Deadline for filing 2023 forms 1099 is near but beware of important changes

New electronic filing requirements, revised form 1099-NEC and new form 15397 present addional challenges for 1099 filers that may necessitate updates

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Deadline for filing 2023 forms 1099 is near but beware of important changes

ARTICLE | January 24, 2024 | Authored by RSM US LLP

Executive Summary:

As the Jan. 31 deadline for filing IRS forms 1099 rapidly approaches, filers are reminded of several small but important changes that have been published in the last few weeks that might affect your ability to file timely and may necessitate changes to your systems and processes. Specifically: 

  • On Jan. 8, 2024, the IRS published a new version of the 2023 Form 1099-NEC, Nonemployee Compensation, which is now a continuous use form, so make sure that you are using the latest version of the form.
  • In November 2023, the IRS published new Form 15397, which must now be faxed to the IRS to request additional time to furnish recipient copies of Forms 1099. An extension of time to file 1099s can still be requested by filing Form 8809 but form 15397 must be faxed as well to avoid penalties.
  • Starting Jan. 1, 2024, filers of 10 or more forms 1099 must file the forms electronically and may be subject to penalties if paper forms are filed unless a waiver is requested. 
  • To file 1099 forms electronically this year, filers must request a new IR-TCC code from the IRS, which can take up to 45 days to obtain. Old TCC codes issued prior to September 2023 are no longer valid, so filers should plan accordingly and may need to outsource the filing of forms. See prior alert here for details.
  • In December 2023, the IRS announced a one-year delay in implementation of the lower $600 filing threshold for third party settlement agents, including payment processors, ride share platforms, and others to file forms 1099-K. Instead, the filing threshold remains at $20,000 and 200 transactions for 2023 returns which means that filers may need to revise systems and processes to properly flag 1099-K reportable payments for 2023 and avoid over reporting. See prior alert for details. 

Additional details on new requirements appears below.

Deadline for filing 2023 forms 1099 is near but beware of important changes

IRS releases revised final continuous use Form 1099-NEC

On Jan. 8, 2024, the IRS published a revised version of the 2023 Form 1099-NEC. Form 1099-NEC is used for reporting compensation (such as fees, commissions, and other payments) made to U.S. persons who are not the filer’s employees. The January 2024 version of the form incorporates several changes from the previous draft 1099-NEC released in September 2023 and follows the IRS announcement to move the Form 1099-NEC to a continuous use basis, instead of single year forms updated each year.

Key changes are the following:

  1. The “2nd TIN Not” field which was removed from the September 2023 draft at the bottom of the form was added back to the form
  2. The tax year field was changed from “20__” where filers only needed to enter the last 2 digits of the year to just a blank line “____”

Additionally, the instructional note/preamble that is attached to the official form was updated to clarify that filers of 10 or more information returns are now required to file them electronically.

Companies that are filing Forms 1099-NEC in house should build in sufficient lead time and budget to address these changes to Form 1099-NEC. There are potential system errors that may arise for taxpayers/filers if the above changes are not made prior to preparing the 2023 forms 1099-NEC. Filers using third parties to prepare and file their forms 1099-NEC should also confirm that their software vendors have updated their systems for the latest version of the form published this month.

IRS publishes new Form 15397 for requesting extensions for recipient copies

The IRS recently published new Form 15397 in November 2023 which should now be used to request an extension of time to furnish recipient copies of information returns including forms 1099-NEC to each respective recipient. Filing form 15397 will extend the time to furnish recipient copies of Form 1099 to recipients by 30 days.

The deadline for furnishing recipient copies of 2023 Forms 1099-NEC to recipients is Jan. 31, 2024, while the deadline for furnishing recipient copies of Forms 1099-B, and 1099-S, and 1099-MISC (if amounts are reported in boxes 8 or 10) is Feb. 15, 2024.

If form 15397 is completed correctly and signed, and successfully transmitted to the IRS, the extended due date for furnishing the 2023 Forms 1099-NEC Recipient copies will be March 1, 2024, and the extended due date for filing Forms 1099-NISC, 1099-B, and 1099-S will be March 15, 2024. The form 15397 must be faxed to the IRS on or before January 31 each year at:

Internal Revenue Service Technical Services Operation

Attn: Extension of Time Coordinator

Fax: 877-477-0572 (International: 304-579-4105)

Please contact us if you have questions regarding your 1099 filing obligations and the impact of the changes discussed.

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This article was written by Aureon Herron-Hinds, Paul Tippetts, Dustin Freeman and originally appeared on 2024-01-24.
2022 RSM US LLP. All rights reserved.
https://rsmus.com/insights/tax-alerts/2024/deadline-for-filing-2023-forms-1099-is-near-but-beware-of-import.html

The information contained herein is general in nature and based on authorities that are subject to change. RSM US LLP guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. RSM US LLP assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein. This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer.

RSM US Alliance provides its members with access to resources of RSM US LLP. RSM US Alliance member firms are separate and independent businesses and legal entities that are responsible for their own acts and omissions, and each are separate and independent from RSM US LLP. RSM US LLP is the U.S. member firm of RSM International, a global network of independent audit, tax, and consulting firms. Members of RSM US Alliance have access to RSM International resources through RSM US LLP but are not member firms of RSM International. Visit rsmus.com/aboutus for more information regarding RSM US LLP and RSM International. The RSM(tm) brandmark is used under license by RSM US LLP. RSM US Alliance products and services are proprietary to RSM US LLP.

KDP Certified Public Accountants, LLP is a proud member of RSM US Alliance, a premier affiliation of independent accounting and consulting firms in the United States. RSM US Alliance provides our firm with access to resources of RSM US LLP, the leading provider of audit, tax and consulting services focused on the middle market. RSM US LLP is a licensed CPA firm and the U.S. member of RSM International, a global network of independent audit, tax and consulting firms with more than 43,000 people in over 120 countries.

Our membership in RSM US Alliance has elevated our capabilities in the marketplace, helping to differentiate our firm from the competition while allowing us to maintain our independence and entrepreneurial culture. We have access to a valuable peer network of like-sized firms as well as a broad range of tools, expertise, and technical resources.

For more information on how KDP LLP can assist you, please call us at:

Oregon Office:
(541) 773-6633

Idaho Office:
(208) 373-7890

Protecting value with your compliance and response program

An integrated team of compliance and investigative professionals with the right technology can protect your reputation and profitability.

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Protecting value with your compliance and response program

ARTICLE | January 23, 2024 | Authored by RSM US LLP

Businesses with an eye on compliance know that the Department of Justice’s (DOJ) Criminal Division has recently released an update to the Evaluation of Corporate Compliance Program (2023 Guidance). Although this update is meant to assist prosecutors in evaluating and determining the adequacy and effectiveness of a corporation’s compliance program, the 2023 Guidance should be considered by in-house counsel, corporate compliance leaders and auditors as they administer and oversee their own programs, including their response to allegations of noncompliance, both in design and practice. For instance, recent regulation regarding clawback of management compensation due to noncompliance has been top of mind for executives and attorneys alike.

The importance of a robust compliance program cannot be emphasized enough in today’s complex regulatory and legal environment. The financial impact of settlements, fines and penalties for compliance violations are continually on the rise—and often on the front page of the news. All things considered, your company’s reputation, as well as current and future profitability, will be better protected when you have integrated compliance and investigations teams.

The case for integrated compliance and investigations teams

A sophisticated compliance program recognizes that (1) proactive compliance and (2) any resulting investigations into alleged noncompliance can each influence, complement and strengthen the other.

  1. A strong and effective compliance program lays the foundation for a healthy and ethical business operation. However, even the most robust ethics and compliance programs cannot eliminate all fraud and corruption risk. As such, while the occurrence and magnitude of misconduct can be minimized, it cannot be fully eliminated. When allegations of misconduct and noncompliance occur, companies can quickly determine the who, what, when, where, how and potentially why through deploying leading practices in conducting investigations.
  2. After misconduct or noncompliance is alleged or identified, well-executed investigations should be conducted that include root cause analyses to provide valuable feedback on required internal control and compliance program remediation, further enhancing the effectiveness of the corporate compliance program. The integrated cycle of identify—investigate—report—remediate across the compliance and investigations functions demonstrates the organization’s earnestness regarding its obligations toward compliance and legal issues.

What should companies focus on?

Compliance programs are not one-size-fits-all. Your organization should tailor your program to fit your needs and circumstances. However, based on recent cases resolved under the DOJ guidance, your company should consider how well your programs are designed to address four key elements critical to compliance programs. Addressing these issues will increase the chances of a more positive outcome when faced with compliance issues:

  1. Risk mitigation: Compliance frameworks are designed to identify and mitigate risks so corporations can adhere to relevant laws and regulations. Understanding the existing legal and regulatory landscape (both domestically and globally) facing your organization, coupled with a focus on communication and engagement, as well as conducting periodic risk assessments shaped by the evolving environment in which you operate, will increase your organization’s preparedness and reduce harm.
  2. Know and use your data: Understanding the information and data available to you, including where it resides and its limitations, is imperative to both assess compliance and respond to allegations of misconduct or noncompliance. In more mature compliance programs, the same data and technology utilized by management to make strategic decisions can be leveraged to identify key issues with compliance. Regulators have now come to expect continuous monitoring of key risk areas to mitigate the severity of compliance issues and limit their frequency.
  3. Investigation management drives reputation management: The rigor with which a business investigates misconduct allegations can demonstrate a company’s commitment to ethical conduct. Organizations that do not disclose all facts may lose credibility with regulators, enforcement agencies and their employees. By enhancing employee awareness of confidential reporting hotlines and other resources, including whistleblower protection rights, reputational harm can be mitigated by all employees within the organization.
  4. Consequence management: Finally, the objectives of any compliance and investigation effort should include limiting financial and reputational impact on the business. If a violation occurred, swift and meaningful action, based on the severity of the conduct and the pervasiveness of the issue, illustrates the thoughtful and strategic manner in which your organization has created an environment of compliance in spirit and practice.

Help to integrate

There are a variety of ways your organization can look to mature your compliance and investigations efforts with the help of external experience and insight.

Compliance program review and continuous improvement

An effective compliance program should evolve and adapt to the changes in the business, industry and any other relevant external circumstances. To that end, companies may periodically engage with external advisors to independently review and update their existing compliance program. Experience from outside your organization brings lessons learned from competitors, other industries and geographies to leverage against the specific compliance needs at issue, limiting risks of noncompliance with new industry standards, regulations and laws.

Gap analysis key factors to change

Third-party risk management (TPRM) and international compliance

Third-party resellers, vendors, suppliers, agents and contractors play vital roles in organizations in the global business environment. However, the use of third parties and their relationships introduces certain risks. In some cases, external entities can affect your company’s compliance status and its brand reputation. Risk mitigation begins with establishing and monitoring a TPRM program led by trained compliance advisors to ensure effective due diligence, mitigating potential risks associated with higher-risk external parties.

Third-party relationship management

For companies operating globally, navigating the complexity of international regulations and laws of foreign countries could be challenging. External advisors with a global network can help your company comply with diverse regulatory requirements and form law-abiding strategies abroad.

Investigation support

Without timely and thorough investigations of allegations of noncompliance, the effectiveness of a compliance program can be significantly diminished. Your organization should maintain relationships with experienced law and investigative firms to provide appropriate global subject matter experience when required. Your organization may lack well-established procedures, personnel or resources; the necessary tools and technology to conduct a thorough investigation; or sometimes, the stakes may simply be too high to go at it alone.

Post-investigation analysis and remediation recommendation

As part of the conclusion of any investigation, a thorough root cause analysis of noncompliance incidents is essential to address the underlying financial or operational issues. Internal controls and process management advisors have deep insights into the types of noncompliance activities and control failures in specialized industries. Advisors can perform the appropriate analyses, determine remediation efforts, assess the adequacy of your data and technology, and develop a prioritized, actionable work plan to remediate control deficiencies.

Post-investigation analysis and remediation recommendation

The risks, the expectations and the stakes for compliance and response have never been higher.  When you establish a team of integrated compliance and investigative professionals that deploy the right technology and outside resources when needed, you are positioned for future success reputationally and financially.

Let’s Talk!

Call us at (541) 773-6633 (Oregon), (208) 373-7890 (Idaho) or fill out the form below and we’ll contact you to discuss your specific situation.





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This article was written by RSM US LLP and originally appeared on 2024-01-23.
2022 RSM US LLP. All rights reserved.
https://rsmus.com/insights/services/financial-management/protecting-value-with-your-compliance-and-response-program.html

RSM US Alliance provides its members with access to resources of RSM US LLP. RSM US Alliance member firms are separate and independent businesses and legal entities that are responsible for their own acts and omissions, and each are separate and independent from RSM US LLP. RSM US LLP is the U.S. member firm of RSM International, a global network of independent audit, tax, and consulting firms. Members of RSM US Alliance have access to RSM International resources through RSM US LLP but are not member firms of RSM International. Visit rsmus.com/aboutus for more information regarding RSM US LLP and RSM International. The RSM(tm) brandmark is used under license by RSM US LLP. RSM US Alliance products and services are proprietary to RSM US LLP.

KDP Certified Public Accountants, LLP is a proud member of RSM US Alliance, a premier affiliation of independent accounting and consulting firms in the United States. RSM US Alliance provides our firm with access to resources of RSM US LLP, the leading provider of audit, tax and consulting services focused on the middle market. RSM US LLP is a licensed CPA firm and the U.S. member of RSM International, a global network of independent audit, tax and consulting firms with more than 43,000 people in over 120 countries.

Our membership in RSM US Alliance has elevated our capabilities in the marketplace, helping to differentiate our firm from the competition while allowing us to maintain our independence and entrepreneurial culture. We have access to a valuable peer network of like-sized firms as well as a broad range of tools, expertise, and technical resources.

For more information on how KDP LLP can assist you, please call us at:

Oregon Office:
(541) 773-6633

Idaho Office:
(208) 373-7890

Tax framework agreement sets direction for potential business and individual tax relief

Section 174 expensing, a return to EBITDA for section 163(j), an extension of 100% bonus depreciation and disaster relief paid for by ending Employee Retention Credits (ERC)

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Tax framework agreement sets direction for potential business and individual tax relief

ARTICLE | January 19, 2024 | Authored by RSM US LLP

Executive summary 

Momentum continues to build towards a potential tax agreement that would couple an expanded child tax credit with a temporary reinstatement of certain TCJA-related business tax benefits, including:

  1. Research and development (R&D) expensing (section 174)
  2. Less stringent business interest limitations (section 163(j))
  3. Continuation of 100% bonus depreciation

To that end, proposed legislation H.R. 7024, the “Tax Relief for American Families and Workers Act of 2024” key tax writers in the Senate and the House, building upon a framework agreement released Jan. 16, that would further advance these provisions toward potential enactment. However, significant obstacles remain, including the need for buy-in from senior lawmakers, as well as the support (and vote) from enough lawmakers in both the House and the Senate to ensure passage. The framework also includes disaster relief provisions, enhanced section 179 expensing benefits, expansion of the low-income housing tax credit, and relief from double taxation for Taiwan residents. The proposals would be completely paid for by barring new employee retention credit (ERC) claims after Jan. 31, 2024. 

Discussion

Senate Finance Chairman Ron Wyden and House Ways and Means Chairman Jason Smith have proposed legislation that would temporarily postpone certain scheduled tax increases for the “big 3” business provisions that were enacted as part of the 2017 Tax Cuts and Jobs Act (TCJA) in exchange for an expanded child tax credit. The Tax Relief for American Families and Workers Act of 2024 represents the culmination of a months-long negotiating process between key lawmakers, and the measure must now navigate a tricky political environment where Congress is faced with several competing priorities, and where action before the impending tax filing season is critical. The House Ways & Means Committee marked up, and ultimately approved by a 40-3 vote signifying strong bipartisan support, the legislative text on Friday Jan. 19, and the full House will likely take up the measure when they return from recess on Jan. 29, if not sooner. ?

Both the legislative text as well as the Joint Committee on Taxation’s summary of the measure provide additional details of the initial proposals, which may change as the bill advances through Congress. A summary of those initial proposals, as set forth in the framework, as well as our preliminary observations, is provided below. Further changes or modifications will be addressed as needed in subsequent insights from RSM. 

Deduction for research and experimental expenditures.?The framework delays the date on which taxpayers must begin capitalizing their domestic research or experimental costs and amortizing them over a five-year period, as required under the TCJA. Under the proposal, taxpayers would be able to deduct currently (rather than capitalize) domestic research or experimental costs that are paid or incurred in tax years beginning after Dec. 31, 2021, and before Jan. 1, 2026. Foreign research and experimental costs would continue to be capitalized and subject to amortization over a 15-year period.

Observation: Hope for restoration of full expensing for qualifying R&E expenditures under section 174 has been at the top of the wish list for many impacted businesses since the law change became effective in 2022 and is considered a critical component to the package. 

Less stringent business interest deduction limitation.?Under the framework, deductibility of business interest would increase for many taxpayers. The limitation or cap on business interest would revert to an amount based on an EBITDA approach (i.e., earnings before interest, taxes, depreciation, and amortization) , in place of the current more-stringent EBIT (i.e., earnings before interest and taxes) calculation. The provision would take effect for taxable years beginning after Dec. 31, 2023 (and, if elected, for taxable years beginning after Dec. 31, 2021), and before Jan. 1, 2026, thus allowing for potential retroactive treatment.

Observation: How a taxpayer would elect retroactive application for taxable years beginning after Dec. 31, 2021 is not specified in the legislation. Should this bill become enacted, taxpayers wishing to make the election would need to wait for additional procedures from the Treasury and IRS that specify how to make the election.

Observation: Where control of a business entity has changed in a sale (or other transaction), the framework’s retroactive aspects may give rise to business issues. Additional tax deductions retroactively available for either interest or for research and experimental expenditures can still provide tax benefit for the business after the sale. However, the transaction documents for the sale may restrict who can make the tax filings needed to pursue the tax benefit and may dictate whether the additional tax benefit could result in a purchase price adjustment, Taxpayers engaging in merger and acquisition activity should consider the provisions of their transaction documents prior to pursuing any retroactively available tax benefits.

Extension of 100% bonus depreciation. The provision extends 100% bonus depreciation for qualified property placed in service after Dec. 31, 2022, and before Jan. 1, 2026 (Jan. 1, 2027, for longer production period property and certain aircraft.)

Increased expensing of depreciable business assets. The provision increases the maximum amount a taxpayer may expense under section 179 for qualifying property to $1.29 million, reduced by the amount by which the cost of qualifying property exceeds $3.22 million. The $1.29 million and $3.22 million amounts are adjusted for inflation for taxable years beginning after 2024. The proposal would apply to property placed in service in taxable years beginning after Dec. 31, 2023.

Child tax credit. As currently proposed, the framework would expand and extend the child tax credit for three years and would modify the calculation of the refundable child tax credit to enable more families with multiple children to claim a larger credit before running into limits based on earned income. The framework would increase the current child tax credit of $2,000 per child for inflation in tax years 2024 and 2025. In determining their maximum child tax credit, taxpayers would be able to use earned income from the prior taxable year to the extent it exceeds the current year’s amount. The provisions on the child tax credit would be effective for tax years 2023 through 2025.

Observation: It remains to be seen whether proponents of an expanded child tax credit will view these changes as sufficient to meet their demands for a COVID-era equivalent credit, including full refundability, and whether proponents of adding work requirements to the credit will support this provision, or require additional modifications. ???? 

Increasing global competitiveness. The framework provides targeted and expedited relief from double taxation on US-Taiwan cross border investment through changes to the U.S. tax code Notably, it would provide certain treaty-like benefits for income from US sources that is earned or received by qualified residents of Taiwan, contingent on reciprocity to U.S. persons with income subject to tax in Taiwan. Such benefits would generally include (i) reduced withholding tax rates on interest, dividends and royalties; (ii) an increased permanent establishment threshold, and (iii) favorable tax treatment on certain wages of qualified residents of Taiwan that are performing personal services in the U.S. (subject to certain exclusions). The framework includes a provision that would authorize the President to consult with Congress and negotiate an agreement with Taiwan, as none currently exists. 

Observation: In broad brush, these provisions would allow the Biden Administration to negotiate and conclude an executive agreement that would contain provisions similar to those contained in a tax treaty that the U.S. might conclude with a new treaty partner. We expect that the agreement would contain provisions that would grant relief from double taxation including access to the U.S. competent authority.?It remains to be seen whether any future agreement(s) would provide benefits more advantageous than those available under the U.S.-China double tax treaty. Presumably, the agreement will include information reporting/exchange provisions as well.?

Assistance for disaster-impacted communities 

Casualty loss relief for certain disasters

The framework extends the rules for the treatment of certain disaster related personal casualty losses passed in the Taxpayer Certainty and Disaster Tax Relief Act of 2020, including the elimination of the requirement that casualty losses must exceed 10% of adjusted gross income (“AGI”) to qualify for the deduction, to a potentially large amount of disasters. While the AGI limitation would be removed, each separate casualty would still be subject to a $500 floor (a very small limitation in the grand scheme). Further, the taxpayer would be able to take this casualty loss “above the line”, meaning even if they don’t itemize their deductions, they are allowed to claim the casualty loss in addition to the standard deduction. 

Observation: It is our understanding that this provision would relate to many, if not all, of the disasters listed on the IRS website, Tax relief in disaster situations | Internal Revenue Service, starting with the ones listed in 2020 through 2023 and any that occur within 60 days after the date of enactment of this proposal – so a significant amount of disasters. Any future disasters within this 60-day period must still be declared a major disaster by the President. This proposed legislation would provide much needed relief to Taxpayers who experienced casualty losses, especially those victims of Hurricane Ian, Hawaii Wildfires, California Storms and Wildfires, among many other disasters. 

Qualified wildfire relief payments

The framework also includes relief in the form of an exclusion from gross income for compensation for losses or damages resulting from qualified wildfires relief payments. Qualified wildfire relief payments mean any amount received as compensation for losses, expenses, or damages (including compensation for additional living expenses, lost wages (other than compensation for lost wages paid by the employer which would have otherwise paid such wages), personal injury, death or emotional distress) as a result of a qualified wildfire disaster that were not compensated by insurance or otherwise. A qualified wildfire disaster is defined as any federally declared disaster as a result of any forest or range fire. This provision applies to qualified wildfire relief payments received by the individual during taxable years beginning after Dec. 31, 2019 and before Jan 1, 2026. It should be noted that this provision is clear that no double benefit is allowed and as such, no deduction or credit shall be allowed for any expenditure to the extent the amount was excluded from income. Further, if the taxpayer uses these qualified payments on any property they shall not be allowed to increase their basis in the property. 

East Palestine (Ohio) disaster relief payments 

This provision provides necessary relief from the victims of the East Palestine Ohio train derailment insofar that relief payments will be treated as qualified disaster relief payments as defined in section 139(b). Section 139(b) allows these relief payments to be excluded from gross income. East Palestine Train Derailment Payments means any amount received by an individual as compensation for loss, damages, expenses, loss in real property value, closing costs with respect to real property (including realtor commissions), or inconvenience (including access to real property) result from the East Palestine train derailment if such amount was provided by (1) a Federal, State, or local government agency, (2) Norfolk Southern Railway, or (3) any subsidiary, insurer, or agent of Norfolk Southern Railway. East Palestine train derailment means the derailment of a train in East Palestine, Ohio on Feb. 3, 2023. This provision applies to payments received on or after Feb. 3, 2023.

More affordable housing. This provision of the framework seeks to increase the supply of affordable housing by increasing the ceiling on the state housing credit (for purposes of the low-income housing tax credit) for calendar years 2023 through 2025. This would allow states to allocate more credits towards affordable housing projects. In addition, the framework would lower the bond-financing threshold (as part of the tax-exempt bond financing requirement) to 30% for projects financed by bonds with an issue date before 2026, subject to a transition rule for certain buildings that already have bonds issued.

Employee retention credit. The framework would end the period for filing ERC claims for both 2020 and 2021 as of Jan. 31, 2024 and would beef up penalties on a “COVID-ERTC promoter” (as separately defined) who is aiding and abetting the understatement of a tax liability or who fails to comply with certain due diligence requirements relating to the filing status and amount of certain credits. While these changes would stop any claims from being filed before the standard period for filing ERC claims ends (April 15, 2024 and April 15, 2025), it would not have any retroactive effect for claims filed prior to Jan. 31, 2024. However, the framework would extend the statute of limitations period on assessment for all quarters of the ERC to six years from the later of the original filing or the date of the claim. This could potentially allow, for example, a claim filed on Jan. 1, 2024, for the second quarter of 2020, to be examined and adjusted until Jan 2, 2030. This would enable the IRS to examine and seek the return of ERC refunds for years to come. 

The proposed legislation also provides for an extension on the period of time to amend corresponding income tax returns on which employers may have reduced wage deductions to account for the prohibition on claiming ERC on wages deducted from income; however as currently drafted this additional extension seems to only apply to individual and corporate returns and not partnership returns. This proposal would bring parity to the period for making an adjustment to the wage deduction with the period of time the IRS has to make adjustments to the ERC claimed, correcting a mismatch between the limitations period currently in existence on the third and fourth quarters of 2021. 

Next steps

As indicated above, the House Ways & Means Committee marked up the bill on Friday, Jan. 19, where the measure passed by a very strong vote of 40-3 in favor. According to the House’s calendar, a recess is planned for the week of Jan. 22, with members returning Monday, Jan. 29 which happens to coincide with start of the tax filling season, as announced recently by the IRS. The next step would be for the full House to consider the measure on the floor, and if passed, would be sent to the Senate for consideration. Timing will be tight, however, as many lawmakers view Jan. 29 as a deadline for House passage. It is possible that timing could shift beyond this date somewhat to the extent significant progress has been made. There are no guarantees, however, and additional timing and procedural constraints could similarly surface in the Senate, where leading Republican Senators have expressed reservations, particularly around the child tax credit and have called for changes. This could further inject uncertainty into the process.  

It is important to keep in mind this is a very fluid and evolving development, and that ultimate passage of a tax bill is far from certain. Moreover, the provisions (and accompanying observations) described above are subject to potential change as the negotiation process moves forward. 

RSM US LLP’s Washington National Tax and Tax Policy team members are actively monitoring developments and will be issuing additional insights as warranted.

Let’s Talk!

Call us at (541) 773-6633 (Oregon), (208) 373-7890 (Idaho) or fill out the form below and we’ll contact you to discuss your specific situation.





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This article was written by Matt Talcoff, Ryan Corcoran, Fred Gordon, Tony Coughlan and originally appeared on 2024-01-19.
2022 RSM US LLP. All rights reserved.
https://rsmus.com/insights/tax-alerts/2024/tax-framework-agreement-sets-direction-potential-business-individual-tax-relief.html

The information contained herein is general in nature and based on authorities that are subject to change. RSM US LLP guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. RSM US LLP assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein. This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer.

RSM US Alliance provides its members with access to resources of RSM US LLP. RSM US Alliance member firms are separate and independent businesses and legal entities that are responsible for their own acts and omissions, and each are separate and independent from RSM US LLP. RSM US LLP is the U.S. member firm of RSM International, a global network of independent audit, tax, and consulting firms. Members of RSM US Alliance have access to RSM International resources through RSM US LLP but are not member firms of RSM International. Visit rsmus.com/aboutus for more information regarding RSM US LLP and RSM International. The RSM(tm) brandmark is used under license by RSM US LLP. RSM US Alliance products and services are proprietary to RSM US LLP.

KDP Certified Public Accountants, LLP is a proud member of RSM US Alliance, a premier affiliation of independent accounting and consulting firms in the United States. RSM US Alliance provides our firm with access to resources of RSM US LLP, the leading provider of audit, tax and consulting services focused on the middle market. RSM US LLP is a licensed CPA firm and the U.S. member of RSM International, a global network of independent audit, tax and consulting firms with more than 43,000 people in over 120 countries.

Our membership in RSM US Alliance has elevated our capabilities in the marketplace, helping to differentiate our firm from the competition while allowing us to maintain our independence and entrepreneurial culture. We have access to a valuable peer network of like-sized firms as well as a broad range of tools, expertise, and technical resources.

For more information on how KDP LLP can assist you, please call us at:

Oregon Office:
(541) 773-6633

Idaho Office:
(208) 373-7890

IRS announces details for ERC Voluntary Disclosure program

IRS provides VD Program for employers to return ERC refunds and avoid penalties and interest. Employers must apply by March 22, 2024.

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IRS announces details for ERC Voluntary Disclosure program

ARTICLE | December 22, 2023 | Authored by RSM US LLP

Executive summary:

Employee Retention Credit Voluntary Disclosure program

On Dec. 21, 2023, the IRS announced the details of an anticipated employee retention credit Voluntary Disclosure program (ERC-VDP) for employers who claimed and received an ERC refund for a quarter but were not eligible. The program allows claimants to repay ERC at a reduced rate of 80% of the credit.  In addition, the program waives penalties and interest on the full amount, not just the 80% returned. The IRS is only accepting applications for the program until March 22, 2024. Accepted applicants will be required to execute a closing agreement stating they are not entitled to ERC and must provide the name and contact information for any preparer or advisor who assisted in claiming the ERC. The IRS has also published a set of FAQs relating to the ERC-VDP.

The IRS also announced that they are issuing another round of letters proposing adjustments to tax issued to 20,000 employers that claimed an erroneous or excessive amount of ERC.

IRS announces details for ERC Voluntary Disclosure program 

ERC VDP continuation of ongoing IRS initiative to combat dubious ERC claims

Following the October announcement of the ERC withdrawal process, the IRS has released the details of the new ERC-VDP which will allow ERC claimants who have already received the refund or credit against employment taxes to apply to repay the ERC at a reduced rate of 80% of the claim, without penalties or interest. The ERC-VDP was developed mostly for employers who were induced into claiming ERC and now realize they were not entitled to the credits. In particular, the reduced amount required to be repaid was designed to allow employers who paid a contingency fee to a promoter to repay the improper credit at a lower financial cost. The required disclosure about preparers who assisted in filing the claim will help the IRS gather information on promoters who took aggressive positions in advising taxpayers to claim ERC.

Eligibility for ERC-VDP

Taxpayers who claimed ERC and have received the refund or the credit against their employment taxes are eligible to participate in the program. (Taxpayers who have not yet received an ERC credit or refund but no longer believe they are entitled to ERC can use the withdrawal process to withdraw their claim). Taxpayers are not eligible for ERC-VDP if any of the following apply:

  • The taxpayer is under criminal investigation or has been notified that the IRS intends to commence a criminal investigation;
  • The IRS has already received information alerting it to the taxpayer’s noncompliance;
  • The taxpayer is undergoing an employment tax examination for the period for which it is applying; or 
  • The taxpayer has already received a notice and demand for repayment of all or part of the claimed ERC.

Employers who claimed ERC using a third-party payer, such as a professional employer organization (PEO) or payroll agent, are eligible for ERC-VDP, but the third-party payer must submit the application on the employer’s behalf.  The announcement provides some guidance for third-party payers assisting with such applications.

In order to use the program for a given quarter, the taxpayer must give up the full amount of ERC that was applied for on the Form 941 X for that quarter.  Taxpayers who want to reduce only a portion of the ERC claimed in a quarter are not eligible for ERC-VDP or the withdrawal process; these taxpayers must file an amended return to adjust the ERC claimed.

Terms of participation in ERC-VDP

Employers who are approved to participate in the program (’participants’) will be required to execute a closing agreement which provides that they are not eligible for, or entitled to, any ERC for the tax period(s) at issue. The participant will repay 80% of the claimed ERC to the Department of Treasury. Participants will also be excused from repaying overpayment interest received on any issued ERC refund. Underpayment interest will not be required if the participant makes full payment prior to executing the closing agreement.

The program also provides for the possibility of repaying the ERC amount through an installment arrangement.  If the IRS approves repayment under an installment agreement, interest will only accrue prospectively from the agreement date. The IRS will not assert civil penalties against participants that make full payment of the 80% of claimed ERC prior to executing the required closing agreement.

For many taxpayers, the ERC impacted their income tax obligations as well. Because ERC cannot be claimed on wages that are claimed as a deduction against income, recipients of ERC were expected to reduce wage deductions for the 2020 and/or 2021 tax years equal to the ERC amounts. If participants had not already amended their income tax returns to reduce their wage deduction by any claimed ERC, they will not need to file amended returns or Administrative Adjustment Requests (AARs) to reduce their wage deduction. Participants who already reduced their wage deduction by the claimed ERC may file an amended return or AAR to reclaim the previously reduced wage expense. No income will be attributed to participants as a result of participating in the program.

If a return preparer or advisor assisted the participant in claiming the ERC, the participant must provide the name, address, and phone number of the preparer or advisor as well as a description of services provided.

Under the new application form, a taxpayer can provide a power of attorney to allow another person to represent the taxpayer in making the VDP application.

Applications for ERC-VDP due by March 22, 2024, 11:59 pm local time. 

Taxpayers apply to participate in ERC-VDP by completing Form 15434, Application for ERC-VDP and submitting it via the IRS Document Upload Tool by March 22, 2024. Form 15434 must be signed by an authorized person under penalties of perjury. Taxpayers applying for ERC-VDP for a period ending in 2020 must include a completed and signed statute extension Form ERC-VDP SS-10.  Form 15434 will help calculate the payment required to participate in ERC-VDP. Paying the balance via Electronic Federal Tax Payment System (EFTPS) at the time of applying for ERC-VDP is encouraged and could speed up the resolution of the case. However, as discussed above, participants who are unable to pay the entire balance may be considered for an installment agreement.

The IRS FAQs state that ERC-VDP applications will be handled on a first come, first serve basis. The FAQs indicate that most cases should resolve quickly but also provide there is no way to estimate how long the process will take. Applicants can call the ERC-VDP hotline at 414-231-2222 and leave a voicemail to check on the status of their application or for assistance with the ERC-VDP process, including completing Form 15434.

If a taxpayer’s application is approved, the IRS will prepare a closing agreement under section 7121 of the Code and mail the closing agreement to the participant. Once a participant receives the ERC-VDP closing agreement package, they will be asked to review and return the signed agreement within 10 business days. Participants need to pay balances due prior to signing the agreement in order to receive all the benefits of the program. If the IRS denies a taxpayer’s application to participate in ERC-VDP, there is no method to review or appeal the denial. Further, a taxpayer’s participation in ERC-VDP does not preclude the IRS from later investigating any criminal conduct or provide any immunity from prosecution.

Let’s Talk!

Call us at (541) 773-6633 (Oregon), (208) 373-7890 (Idaho) or fill out the form below and we’ll contact you to discuss your specific situation.





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This article was written by Anne Bushman, Alina Solodchikova, Karen Field , Marissa Lenius and originally appeared on 2023-12-22.
2022 RSM US LLP. All rights reserved.
https://rsmus.com/insights/tax-alerts/2023/irs-announces-details-for-erc-voluntary-disclosure-program-.html

The information contained herein is general in nature and based on authorities that are subject to change. RSM US LLP guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. RSM US LLP assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein. This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer.

RSM US Alliance provides its members with access to resources of RSM US LLP. RSM US Alliance member firms are separate and independent businesses and legal entities that are responsible for their own acts and omissions, and each are separate and independent from RSM US LLP. RSM US LLP is the U.S. member firm of RSM International, a global network of independent audit, tax, and consulting firms. Members of RSM US Alliance have access to RSM International resources through RSM US LLP but are not member firms of RSM International. Visit rsmus.com/aboutus for more information regarding RSM US LLP and RSM International. The RSM(tm) brandmark is used under license by RSM US LLP. RSM US Alliance products and services are proprietary to RSM US LLP.

KDP Certified Public Accountants, LLP is a proud member of RSM US Alliance, a premier affiliation of independent accounting and consulting firms in the United States. RSM US Alliance provides our firm with access to resources of RSM US LLP, the leading provider of audit, tax and consulting services focused on the middle market. RSM US LLP is a licensed CPA firm and the U.S. member of RSM International, a global network of independent audit, tax and consulting firms with more than 43,000 people in over 120 countries.

Our membership in RSM US Alliance has elevated our capabilities in the marketplace, helping to differentiate our firm from the competition while allowing us to maintain our independence and entrepreneurial culture. We have access to a valuable peer network of like-sized firms as well as a broad range of tools, expertise, and technical resources.

For more information on how KDP LLP can assist you, please call us at:

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IRS will use AI to help target partnerships and high net worth individuals

The IRS announced a sweeping enforcement effort that will engage AI to focus on large partnerships and wealthy individuals.

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IRS will use AI to help target partnerships and high net worth individuals

ARTICLE | December 08, 2023 | Authored by RSM US LLP

Executive summary: IRS to target large partnerships and wealthy individuals

Large partnerships and high net worth individuals are the target of a sweeping enforcement effort that artificial intelligence will support, the IRS announced Sept. 8, 2023. The agency will prioritize enforcement against the largest and most complex partnerships, as well as individuals with annual income over $1 million and more than $250,000 in tax debt.

The IRS has worked in conjunction with experts in data science and tax enforcement to create machine learning technology to identify compliance issues in the areas of partnership tax, general income tax and accounting, and international tax.

IRS shifts its focus to large partnerships and wealthy individuals

On the heels of the Inflation Reduction Act, which increased the agency’s funding, the IRS has initiated a broad effort to crack down on partnerships and wealthy individuals at risk for noncompliance, specifically targeting the largest partnerships as well as individual taxpayers with income exceeding $1 million and tax debt exceeding $250,000.

Large partnerships

The Government Accountability Office in July 2023 released data that detailed a significant increase in the formation of large partnerships between 2002 and 2019. The report revealed a 600% increase in large partnerships, which it defined as partnerships with at least $100 million in assets and 100 or more partners.

The report further determined the audit rate for these large partnerships had dropped to less than 0.5% since 2007. The report revealed 80% of the audits conducted resulted in no changes to the partnership return, perhaps as a result of the IRS’ inability to properly target noncompliant partnerships.

In October 2021, the IRS initiated the Large Partnership Compliance (LPC) pilot program via its Large Business and International Division in response to the need for a coordinated approach to audits of partnerships under the centralized audit regime enacted as part of the Bipartisan Budget Act of 2018. The LPC successfully engaged in examinations of some of the largest and most complex partnerships in the U.S.

Building on the success of the LPC program, the IRS in September 2023 announced its intent to target 75 of the largest partnerships—those with at least $10 billion in assets—in fiscal year 2024.

Introducing AI to enforcement efforts

To accurately select partnerships for examination, the IRS will use an AI solution, which was developed through a collaboration of experts in data science and tax enforcement who have been working together to develop machine learning technology. The AI will “identify potential compliance risk in the areas of partnership tax, general income tax and accounting, and international tax in a taxpayer segment that historically has been subject to limited examination coverage,” according to the IRS’ news release.

The news release stated that the IRS has also identified balance sheet discrepancies involving partnerships with over $10 million in assets. Specifically, the IRS will target partnerships whose returns show discrepancies exceeding $1 million between end-of-year balances and the beginning balances for the following year.

The agency will mail compliance letters requesting explanations of the discrepancies to around 500 partnerships, and, depending on the responses, may add these partnerships to the audit stream for additional review.

Individuals

The IRS is also targeting high net worth taxpayers with annual income above $1 million who have more than $250,000 in recognized tax debt.

The agency will engage dozens of revenue officers to focus on these high-end collection cases in fiscal year 2024. Through the first half of November 2023, the agency contacted 1,600 high net worth taxpayers that owe hundreds of millions of dollars. Through this effort, IRS collected $122 million in the first 100 cases.

Actions taxpayers should take

Partnerships and high net worth taxpayers should be prepared for an increase in IRS audit activity in the coming months and years. Maintenance and retention of financial records, as well as documentation supporting tax positions likely to be challenged, will be critical. Working with your tax advisor to ensure accurate reporting and prepare for an examination in advance would benefit taxpayers who may be affected by the IRS’ increased enforcement efforts.

Partnerships should regularly update basis schedules for partners. Attempting to re-create them years after the relevant transactions can be difficult due to a lack of adequate records.

All taxpayers should take care to document certain deductions or positions taken on a tax return, including but not limited to:

  • Any position that has been identified as a campaign issue by the IRS’ Large Business and International Division
  • Any position identified as a listed transaction
  • Any position for which a Schedule UTP (uncertain tax position) is required
  • Any position with respect to which a Form 8275 (Disclosure Statement) is included with the relevant return
  • Any positions claiming a research credit
  • Any position on a sale of partnership interest or sale of other assets
  • Any positions where the IRS can question capital vs. ordinary gain treatment of an item

With respect to any of these deductions, credits or positions, taxpayers should make sure they can readily substantiate them to the IRS during an audit. Written memoranda with legal citations supporting positions taken should be drafted as the relevant tax return is prepared. A research credit should not be claimed unless there is a completed research credit study justifying the credit.

Prudent taxpayers should ask their advsors to perform an audit readiness assessment that identifies tax return items that the IRS is likely to examine. This will enable taxpayers to further support those items.

Let’s Talk!

Call us at (541) 773-6633 (Oregon), (208) 373-7890 (Idaho) or fill out the form below and we’ll contact you to discuss your specific situation.





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This article was written by Alina Solodchikova, David McNeely, Jackie Sullivan, Mike Zima and originally appeared on 2023-12-08.
2022 RSM US LLP. All rights reserved.
https://rsmus.com/insights/services/business-tax/irs-use-ai-help-target-partnerships-high-net-worth-individuals.html

The information contained herein is general in nature and based on authorities that are subject to change. RSM US LLP guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. RSM US LLP assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein. This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer.

RSM US Alliance provides its members with access to resources of RSM US LLP. RSM US Alliance member firms are separate and independent businesses and legal entities that are responsible for their own acts and omissions, and each are separate and independent from RSM US LLP. RSM US LLP is the U.S. member firm of RSM International, a global network of independent audit, tax, and consulting firms. Members of RSM US Alliance have access to RSM International resources through RSM US LLP but are not member firms of RSM International. Visit rsmus.com/aboutus for more information regarding RSM US LLP and RSM International. The RSM(tm) brandmark is used under license by RSM US LLP. RSM US Alliance products and services are proprietary to RSM US LLP.

KDP Certified Public Accountants, LLP is a proud member of RSM US Alliance, a premier affiliation of independent accounting and consulting firms in the United States. RSM US Alliance provides our firm with access to resources of RSM US LLP, the leading provider of audit, tax and consulting services focused on the middle market. RSM US LLP is a licensed CPA firm and the U.S. member of RSM International, a global network of independent audit, tax and consulting firms with more than 43,000 people in over 120 countries.

Our membership in RSM US Alliance has elevated our capabilities in the marketplace, helping to differentiate our firm from the competition while allowing us to maintain our independence and entrepreneurial culture. We have access to a valuable peer network of like-sized firms as well as a broad range of tools, expertise, and technical resources.

For more information on how KDP LLP can assist you, please call us at:

Oregon Office:
(541) 773-6633

Idaho Office:
(208) 373-7890

What is operational resiliency and why is it important?

Operational resiliency: anticipate, prepare, respond, recover from disruptions, ensuring core services.

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What is operational resiliency and why is it important?

ARTICLE | November 21, 2023 | Authored by RSM US LLP

Skyscrapers are designed to sway. If they were too rigid, high winds or earthquakes would crack their structures. They are built to be resilient under all kinds of unforeseen conditions.

Similarly, an organization cannot afford to be rigid and inflexible. Successful companies are resilient.

Operational resiliency is a company’s ability to anticipate, prepare for, respond to and recover from unanticipated disruptions while continuing to deliver its core products and services. Creating resiliency is a proactive endeavor that focuses on building an organization’s capacity to absorb shocks and adapt swiftly to evolving circumstances.

Companies with a high degree of resiliency can withstand unexpected challenges or even full-blown crises. The key is to create a business model that is powerful and efficient, yet adaptable enough to address the sudden problems—anything from cyberattacks to natural disasters to supply chain disruptions—that can plague a business.

But how does a company accomplish that?

Assess the situation

Many third-party organizations provide business motion analyses, which gather information about a company’s level of resiliency. This type of analysis examines relevant criteria across an organization, such as the company’s industry, strategy, governance, communication approach, decision-making structure and other factors, coupled with a deep systematic study, now AI-driven, of the movement and flow of tasks, activities and information within the organization. The outcome identifies inefficiencies, bottlenecks and areas for improvement to optimize the overall performance and effectiveness of the business operations. A thorough analysis will also provide an objective look at how prepared a company is for an emergency.

This analysis does not necessarily identify specific threats. Instead, motion analysis assesses if the company is ready for the day when something goes wrong.

The dangers of being unprepared

Companies that lack resilience put themselves at risk for a host of problems, including the following:

  • Financial losses—negatively affecting cash flow
  • Massive downtime—alienating customers
  • Reputational damage—causing time-consuming crisis management
  • Regulatory noncompliance—leading to fines and consent orders
  • Shaken confidence of stakeholders—devaluing the brand and company

In some cases, a lack of resiliency could even mean the end of the company altogether. It’s crucial, therefore, to understand the components of operational resiliency and how to enhance them.

Risk management

There are several pillars that support the concept of operational resiliency. Perhaps the most foundational of these is risk management.

A comprehensive understanding of potential risks consists of identifying a company’s vulnerabilities in processes, systems, suppliers, partners and external factors, then assessing their potential impact. By obtaining a clear view of these risks, organizations can create targeted strategies to mitigate them.

A well-structured risk assessment can incorporate everything from testing a company’s cybersecurity to analyzing geopolitical issues that could disrupt the organization’s functions, among other factors. Potential risks can be obvious or hidden, major or minor, direct or indirect. In all cases, the resilient company has completed scenario planning that at least considers the possibility of these risks becoming a reality.

Business continuity

Companies must maintain their essential functions even during a crisis. This involves formulating contingency plans, establishing alternative work sites, designing flexible processes and implementing communication protocols to ensure seamless collaboration among employees and stakeholders.

For example, natural disasters cannot be contained. However, resilient organizations find a way to keep working even when Mother Nature wants to shut the company down.

It’s not just about assessing worst-case situations. It is about running through scenarios, coming up with solutions and being prepared to implement them when disaster strikes.

Data management

Technology plays a crucial role in operational resiliency. However, many organizations suffer from siloed data that is stored across different systems, and in such cases, vital information goes unused or unexamined. Embracing digital transformation enables organizations to quickly adapt to changing conditions and to make decisions in real time.

Redundancy in critical systems, regular data backups and strong cybersecurity measures are vital to prevent, or recover from, cyberattacks or technical failures. In addition, new tools are being developed constantly, and companies need to keep up to date on the best systems to bolster their resiliency.

Perhaps more importantly, access to real-time insights—gathered from the volumes of data collected and stored—enables management teams to make critical decisions quickly when faced with the unexpected.

Proactive leadership and culture

Resilient organizations are led by individuals who make thoughtful and data-driven decisions under pressure and guide their teams through challenging times. Adaptive leaders foster a culture of trust, preparedness, open communication and timely decision-making, which are essential in times of crisis.

As with every aspect of leadership, the tone that is set becomes contagious. Flexible leaders inspire flexibility in others within the organization. Leaders who panic provoke more panic. Resiliency is a trait that filters down through a company.

The resilient organization

Operational resiliency is not a luxury. It is a necessity for companies that want to stay relevant in today’s dynamic business environment.

By identifying risks, building sound strategies and fostering a culture of adaptability, organizations can navigate crises with strength and agility. Operational resiliency equips businesses to overcome challenges and emerge even stronger than before.

Let’s Talk!

Call us at (541) 773-6633 (Oregon), (208) 373-7890 (Idaho) or fill out the form below and we’ll contact you to discuss your specific situation.





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This article was written by RSM US LLP and originally appeared on 2023-11-21.
2022 RSM US LLP. All rights reserved.
https://rsmus.com/insights/services/business-strategy-operations/what-is-operational-resiliency-and-why-is-it-important.html

RSM US Alliance provides its members with access to resources of RSM US LLP. RSM US Alliance member firms are separate and independent businesses and legal entities that are responsible for their own acts and omissions, and each are separate and independent from RSM US LLP. RSM US LLP is the U.S. member firm of RSM International, a global network of independent audit, tax, and consulting firms. Members of RSM US Alliance have access to RSM International resources through RSM US LLP but are not member firms of RSM International. Visit rsmus.com/aboutus for more information regarding RSM US LLP and RSM International. The RSM(tm) brandmark is used under license by RSM US LLP. RSM US Alliance products and services are proprietary to RSM US LLP.

KDP Certified Public Accountants, LLP is a proud member of RSM US Alliance, a premier affiliation of independent accounting and consulting firms in the United States. RSM US Alliance provides our firm with access to resources of RSM US LLP, the leading provider of audit, tax and consulting services focused on the middle market. RSM US LLP is a licensed CPA firm and the U.S. member of RSM International, a global network of independent audit, tax and consulting firms with more than 43,000 people in over 120 countries.

Our membership in RSM US Alliance has elevated our capabilities in the marketplace, helping to differentiate our firm from the competition while allowing us to maintain our independence and entrepreneurial culture. We have access to a valuable peer network of like-sized firms as well as a broad range of tools, expertise, and technical resources.

For more information on how KDP LLP can assist you, please call us at:

Oregon Office:
(541) 773-6633

Idaho Office:
(208) 373-7890

SALT Tax-tober brings spooky ghouls and goblins

State and local taxes can be scary. Find out what keeps RSM’s state and local tax professionals up at night.

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SALT Tax-tober brings spooky ghouls and goblins

ARTICLE | October 20, 2023 | Authored by RSM US LLP

The scariest tax proposals and possibilities in all of state and local tax

With Tax-tober quickly coming to a close, RSM US’s Washington National Tax state and local tax (SALT) practice decided to grab a wooden stake, puree some garlic, melt all the silver we could find, light a torch and see what could be unearthed from some of the scariest SALT proposals and scenarios we’ve seen or considered. Turn on a light, definitely do not answer the phone, and find out what keeps us up at a night.

SALT Tax-tober brings spooky ghouls and goblins

Brian Kirkell

Time is ticking toward another Halloween. However, this one holds a strange poignancy for me. My daughter has announced to everyone in the house that (in her words) America’s repressive “grow up fast and get a job” social construct will make this her last chance to trick-or-treat without the negative judgment and ill-will of candy givers neighborhood-wide. Why do we do this? Why do we feel the need to arbitrarily take away an environment where fear and joy can be safely experienced all at once?

For the sake of Tax-tober, it makes as little sense to me as all of the proposals states are floating to restrict or eliminate ballot measures.

Only about half the states allow citizens to get measures on the ballot, and, if you live in one of them, you are lucky. You can directly participate in your state’s governance based purely upon having an idea and the passion to see it through. And there’s no better place to focus than the manner in which a state or locality can exert its tax authority.

Some will seek to expand that authority. Some will seek to restrict it. Most of what is proposed will never make it to the ballot, or will not pass if it does. But there’s magic in the possibility; magic in one of the few forms of direct democracy we have available to us. 

States, don’t limit it. Don’t take it away. While you’re at it, how about something that incentivizes everyone to get out there and trick-or-treat? Let’s prove my daughter wrong. Otherwise, someday she might just try to get enough support for a ballot measure mandating a tax-free Halloween for everyone.

David Brunori

Brian thinks the challenges to direct democracy are scary. I would tend to agree, but I am not sure initiatives and referendums are the avenue for developing all tax policy. Not all voters are as smart as his daughter. If you put single-sales factor on the ballot, most voters’ eyes will glaze over.

My colleague, Mo, takes a more lighthearted view below of what is scary in the SALT world. Sales tax exemptions are certainly frightful, particularly for vendors who must determine what is or is not subject to tax. There are literally hundreds of fun—and spooky—examples.

Remember, if vendors do not collect and remit tax on what is actually taxable, they are on the hook. In my experience—and I have been practicing throughout most of the ’Friday the 13th’ movies—many vendors will err on the side of taxability. Better to collect the tax on things not subject to tax, than to face a revenue department auditor. Now there’s a nightmare you can’t just wake up from.

But what I find most petrifying is that many states are still considering worldwide combined reporting. New Hampshire is thinking about it right now. Mandatory worldwide reporting is as terrifyingly anti-business as you can get. Companies are not going to stop doing business overseas. But they may stop doing business in a state with worldwide. Like the poor counselors at Camp Crystal Lake, you would hope state legislators would know better.

Mo Bell-Jacobs

With the jack-o’-lantern lit, I always come back to the outright frightening example I’ve used to teach sales tax for over a decade. In Pennsylvania, decorative pumpkins are subject to sales tax, but pumpkins as food are not. No wonder sales tax compliance is hated more than Frankenstein’s monster.

Yes, I recognize there is a logic to the different tax treatment, but I’m not sure my mom would understand and she is much smarter than I am. It could be worse, we could discuss the taxability of frozen pizzas, or how many nuts it takes for a Snickers bar to no longer be taxed as candy (pitch forks and torches down, Streamline states).

What’s keeping me most on edge lately is a subject I know not to feed after midnight: the continued state tax cuts to corporate and individual income taxes.

I’m less concerned about corporate taxes due to the minor amount of revenue generated overall, but individual income taxes nationwide account for over 36% of most state tax collections. Through the second quarter of this year, we’ve experienced four quarters of no or negative individual income tax growth. And yet, states continue to slash individual income taxes. Adding on, state sales tax growth slowed to near zero in the second quarter.

My Elm Street nightmare wouldn’t be complete without a warning—the tax collection data is beginning to show a revenue crunch. Cutting individual income taxes without looking to the horizon is exactly how trolls turn to stone and vampires combust into dust.

While it is true states are some of the most prepared in history to weather a fiscal crisis thanks to boosted rainy-day funds, drastically cutting revenue drivers because revenue is good today ignores that it may not be good tomorrow. The economy is cyclical, just like a new Halloween movie every few years. I urge restraint and good fiscal policy during uncertain times.

Finally, with my new-found authority to trick-or-treat at age 41 thanks to Brian’s daughter, I’ll mostly skip the direct ballot debate this time. And although I’d rather not have voters directly decide tax policy, I think restricting ballot measures could be more akin to finding a strange plant during a total eclipse and naming it after your crush—that is to say, a questionable idea.

Let’s Talk!

Call us at (541) 773-6633 (Oregon), (208) 373-7890 (Idaho) or fill out the form below and we’ll contact you to discuss your specific situation.





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This article was written by David Brunori, Brian Kirkell, Mo Bell-Jacobs and originally appeared on 2023-10-20.
2022 RSM US LLP. All rights reserved.
https://rsmus.com/insights/tax-alerts/2023/salt-tax-tober-brings-spooky-ghouls-and-goblins.html

The information contained herein is general in nature and based on authorities that are subject to change. RSM US LLP guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. RSM US LLP assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein. This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer.

RSM US Alliance provides its members with access to resources of RSM US LLP. RSM US Alliance member firms are separate and independent businesses and legal entities that are responsible for their own acts and omissions, and each are separate and independent from RSM US LLP. RSM US LLP is the U.S. member firm of RSM International, a global network of independent audit, tax, and consulting firms. Members of RSM US Alliance have access to RSM International resources through RSM US LLP but are not member firms of RSM International. Visit rsmus.com/aboutus for more information regarding RSM US LLP and RSM International. The RSM(tm) brandmark is used under license by RSM US LLP. RSM US Alliance products and services are proprietary to RSM US LLP.

KDP Certified Public Accountants, LLP is a proud member of RSM US Alliance, a premier affiliation of independent accounting and consulting firms in the United States. RSM US Alliance provides our firm with access to resources of RSM US LLP, the leading provider of audit, tax and consulting services focused on the middle market. RSM US LLP is a licensed CPA firm and the U.S. member of RSM International, a global network of independent audit, tax and consulting firms with more than 43,000 people in over 120 countries.

Our membership in RSM US Alliance has elevated our capabilities in the marketplace, helping to differentiate our firm from the competition while allowing us to maintain our independence and entrepreneurial culture. We have access to a valuable peer network of like-sized firms as well as a broad range of tools, expertise, and technical resources.

For more information on how KDP LLP can assist you, please call us at:

Oregon Office:
(541) 773-6633

Idaho Office:
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How midsize companies can optimize finance, accounting functions as costs rise

Optimizing the finance and accounting function can help middle market companies weather the environment of rising capital costs.

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How midsize companies can optimize finance, accounting functions as costs rise

ARTICLE | October 19, 2023 | Authored by RSM US LLP

Rising costs of capital are squeezing middle market firms, according to an RSM US Middle Market Business Index special report on financing.

Rising costs of capital are squeezing middle market firms, according to an RSM US Middle Market Business Index special report on financing. The rising costs will make financing more expensive and also make it tougher for businesses to access capital, which is already more of a challenge for many small and midsize businesses than their larger counterparts.

Streamlining the finance and accounting function can help middle market companies weather this environment. Optimized finance and accounting departments can provide lenders with higher-quality data and better visibility into the business.

“That will ultimately put the business in a better position to work with lenders and raise capital,” says Michael Smith, finance and accounting outsourcing leader at RSM US LLP. “But those things can’t happen unless you optimize your finance department.”

Here are some ways businesses can enhance their accounting and finance departments to mitigate the challenges of surging financing costs:

  • Assess opportunities for automation: Even companies that already use automation technologies should look for ways to automate manual functions to produce more timely reporting while freeing up employee time for more critical tasks.

    For example, in the finance department, organizations can use robotic process automation to automate the creation of journal entries, which is often a manual process.

    “Automation doesn’t have to be all or nothing,” says Smith. “Even if something can be automated but still needs to be reviewed by a person, that can still save time.” One example is using exception reporting tools; instead of an employee having to look through an entire dataset for accuracy, such tools can flag anomalies for human review.

    Automation usually goes hand in hand with enabling a clear data strategy, too. Better information and analytics will ultimately allow the business to spend more efficiently.

  • Explore scalable alternative staffing models: Like automation, outsourcing isn’t usually an all-or-nothing approach, either. For most companies, co-sourcing—keeping some functions in-house and working with an external provider for others—is a key solution to improve efficiency.

    It’s also important to ensure your staffing approach is scalable depending on changes the business may experience throughout its life cycle. The finance and accounting teams may need to expand or contract at different times. When a company needs to adopt a new accounting standard, for example, it might make more sense to work with a third party for that adoption. Teams should continually assess which functions are better candidates for outsourcing.

Read the special report

2023 RSM US Middle Market Business Index Special Report: Funding

Rising real interest rates are pushing up the cost of commercial and industrial loans, making it harder for middle market firms to meet payroll and finance their expansion, according to findings in the third-quarter
RSM US Middle Market Business Index survey.

Find out how businesses are coping with the higher cost of capital in our special report.

  • Leverage the FP&A function to its full extent: The financial planning and analysis function will be key in helping organizations navigate the implications of higher financing costs across the entire company.

    “It’s not just about the function of accounting and finance; FP&A plays a key role in helping the business understand itself and where capital should be deployed,” says Patrick Brennan, a financial consulting leader at RSM US LLP.

    FP&A teams might zero in on customer profitability metrics, variance analysis, key financial performance indicators and operational KPIs, plus a clear understanding of cost structures, including fixed versus variable costs. Using tools such as Microsoft Power BI to pull all that information into a dashboard enables a company to tell a comprehensive story on business and financial performance.

  • Revisit your pricing structure: Depending on their sector, some businesses may not have revisited their product or service prices following the disruption and inflation of recent years, and for many of those, now is the time to do so.

    “We get so cost-conscious in times of rising capital costs, but we don’t always address how to price products and services,” says Brennan. “The FP&A function can also help the organization think about pricing and other untapped areas for value creation.”

  • Have the right people in place: Companies need to be careful not to get too caught up in buying new technologies without having the right people on their teams to achieve success as costs rise and the margin for error shrinks.

    “Profits can mask many problems. And since profits are shrinking, it’s important to have the right team and technology in place,” says Smith. The two should work harmoniously together, with employees leveraging technology to its fullest and most efficient extent.

Meeting a higher threshold

Alongside these action items, companies must also be prepared to meet a higher bar for the internal and external projects they pursue.

“In a lower interest rate environment, plenty of projects might make sense,” says Brennan. “But in this environment, potentially fewer projects achieve the hurdle rates necessary to proceed. That means certain businesses face more pressure on the investments and the capital expenditures that fuel growth.”

Middle market organizations will need to be more strategic in how they prioritize going forward, balancing cost optimization with enabling growth as market conditions continue to evolve. Working with an advisor to explore the critical points above can be a good place to start.

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This article was written by RSM US LLP and originally appeared on 2023-10-19.
2022 RSM US LLP. All rights reserved.
https://rsmus.com/insights/services/financial-management/how-midsize-companies-can-optimize-finance-accounting-functions.html

RSM US Alliance provides its members with access to resources of RSM US LLP. RSM US Alliance member firms are separate and independent businesses and legal entities that are responsible for their own acts and omissions, and each are separate and independent from RSM US LLP. RSM US LLP is the U.S. member firm of RSM International, a global network of independent audit, tax, and consulting firms. Members of RSM US Alliance have access to RSM International resources through RSM US LLP but are not member firms of RSM International. Visit rsmus.com/aboutus for more information regarding RSM US LLP and RSM International. The RSM(tm) brandmark is used under license by RSM US LLP. RSM US Alliance products and services are proprietary to RSM US LLP.

KDP Certified Public Accountants, LLP is a proud member of RSM US Alliance, a premier affiliation of independent accounting and consulting firms in the United States. RSM US Alliance provides our firm with access to resources of RSM US LLP, the leading provider of audit, tax and consulting services focused on the middle market. RSM US LLP is a licensed CPA firm and the U.S. member of RSM International, a global network of independent audit, tax and consulting firms with more than 43,000 people in over 120 countries.

Our membership in RSM US Alliance has elevated our capabilities in the marketplace, helping to differentiate our firm from the competition while allowing us to maintain our independence and entrepreneurial culture. We have access to a valuable peer network of like-sized firms as well as a broad range of tools, expertise, and technical resources.

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What to do if you filed an employee retention credit claim with the IRS

ERC submissions are under scrutiny by the IRS due to a surge in questionable claims. Are you confident your claim meets the eligibility requirements and can stand up to a potential audit?

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What to do if you filed an employee retention credit claim with the IRS

ARTICLE | September 19, 2023 | Authored by RSM US LLP

The employee retention credit (ERC or ERTC) was originally enacted in the CARES Act in March of 2020 at the onset of the COVID pandemic. Congress acted quickly by enacting this credit to get money in the hands of employers who were continuing to pay employees despite being affected by COVID mitigation measures. Specifically, those effects were a significant decline in gross receipts (which is objective) or a full or partial suspension from government orders (which is very subjective).

Over time, the credit has been changed, and many businesses have been filing. Though the ERC ended for most on Sept. 30, 2021, many businesses continue to file because the statute of limitations is still open. Specifically, the statute for 2020 claims ends April 15, 2024 (taxpayers have another year beyond that for 2021 claims).

Determining eligibility is complex and includes careful analysis and calculation of qualified wages.

The IRS announced an immediate halt to processing ERC claims. Now what?

On Sept. 14, the IRS will discontinue processing claims for the remainder of 2023 in an attempt to limit fraudulent activity in the employee retention credit market. The IRS hopes this measure will reduce the number of fraudulent claims encouraged by third-party providers.

We expect there will be significant delays in processing ERC claims in 2024 when the IRS resumes processing procedures.

The announcement is also significant for those taxpayers who have already filed ERC refund claims but should not have due to ineligibility. Additional procedural guidance from the IRS is expected to allow taxpayers the ability to withdraw claims that have not been processed.

Further, the IRS also intends to provide guidance for those who have received refunds in error, who want to pay them back to avoid penalties and future compliance action.

Understand what options are available for submitted ERC claims

First, and most importantly, employers should work with their trusted tax professional.

The IRS provides some red flags for recognizing some of the aggressive promoters which include:

  • Unsolicited calls or advertisements
  • Statements about it being easy or determinable in minutes
  • Large upfront fees or fees based on the size of the credit

Companies that did engage parties like this should have tax professionals review their substantiation to determine whether it appears to be valid or outside the provided guidance. The IRS published some guidance in July 2023 on supply chain impacts, for example, and in cases where employers were claiming a partial suspension from supply chain impacts, the IRS is expecting to see support of specific government orders and substantiation that suppliers were impacted by those orders. This is only one area of possible impact, but it’s an example of what employers need to be prepared for if the IRS reviews their claim.

You’ve submitted your ERC claim but haven’t received payment. What’s next?

Many employers, even with valid claims, are still waiting for refunds. These entities should expect more delays in processing (even beyond what we were experiencing before) and possibly will receive additional questions from the IRS. In some cases, such entities may be pulled for exam before the IRS issues a refund. The IRS can also commence examination even after the refund is issued.

Also, taxpayers need to be aware that even if a refund is issued, if it is later deemed invalid, the IRS has two years from the date the refund was issued to commence erroneous refund claim action. Erroneous refunds are subject to a 20% penalty.

Recommendations for navigating your ERC claim

The IRS is expected to provide additional guidance for taxpayers about how to withdraw or amend an ERC claim.

If you choose to withdraw your ERC claim or pay back a previously received credit, work with a qualified tax professional to ensure the appropriate steps are taken to protect yourself from potential penalties or interest. 

Let’s Talk!

Call us at (541) 773-6633 (Oregon), (208) 373-7890 (Idaho) or fill out the form below and we’ll contact you to discuss your specific situation.





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This article was written by Anne Bushman, Alina Solodchikova and originally appeared on 2023-09-19.
2022 RSM US LLP. All rights reserved.
https://rsmus.com/insights/services/business-strategy-operations/what-to-do-if-you-filed-an-employee-retention-credit-claim-irs.html

The information contained herein is general in nature and based on authorities that are subject to change. RSM US LLP guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. RSM US LLP assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein. This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer.

RSM US Alliance provides its members with access to resources of RSM US LLP. RSM US Alliance member firms are separate and independent businesses and legal entities that are responsible for their own acts and omissions, and each are separate and independent from RSM US LLP. RSM US LLP is the U.S. member firm of RSM International, a global network of independent audit, tax, and consulting firms. Members of RSM US Alliance have access to RSM International resources through RSM US LLP but are not member firms of RSM International. Visit rsmus.com/aboutus for more information regarding RSM US LLP and RSM International. The RSM(tm) brandmark is used under license by RSM US LLP. RSM US Alliance products and services are proprietary to RSM US LLP.

KDP Certified Public Accountants, LLP is a proud member of RSM US Alliance, a premier affiliation of independent accounting and consulting firms in the United States. RSM US Alliance provides our firm with access to resources of RSM US LLP, the leading provider of audit, tax and consulting services focused on the middle market. RSM US LLP is a licensed CPA firm and the U.S. member of RSM International, a global network of independent audit, tax and consulting firms with more than 43,000 people in over 120 countries.

Our membership in RSM US Alliance has elevated our capabilities in the marketplace, helping to differentiate our firm from the competition while allowing us to maintain our independence and entrepreneurial culture. We have access to a valuable peer network of like-sized firms as well as a broad range of tools, expertise, and technical resources.

For more information on how KDP LLP can assist you, please call us at:

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Cost recovery, losses and R&D

This roundup of developments in the tax accounting methods and periods realm covers rulings and advice regarding cost recovery and losses.

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Cost recovery, losses and R&D

ARTICLE | August 08, 2023 | Authored by RSM US LLP

Recent tax accounting methods guidance may assist with tax planning ideas

With the second quarter in the rearview mirror for calendar-year companies, we enter a period of finalizing 2022 tax compliance and looking ahead to tax planning for the 2023 calendar year.

Neither the courts nor the IRS in the second quarter issued major guidance related to accounting methods, but taxpayers did receive the anticipated annual update to the list of automatic accounting method changes, the obsoletion of a 65-year-old revenue ruling that allowed taxpayers to amend returns for consistency in section 174 cost treatment, and various letter rulings and advice regarding cost recovery and losses.

While not covered in detail here because it is proposed legislation that has not moved to the legislative floor, the House Ways and Means Committee released three proposed bills: the Tax Cuts for Working Families Act, the Small Business Jobs Act, and the Build it in America Act.

The Build it in America Act contains provisions to bring back the ability to expense research and experimentation expenditures for taxable years beginning in 2022 through 2025. It also resets the interest expense limitation calculation to allow the addback of depreciation, depletion and amortization for taxable years beginning in 2022 through 2025. For calendar year 2022 and tax planning into 2023, sections 174 and 163(j) continue to be top of mind for many companies.

Before recapping the recent updates from the IRS and Treasury Department, here’s a tax planning idea for companies subject to capitalization of costs under section 263A. As many companies now have spent three or more years computing section 263A capitalization under the 2018 final regulations, they may be eligible for a more streamlined cost allocation method election called the historic absorption ratio election.

Tax planning opportunity

Inventory and cost allocation planning: UNICAP and the historic absorption ratio election

Contributor:
Maureen Hansen | Manager

If I’ve learned anything by talking to people since the release of the 2018 UNICAP regulations, it is that most don’t enjoy the intricacies of inventory accounting, and they enjoy the complicated UNICAP rules even less. I used to feel similarly as I began my career outside of accounting and found the first few UNICAP projects I ever did to be—shall we say—intense.

While I Learned to Stop Worrying and Love UNICAP (apologies to Mr. Kubrick) and spend most of my time thinking about inventory, I doubt all tax professionals will find the same beauty in UNICAP that I do. If you are one of those people who don’t, moving to the historic absorption ratio (HAR) for UNICAP might help you spend a little less time thinking about inventory.

What is the HAR and why now?

The HAR is an optional election for UNICAP that generally reduces the time and effort to calculate UNICAP. Instead of calculating an absorption ratio every year from the entirety of the income statement, the taxpayer applies an average ratio from a three-year test period to ending inventory. The taxpayer must “retest” the ratio by generating a full UNICAP calculation periodically to determine if a new three-year average is necessary.

As described below, a taxpayer needs three prior years on a UNICAP method to compute the HAR ratio. With many taxpayers having adopted the section 263A regulations in 2018, 2019 or 2020, there should now be at least three prior years to pull from to compute the HAR.

How does it work?

In the year of election, the taxpayer takes the prior three years of additional section 263A costs and divides them by the section 471 costs to generate the HAR ratio. This ratio may have other components depending on the inventory methods in place.

The HAR generated from the test period is applied to section 471 costs remaining on hand at year end (generally meaning ending inventory). A taxpayer uses this ratio for five years (the year of election plus the subsequent four years) in the qualifying period. In the sixth year from election (which is the recomputation year), a taxpayer needs to compute a full UNICAP calculation using the method from the original test period.

If the newly computed ratio is within +/- 0.5% of the existing ratio, a taxpayer continues to use the HAR for the sixth year and the next five years. The taxpayer then will need to repeat the recomputation process.

What are potential benefits and detriments to the HAR?

Taxpayers considering the HAR are generally interested in reducing the administrative burden of calculating UNICAP every year, as a full UNICAP calculation is no longer necessary.

As the HAR locks in the absorption ratio, it can lead to either favorable or unfavorable outcomes compared to a full UNICAP computation each year. Taxpayers with lower absorption rates expected to increase soon can enjoy a five-year period at the prior rates. Taxpayers with high absorption ratios would have established those rates for the next five years, regardless of if those rates are expected to decrease.

As an example, taxpayers experiencing elevated levels of uncapitalized tax depreciation related to installation of new equipment for inventory production may have abnormally high ratios that may adjust downward as fewer assets are placed in service and/or bonus depreciation phases out.

Taxpayers with planned or frequent updates to their book or tax methods for inventory may not benefit from the HAR as anticipated. Depending on the inventory changes involved, the taxpayer may have to recompute and apply the test period HAR ratio under the new inventory method. This may represent a substantial administrative burden and may alter the HAR ratio unfavorably.

As an industry consideration, private equity portfolio companies may also benefit from a HAR election. If the general hold period is less than eight years and the exit structure is going to be a taxable asset acquisition (or part-taxable, part-tax-free), then that portfolio company may never encounter its retest period.

Final thoughts

A taxpayer looking to reduce their time on UNICAP compliance may benefit from electing the HAR. It would be wise, however, to consider future acquisitions, ERP upgrades and expected efficiency increases, among other things, before rushing the election in an attempt to simplify compliance.


Case law updates


Conmac Investments, Inc., T.C. Memo 2023-40 (March 27, 2023)

Summary

This decision requiring a taxpayer to return to a prior method of accounting highlights risks of unauthorized changes. Taxpayers should be careful to document and distinguish factual changes versus changes in method. If a change is determined to be change in method, requesting consent of the IRS is the path forward.

In Conmac Investments, Inc. v. Commissioner, the United States Tax Court held that a corporate taxpayer (“Taxpayer”) that owns and leases farmland made an unauthorized change in its method of accounting related to base acres rented to tenant farmers, violating section 446(e)’s consent requirement and. Notwithstanding that the unauthorized change occurred in a closed year, the court sustained an IRS-imposed method change and resulting section 481 adjustment to put the Taxpayer back on its prior method of accounting.

In Conmac, the Taxpayer acquired and leased to tenant farmers farmland that included so-called “base acres” during years ranging from 2004 to 2013. Base acres are a congressionally created right to receive farm program subsidies for the production of certain commodities from the U.S. Department of Agriculture (“base acre payments”). The right to receive the base acre payments attach to the farm rather than the farm owner.

The Taxpayer’s base acres were all farmed by tenant farmers, who in turn collected all base acre payments. Under the leases between the Taxpayer and tenant farmers, tenants paid the Taxpayer annual rent equal to twenty-five percent of the tenant farmer’s gross income from farming activities (including base acre payments received by the tenants).

Historically, the Taxpayer refrained from claiming any amortization or depreciation deductions on its farmland; however, beginning in 2009 the Taxpayer began treating certain of its base acres assets subject to amortization under section 197 (governing the amortization of certain intangible assets), claiming an amortization deduction for base acres acquired and placed in service in 2004 through 2013. The Taxpayer failed to request the IRS’ consent before adopting such treatment (e.g., through filing a Form 3115) and did not otherwise file amended returns reclassifying the base acres rented to tenant farmers as amortizable section 197 intangibles.

During an examination of the Taxpayer’s 2013 and 2014 tax returns, the IRS determined that Taxpayer’s method of accounting for its base acres was not permissible and imposed an exam-related method change on the taxpayer for 2013, including calculating a section 481(a) adjustment for amounts taken into account in the prior, closed years.

In determining whether the Taxpayer made an unauthorized change in method when it began amortizing the base acres, the Tax Court observed that a change in tax reporting attributable to a change in underlying facts is generally not a change in method of accounting. However, a change in fact requires a change in business practices, a change in economic or legal relationships, or an otherwise altered factual situation.

In applying this principle, the Tax Court determined that the Taxpayer’s change was not precipitated by a change in fact because the Taxpayer did not change its economic or legal relationship with tenant farmers through the modification of any lease agreement terms and the only economic consequence resulting from the Taxpayer’s change in treatment was the tax benefit received by Taxpayer from changing its accounting method.

The Tax Court concluded that the change in the treatment of the base acres from nonamortizable to amortizable beginning in 2009 was a change in accounting method, and, as a result, the Taxpayer should have obtained the IRS’ consent by filing a Form 3115 regardless of whether the existing method was proper or permitted.

The Taxpayer’s failure to obtain the IRS’ consent triggered the IRS’ authority to return the Taxpayer to its former method, despite the method being impermissible. As a change in accounting method, the IRS was further permitted to impose a section 481(a) adjustment relating to amounts from closed years.

The Taxpayer argued that even if it was required to file a Form 3115, the lack of prior consent is irrelevant because it related to a closed tax year. Even though not cited by the IRS or the Taxpayer, the Tax Court noted that in Commissioner v. Brookshire Bros. Holding, Inc. the Fifth Circuit held that the IRS’ challenge to a method change for which consent was never given must be for the year of the improper change and that the failure to obtain prior consent does not serve as a basis to challenge a change made in a closed year.

The Tax Court distinguished Brookshire Bros. Holding, Inc. from the facts of this case, noting that unlike the taxpayer in Brookshire Bros., the Taxpayer neither filed amended returns to reflect its change in treatment, nor did the Taxpayer adopt consistent treatment for all of its base acres. The Tax Court concluded that the Taxpayer was precluded from implementing its method change because it failed to obtain the Commissioner’s consent under section 446(e), and as such, the IRS was entitled to change the Taxpayer’s accounting method back to its prior method, notwithstanding that the method change occurred in a closed year. The court further held that under the rules of section 481, the IRS was permitted to impose a section 481 adjustment that included amounts attributable to an otherwise time barred tax year.


Treasury and IRS updates


Revenue Ruling 2023-8

Summary

This revenue ruling obsoletes prior guidance allowing taxpayers to amend tax returns to correct improper capitalization of research and development costs subject to full expensing under section 174(a) as in effect prior to amendments by the Tax Cuts and Jobs Act. Taxpayers should discuss any prior-year improper treatment of R&D costs with their tax advisor to determine the appropriate way to correct such treatment.

Although Treasury and the IRS have not yet released substantive guidance on the treatment of research and development (R&D) costs under section 174, as amended by the Tax Cuts and Jobs Act (TCJA), the IRS recently issued Rev. Rul. 2023-8, obsoleting Rev. Rul. 58-74 as of July 31, 2023.

Rev. Rul. 58-74 provided that if a taxpayer previously adopted the expense method for R&D costs under section 174(a) (as in effect prior to amendment by the TCJA) but failed to deduct such costs in one or more years, the taxpayer should submit a refund claim or amended return, to claim a deduction for the costs in the year(s) omitted. Rev. Rul. 58-74 noted that once the expense method is adopted under section 174(a), the taxpayer could not change the treatment of its R&D costs without first obtaining consent of the IRS to change its accounting method for such costs. The ruling provided that without first obtaining consent, the taxpayer was not permitted to treat its R&D costs as deferred or permanently capitalized expenses; therefore, the only way to recover such previously capitalized or deferred costs is through amending or filing a refund claim for prior, open years.

Revenue Ruling 58-74 has long been an anomaly in the context of how the general accounting method rules apply. Changing a permissible or impermissible method of accounting for an item, including R&D costs, typically requires IRS consent through the filing of an accounting method change (i.e., a Form 3115); such changes generally cannot be applied retroactively through amended returns. On the other hand, an error in treatment (e.g., a mathematical error or one that does not involve the timing of recognizing an item of income or expense) must be corrected through amending prior year returns. In certain cases, Rev. Rul. 58-74 supported retroactive changes to the treatment of R&D costs that might otherwise be treated as a change in method of accounting.

In Rev. Rul. 2023-8, the IRS noted that Rev. Rul. 58-74 lacks adequate facts to correctly determine whether the taxpayer’s failure to deduct certain R&D costs constituted a method of accounting or an error. By obsoleting Rev. Rul. 58-74, Rev. Rul. 2023-8 removes the ability of taxpayers to amend returns in order to adjust an item that arguably is subject to a prospective accounting method change. Obsoleting Rev. Rul. 2023-8 may also avoid IRS challenge that a taxpayer will permanently lose the recovery of R&D costs that were improperly capitalized in closed years.

Although Rev. Rul. 58-74 has been obsoleted, the general rule for correction of errors (versus changes in method of accounting) remain unchanged. Taxpayers should discuss any inconsistencies in their established methods with their tax advisors to determine the appropriate way forward.

Revenue Procedure 2023-24

Summary

Rev. Proc. 2023-24 updates the list of automatic tax accounting method changes previously contained in Rev. Proc. 2022-14. While most existing changes are not significantly modified, the revenue procedure includes changes related to depreciation, research and development expenses, and mark-to-market elections and revocations.

Rev. Proc. 2023-24 is effective for method changes filed on or after June 15, 2023 for a year of change ending on or after Oct. 31, 2022. Taxpayers should carefully navigate these revised procedures, paying close attention to ensure compliance and to effectively manage their tax obligations.

Private Letter Ruling 202301009

Summary

The IRS ruled that payments received from disparate sources were properly treated as separate items such that treatment of payments from one source did not affect the taxpayer’s method of accounting for payments from another source. Although the ruling itself was favorable to the Taxpayer, the PLR highlights the importance of reviewing contractual terms and conditions to determine the appropriate treatment of amounts received, including whether such amounts constitute gross income.

In PLR 202301009, the IRS ruled that a taxpayer/licensor’s established method of accounting for certain payments received from licensees was not affected by the taxpayer’s treatment of payments received from non-licensees.

The taxpayer (Taxpayer) in the PLR operated a global brand that included: (1) licensing its brand to licensees (Licensees); and (2) managing a “Brand Fund” to pay for promotional activities that benefit the Licensees. Pursuant to both the Taxpayer and Licensees’ license agreements and a “Brand Fund Agreement” between the Taxpayer and an independent “License Association” managed by the Licensees, the Taxpayer was obligated to pay a certain portion of the payments received from Licensees into the Brand Fund; amounts held in the Brand Fund were required to be used by the Taxpayer for marketing and related activity benefiting the Licensees and were subject to monitoring the Licensees.

In an earlier tax year, the Taxpayer received consent to change its accounting methods with respect to the payments received from Licensees and remitted to the Brand Fund (Licensee Payments) to a method whereby the Taxpayer would treat itself as a conduit for the Licensee Payments and exclude them from gross income for federal income tax purposes (the Consent Agreement).

The Taxpayer subsequently entered into various agreements with third parties (non-licensees), under which the Taxpayer received amounts (Non-licensee Payments) that, pursuant to the Brand Fund Agreements, were required to be placed in the Brand Fund. Initially, the Taxpayer treated itself as a conduit with respect to the Non-licensee Payments, in line with its treatment of the Licensee Payments; however, in a subsequent year, the Taxpayer and License Association agreed that the Non-licensee Payments would no longer be paid into the Brand Fund. As a result, the Taxpayer intended to begin including the Non-licensee Payments in taxable income.

In the PLR, the Taxpayer requested a ruling that the change in treatment of Non-licensee Payments represented a change in fact, rather than a change in method of accounting, which would not adversely affect the validity of the Taxpayer’s Consent Agreement relating to the Licensee Payments.

Although the IRS ultimately ruled that the Taxpayer’s change in treatment did not adversely the Consent Agreement, the IRS’ conclusion was not predicated on an underlying change in fact but rather that the Non-Licensee Payments were never part of the Consent Agreement.

The IRS noted that gross income under section 61 is generally expansive in definition and includes any undeniable accession to wealth; however, “if a taxpayer’s receipt of a payment is conditioned on a binding legal obligation to remit the payment to another . . . the taxpayer is generally deemed to be a mere conduit of those funds and is not required to include the payment in income.” While the Licensee Payments may have been received on the condition that the Taxpayer remit the payments to the Band Fund, the restrictions on the Non-Licensee Payments were imposed by the Brand Fund Agreements, not by the third-party payors who owed the Payments to the Taxpayer. As such, the Non-Licensee Payments were never covered by the Consent Agreement and a change in treatment of such payments would therefore have no impact on the Consent Agreement.

Although the ruling is arguably favorable to the Taxpayer in that it confirms that the earlier Consent Agreement is still valid, the IRS’ discussion implies that the Taxpayer never should have treated itself as a conduit for the Non-licensee Payments because the Taxpayer’s obligation to remit such payments to the Brand Fund was not a condition to it receiving the Payments.

Chief Counsel Advice 202304009

Summary

The IRS ruled that costs to acquire a priority review voucher (PRV), which may either be used by a pharmaceutical company to expedite a New Drug Application with the Food and Drug Administration or held for investment or future sale, must be capitalized upon acquisition, with recovery dependent on how the PRV is ultimately used. Pharmaceutical companies that acquire and hold PRVs should consult with their tax advisors to determine the proper treatment of the associated costs, including whether an accounting method change is recommended.

Priority review vouchers (PRVs) were created by Congress to incentivize pharmaceutical companies to invest and develop new therapies and treatments for certain neglected and rare diseases. A PRV may be awarded by the Food and Drug Administration (FDA) to any pharmaceutical company that applies and receives approval of a New Drug Application (NDA) for a new drug that treats a targeted condition. These vouchers are valuable assets to pharmaceutical companies as they entitle the holder to an expedited review of a future NDA by the FDA. Alternatively, the holder of a PRV may choose to sell the PRV to another pharmaceutical company, rather than use the PRV itself. PRVs do not expire and can be transferred an unlimited number of times before use. Thus, a pharmaceutical company can acquire a PRV and: (1) use the PRV immediately to expedite an NDA; (2) redeem the PRV at a future time for an expedited NDA; or (3) hold the PRV for resale to another pharmaceutical company.

In CCA 202304009, the IRS ruled that regardless of the intent in acquiring and holding a PRV, the PRV is an intangible asset subject to capitalization under section 263(a) and Treas. Reg. §1.263(a)-4 (governing the treatment of certain costs to acquire or create intangible assets); however, the proper method of recovering costs to acquire a PRV depends on whether the PRV is held for future use by the taxpayer or for sale.

Under Treas. Reg. § 1.263(a)-4, a taxpayer must capitalize amounts paid or incurred to acquire certain intangible assets, including, among other items: (1) amounts paid to a government agency to obtain rights under a franchise or other similar right granted by the government agency; and (2) amounts paid to acquire a separate and distinct intangible asset. Additionally, a taxpayer must capitalize amounts paid or incurred to facilitate the acquisition of such rights. Amounts are treated as facilitative when they are paid or incurred in the process of investigating or otherwise pursuing the transaction.

According to the CCA, an NDA is a franchise subject to the capitalization rules of Treas. Reg. § 1.263(a)-4 because the NDA represents a government-provided right to market and sell a product in a defined area. In cases where a PRV is used to expedite the FDA review of an NDA, the IRS reasoned that the costs to acquire the PRV are properly treated as transaction costs that facilitate the creation of such right.

Where a taxpayer acquires a PRV with the intent to hold the PRV for sale rather than to apply it to a future NDA, the CCA similarly concludes that the costs are subject to capitalization under Treas. Reg. § 1.263(a)-4, this time as a cost to acquire a separate and distinct intangible asset. Thus, in either case, a taxpayer must capitalize amounts paid or incurred to acquire a PRV.

Although the cost to acquire a PRV are subject to capitalization regardless of the underlying reason for acquiring and holding the asset, the CCA concludes that recovery of the cost is dependent on the intent in holding the asset.

In cases where the PRV is held for future use by the taxpayer, the CCA concludes that the cost to acquire the PRV may either be amortized as part of the related NDA, or, if the NDA is ultimately not approved by the FDA, recovered as a loss under section 165. The CCA provides that a PRV is not depreciable or amortizable by itself because it is not by itself an amortizable section 197 intangible asset and it is not subject to depreciation under section 167 because it has an unlimited useful life.

However, an NDA is a section 197 intangible asset; as such, if used to expedite an NDA review, the PRV can be recovered under section 197 as part of the amortization of the NDA. In this case, the taxpayer would amortize the PRV over 15 years beginning in the month the NDA is approved. If the NDA is not granted by the FDA, the taxpayer can deduct the loss under section 165 in the taxable year that the NDA is abandoned, provided no loss disallowance rules come into play.

Alternatively, should the taxpayer acquire the PRV for resale or investment, the CCA concludes that the taxpayer would recover its costs only upon disposition of the PRV.

Although the CCA predicates recovery on the intent in holding the PRV, ultimate use of the PRV is what will ultimately determine the recovery of the associated cost. Changing the treatment of costs to acquire PRVs likely requires an accounting method change; taxpayers that hold PRVs should discuss the impact of the CCA with their tax advisors.

Private Letter Ruling 202318008

Summary

The IRS’ ruling highlights the provisions in section 460 that require a taxpayer to utilize a long-term contract method of accounting, even if the subject matter of the contract is not the item being constructed. If the taxpayer must manufacture or construct an item to fulfill its obligations under the contract, the fact that the taxpayer is not required to deliver the item to the customer is not relevant. While this ruling is only applicable to the taxpayer’s specific facts, it may provide insight to how the IRS will interpret similar or analogous situations.

In this letter ruling, taxpayer and its customer entered in a services agreement that covered at least a period covering more than one taxable year. As part of the agreement, the taxpayer received title to facilities related to the services being provided and customer retained title to the underlying land. The agreement included an easement granting the taxpayer access to the customer’s property to fulfill contractual services and allowed the customer to mandate relocation of facilities if customer so desired.

When the customer exercised this right, they established a new contract requiring taxpayer to relocate the facilities to remove an item owned by the customer situated within taxpayer’s premises. The contract outlines the work the Taxpayer must perform, including partial demolition of a building, construction for the extension of the building and an adjacent building, and relocation and installation of equipment. The contract for this construction work provides that the payments are intended to reimburse taxpayer for its costs.

After examining the facts, the IRS ruled that this contract for construction qualified as a long-term contract under section 460.

Chief Counsel Advice 202325007

Summary

In what appears to be a first-of-its-kind advice, the IRS ruled on the application of the disaster loss election to worthless stock deductions claimed with respect to the stock of three controlled foreign corporations (CFCs).

The CCA expresses the IRS’ position that taxpayers cannot attribute the worthlessness of stock in a CFC to the COVID-19 disaster and thus cannot use the provisions of section 165(i) to accelerate the timing of the loss deduction. The IRS makes clear that the use of section 165(i) is geographically restricted, and the statute cannot be construed as including holdings of domestic taxpayers related to overseas companies.

While heavily redacted, it appears the taxpayer in the CCA (Taxpayer) experienced certain closures in the United States to comply with government mandates imposed because of COVID-19. The reduced cash flow resulting from this event caused a decrease in payments from the Taxpayer to its CFCs and eventually to the CFCs’ insolvency. This, in turn, caused the Taxpayer to deem its investment in the CFCs worthless. The Taxpayer then invoked section 165(i) to claim a worthless securities deduction with respect to its shares of stock in the CFCs in the year prior to the year the Taxpayer deemed the stock worthless. This claim was timely made on the Taxpayer’s federal income tax return for the prior year, in accordance with section 165(i)(1).

In the ILM, the IRS acknowledged that the events in question occurred during the COVID National Emergency period as declared by the President of the United States under the Stafford Act. The IRS does not explicitly opine on whether the loss was attributable to the COVID-19 disaster but appears to tacitly acknowledge that such a loss may qualify as a disaster loss under section 165(i). However, the IRS concluded that the loss related to CFC stock cannot satisfy section 165(i)’s requirements because it did not occur within the disaster area, which is defined as the area so determined to warrant assistance under the Stafford Act.

The IRS noted that no existing authority directly opines on where a loss sustained with respect to stock in a CFC occurs for purposes of section 165(i). Accordingly, to evaluate the location of the economic loss may require consideration of several business metrics. While in some contexts a shareholder’s residence is important, the IRS emphasized its poor fit with the clear congressional intent to cover a specific geographic area.

The IRS explored various indicators examining agents may use to identify the location of a loss tied to a foreign corporation’s stock, including income-generating assets, customers, employees, or revenue streams. In this case, no substantial part of the CFCs’ revenues came from U.S. customers. Other potential metrics like income-generating assets, employees, and revenue streams were all located or took place outside the United States. Consequently, the losses experienced by the Taxpayer should not be treated as having occurred within the disaster area. The IRS examined the legislative intent and policy reasons for section 165(i), finding that it is meant to provide relief by “alleviating the financial impact of damages resulting from a physical disaster that is geographically confined.”

The COVID-19 disaster created a somewhat novel situation for section 165(i) deductions. In CCA 202325007, the IRS highlighted that prior disasters eligible for an accelerated deduction under section 165(i) were typically linked to specific, tangible events, like hurricanes, floods, or droughts, resulting in clearly defined geographic disaster zones. This aligns with the Congressional intent behind section 165(i), which aims to provide relief by mitigating the financial burden caused by physically and geographically confined disasters. However, in the Taxpayer’s case, these precedents are less useful as the disaster was not physical and the loss was not clearly assignable to a particular location. The IRS appears to acknowledge that the COVID-19 disaster may give rise to disaster losses that are deductible under section 165(i) but does not directly conclude in this manner.

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This article was written by Kate Abdoo, Ryan Corcoran, Justin Silva and originally appeared on 2023-08-08.
2022 RSM US LLP. All rights reserved.
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