of available federal, state and local tax credit and incentive programs and loan programs when developing a project’s capital stack.

Optimize your project’s approach to capital with the New Markets Tax Credit program.

We pair deep industry knowledge with our transaction experience to provide a tailored approach to every New Markets Tax Credit project, from initial concept through completion.

The trend to revitalize historic buildings nationwide is becoming more prevalent with the availability and value of Historic Tax Credits.

Baker Tilly translates its deep knowledge of the Historic Tax Credits program and experience from successful projects into optimized development capital for our clients.

A powerful tax incentive for real estate investors, venture capital, private wealth, family offices and private equity.

The Opportunity Zone program provides tax incentives for investors with unrealized capital gains to fund development projects in underserved communities. 

Our state and local tax professionals offer specialized expertise to help businesses and individuals understand increasingly complex state and local tax rules.

Every year, federal, state and city governments across the United States invest over $170 billion of incentive funding into private businesses. Taking advantage of available incentives programs can fill financing gaps and turn planned projects into a reality. 

Government incentives programs can fill financing gaps in real estate projects.

Research & Development Credits

Actionable federal tax insights for energy credits and incentives in 2024

Bonus energy credit domestic content requirements: Preliminary IRS guidance

Electric vehicle tax credit update

Capitalizing research costs delays tax deductions

2022 year-end business tax planning

2022 year-end tax letter

Research credit changes bring good news and bad news

Baker Tilly acquires True Partners Consulting

2021 year-end tax letter

2020 year-end tax letter

Bringing a Kansas City building back to life

Tax

Federal Tax

Project Finance

New Markets Tax Credits

Historic Tax Credits

Opportunity Zones

State & Local Tax

Incentives Advisory

Doron Bass

Peter S. Noce

Brian J. Shin

Baker Tilly has an experienced team of research and development (R&D) professionals who have assisted many clients in a variety of industries in identifying, documenting and sustaining federal and state R&D credits through a comprehensive understanding of their business operations.

Our professionals can help you make the most of your R&D investments while minimizing the disruption to day-to-day operations.

Benefits from R&D credits include:

Article

Webinar

Articles and case studies

Strategic discussions can help manufacturers maximize the benefits of R&D tax credits

R&D credit opportunities for life sciences organizations

Meat manufacturer bites into R&D credits with Baker Tilly’s help

Our professionals