Tax news: What you may have missed during busy season

By Art Auerbach, CPA

During the 2023 busy season, the Internal Revenue Service (IRS), Virginia General Assembly and Department of Taxation (TAX) were adding to the base of knowledge for tax preparation and tax planning. 

Virginia

The legislature extended the conformity date with the Internal Revenue Code to Jan. 1, 2023, with no exceptions for those items included in the Inflation Reduction Act signed in August 2023 and Budget Bill signed in December 2023, which included Secure Act 2.0. This was emergency legislation and thus became effective upon Gov. Glenn Youngkin’s signature.

The VSCPA successfully lobbied legislators to change the statute to now contain rolling income tax conformity. Thus, any future changes to the Internal Revenue Code will be automatically adopted in Virginia unless they have a more than $15 million effect on the Virginia budget.

The General Assembly also passed an amendment to the pass-through entity taxation (PTET)/SALT workaround, which made it easier to more entities to take advantage of the Virginia statute. This, however, was effective July 1, 2023.  
TAX issued Tax Bulletin 22-6, Information Regarding 2021 Virginia Income Tax Returns, and in March released a reminder about the new PTET provisions.

Federal

Below are important federal tax updates.

1.    See IRS IR-2022-162 regarding improperly forgiven PPP loans. Bear in mind, the U.S. Small Business Administration was given 10 years by Congress to examine Paycheck Protection Program (PPP) loans for compliance with the statute. The IRS was given five years. The information release discusses the taxability of the amount of the PPP loan that was determined to be improperly forgiven.    This also led to the discussion on the PTET/SALT limit and the taxation of any refunds made by the states and the taxability of those refunds. There will be more to come on this subject in the next few months and will involve application of the tax benefit rule. 

2.    Many states and the IRS are beginning to look at gig economy treatment of some workers as independent contractors rather than employees. Two recent New Jersey cases brought this to everyone’s attention. In both situations, the employer lost. This is a very complex issue as it involves different tests depending on which portion of the Code you are looking at:

• Social security and Medicare withholding.
• Withholding of income taxes.
• Unemployment taxes.
• Wage and hour laws.
• A number of Department of Labor provisions regarding fringe benefits and retirement plans.

It would behoove most practitioners to review the rules with their clients regarding the degree of worker independence and the degree of employer control of the worker. IRS Tax Tip 2022-117 is a great place to start (particularly if you prepare Forms 1099-MISC or 1099-NEC to be certain that the employer or user of the service is in compliance). 

3.    Section 174 of the Internal Revenue Code is the subject of potential Congressional action. Remember, research and experimental expenses are the subject of changes in methods of accounting since they now must be amortized rather than deducted. This occurred because there has not been an extenders bill from Congress for at least three years. Those currently incurring these expenses should consult IR 2022-235 and the related Rec. Proc. 2023-11.

4.    Regarding extenders, check the IRS website for Joint Committee publication JCX-1-22, which details the provisions of the Internal Revenue Code that have expired or are due to expire between 2021 and 2031 since we have not had an extenders bill or legislation for three years.

5.    See IRS Announcement 2023-1 regarding Section 179D, which provides a reference standard required to be used when determining the amount of the energy-efficient commercial building property deduction.

6.    See IRS FAQs FS-2022-40 for more information regarding the new home improvement and clean energy property credit enacted last August.

7.    The scams regarding the Employee Retention Credit (ERC) are out in force. When a client approaches and says then have been informed they are missing millions in refunds, refer to the AICPA for “Employee Retention Credit: Fact or Fiction?” This is a terrific resource to explain to clients how most of these are scams. For those who prepare financial statements as well as tax returns, check the Center for Plain English Accounting regarding noncompliance with the ERC statute.

8.    Digital assets and the question on the Form 1040 is a concern for practitioners. Guidance was issued regarding broker reporting and the delay in the process of providing statements to investors. Make sure you read IR 2022-227. Reminder: Losses involving cryptocurrency are not subject to the capital loss limitation rules since IRS rules they are property, not a security. Regarding crypto assets used for charitable contributions, Chief Counsel Memorandum 202302012 required charitable organizations to obtain appraisals for contributions received when they determine the amount of the contribution. This affects individuals who have used crypto assets to make contributions in excess of $250.

9.    Practitioners have questions about disaster losses and the additional time to file and pay taxes. There is a technical issue here involving the Code. When there is a declared disaster and the IRS grants additional time, this is a postponement — NOT an extension. Thus, it would affect the statute of limitations and certain elections for taxpayers, including the ability to deduct the loss in the immediate prior year. See IRS TD 9950 for a more detailed discussion.

10.  Real estate developers concerned about implementing the new rules and conditions regarding common improvement costs will be affected by the statutory change enacted in August 2022 and should check Rev. Proc. 2023-09. This would affect the addition to basis of certain common costs incurred and whether they may be currently deductible or must be added to basis.

11.  The use of electronic signatures for federal tax purposes is due to expire in October 2023. Please watch further developments in this area.

12.  Remember the rules regarding the purchase of alternative fuel vehicles changed on Jan.  1, 2023, and will change again Jan. 1, 2024. Check with clients who are making these purchases.

13.  For those practitioners or businesses that are required filed information returns, check IRS Publication 5717, IRIS, Information Returns Intake System. The required electronic filing of many forms begins with this year, to be filed in January 2025.

14.  Secure Act 2.0, included in the Consolidated Appropriations Act signed in late December, contained may provisions involving financial and retirement planning for clients. Here are just some a few:

• Required minimum distribution (RMD) age has been raised for this year for those who attain age 73.
• The penalty for a missed RMD has been reduced.
• Roth employee match is available for certain retirement plans.
• Possible use of gift cards to encourage plan participations.
• Any overpayments of contributions are not required to be withdrawn.
• Participants can make penalty-free withdrawals if they have a terminal illness.
• Reduced service is required of participants (watch part-time employees) and hardship withdrawals are now self-determined.

More provisions go into effect on Jan. 1, 2024. You can expect to get questions concerning credits for plan startup costs, automatic enrollment into 401(k) and 403(b) plans, and more opportunities for those 50 and older to increase contributions.

15.  Treasury has issued final regulations on e-file for businesses. TD 9972 affects partnership returns, corporate income tax returns, unrelated business income tax returns, withholding tax returns, and certain information returns (see above mention of IRIS). This affects the filing requirement reducing the 250-return threshold to 10 and increasing those returns that must be electronically filed. See IR-2023-31.

16.  Updated FAQs for Form 1099-K were issued in March 2023, with several changed answers.

17.  For those practitioners claiming the Section 199A deduction, check the AICPA website for the 2023 Sec. 199A flowchart.

18.  The new Standards on Tax Services comment period has expired and new standards will go into effect at the end of 2023. Further, for those dabbling in the international area with foreign transactions, the International Ethics Standards Board has issue new rules regarding tax preparation and tax advice.

19.  Since we are now approaching more IRS examinations, it is a good time to review the preparation of the Form 2848, Power of Attorney (IRS Tax Tip 2023-26). This can now be done electronically and changed electronically. Further, please remember what to include on the power. 

20.  Per IRS IR 2023-29, taxpayers can now upload more documents to the IRS. A new online option for notices can help resolve issues faster.
 
That is just a brief summary of items that could have been overlooked during the preparation season. See you all at tax updates this year.

Arthur Auerbach, CPA, CGMA, is an independent tax consultant located in Atlanta, Ga., specializing in tax consulting and estate and financial planning for individuals and closely held businesses. He is affiliated with the Asbury Law Firm as a consultant. Art is a member of the VSCPA Tax Advisory Committee and a former member of the AICPA’s Tax Executive Committee. He is currently chair of the George Society Federal/State Task Force and a member of AICPA’s Tax Practice and Procedure Committee.