US tax reform: an overview
This past tax season has haunted US professionals with many cumbersome, albeit sometimes helpful, policy changes by the Treasury and the Internal Revenue Service (IRS). In this article we will give an overview of some of the most significant changes that could impact your business.
Paycheck Protection Programme
While this programme has ended and has shown great success in injecting funds into the hands of businesses and self‐employed individuals to keep people employed, the IRS continued to adjust the presentation of the relief of loans (forgiveness) on business tax returns.
Employee retention credits
This was another successful programme that injected funds into businesses whose revenues suffered because of Covid. The IRS provided late guidance affecting the 2020 tax returns for those who qualified for the benefits, by requiring a removal of deductions for payroll used to claim such credits.
Pass-through entities – state and local tax workarounds
In 2020 some states enacted programmes to create a benefit to shareholders and members of pass‐through entities relating to state and local taxes which were typically paid at an individual level. Modifications are still being made to the computations to correct the states’ interpretations; for example, New York plans to include something for NYC tax.
The IRS and Treasury now require tax returns to report all cryptocurrency activity. Whenever there is a sale of such an asset, a gain or loss must show on a tax return as short-term and long‐term capital gains. The IRS also expects form 1040 to report any activity involving cryptocurrency. This creates additional tax and reporting, even if simply using crypto in a wallet to purchase something.
State nexus and reporting
When people started working remotely from homes, states exercised some leniency in the rules regarding economic nexus (connection) as it related to bordering states. The Treasury also relaxed certain federal residency rules relating to US nexus for some foreign workers confined by Covid lockdowns. Once the remote workforce concept became more widespread, states realised they were losing revenue. They asserted that people working from home could create nexus and state allocated income for businesses and individuals alike. Other states looked to protect their eroding tax base by asserting conflicting rules that tied employees to their business office location. We have seen an increase in nexus assertions by various states through desk audits; care is needed both individually and as it relates to sourcing income from your business operations based upon employee location.
Forms K‐2 and K‐3
While K-1 is necessary for investments made in publicly traded partnerships and other investments, K-2 and K-3 create additional reporting for entities that have foreign operations, foreign shareholders, and other complexities so that the IRS can present the information in a standardised way. The new forms created quite a headache for many, and the presentation only confused the public and professionals alike.
Research and development tax credit reporting
Effective in 2022, any claims for tax credits related to research and development spending will require more stringent disclosures. The IRS is on the lookout for fraudulent claims and will require details in the tax return of the specific research.
The Financial Accounting Standards Board (FASB) creates new accounting pronouncements on a regular basis. This one has been delayed many times but is expected this year. Businesses will need to create balance sheet items related to leased assets. A rental arrangement for warehouse or office space will find its way onto the balance sheet in the form of an asset and liability. For those who prepare financial statements given to a bank, these changes should be addressed and presented now. This will result in clearer communication with agencies and banks and better understanding of reporting requirements and covenant computations for 2022.
Future policy setting
The new US Department of Treasury Greenbook, published in March 2022, gives a feel for the proposed changes in store for 2023.
While these are only proposed changes, clearly the current administration is pushing a similar agenda as seen in earlier proposals and bills, many of which did not pass. There appears to be a sense of catching up on revenue, and it seems we should expect tax increases in the coming years.
About the author
Mark B. Feldstein
New York, USA
Mark is a partner at Spielman Koenigsberg Parker LLP, Russell Bedford’s New York member firm. With over 20 years of public accounting experience, he has extensive experience in handling diverse practice areas, including accounting and auditing, taxation of closely held and internationally owned businesses, international taxation, taxation of high-net-worth individuals, and private foundations.
Mark is also experienced in establishing accounting systems and policies for start-up and emerging businesses. He works in an array of industries, including wholesalers, retailers, manufacturers, professional service firms, high-tech companies, apparel and textile companies, hospitality, and estate and trust matters.