Lobb & Plewe
2022/2023 Legal Checklist
This checklist is not comprehensive of all the new laws affecting our clients in 2023, but it does include many of the changes requiring consideration. If there is a specific concern not addressed here, feel free to contact me.
Across the United States, minimum wage ordinances have been changing to keep up with inflation and in some instances to secure a living wage for entry level jobs. A sampling of some of the minimum wage rates for 2023 include:
Nevada: $11.25/$10.25/hour (The higher rate applies to employees with no health benefits)
Simply because a state has a required minimum wage does not mean the same minimum wage applies to a certain city or county. Cities, counties, and certain industries in many parts of the country have higher minimum wage requirements than that required by the state.
For instance, the state minimum wage for New York in 2023 will be $14.20 an hour. In New York City, the minimum hourly wage will be $15.00.
In California, some of the cities and counties have a higher minimum wage than the state such as the following:
San Diego: $16.30/hour
Los Angeles (City): $16.04/hour
Los Angeles (County): $15.96/hour
Santa Monica: $15.96/hour
Many states also have a minimum annual salary requirement for salaried employees. For instance, effective January 1, 2023, the minimum salary for all California exempt employees will increase to $64,480.00 per year. Employers need to be aware of salary requirements in all states in which they have operations.
Clients have been calling us about the new required filings for entity filings. The new filing requirement does not kick in until 2021. Congress passed the Corporate Transparency Act of 2021 (CTA) as part of the Anti-Money Laundering Act of 2020 which creates the new filing requirement. The CTA created a beneficial ownership registry within the U.S. Department of the Treasury’s Financial Crimes Enforcement Network (FinCEN). On September 29, 2022, FinCEN issued a final rule implementing the beneficial ownership information reporting requirement of the CTA, which will go into effect on January 1, 2024. Reporting companies created or registered before January 1, 2024, will have one year to file their initial reports. Reporting companies created or registered on or after January 1, 2024, will have 30 days after receiving notice of their creation or registration to file their initial reports.
Companies will be required to submit information to FinCEN regarding beneficial ownership or face the prospect of civil and criminal penalties for failure to comply. Most of the 32 million companies anticipated to be subject to the Final Rule will be small businesses, single-owner LLCs, or other types of business entities with four or fewer beneficial owners. The overall compliance costs are estimated to reach $22.8 billion for the first year and $5.65 billion annually after that. As we close in on 2024, we will notify you as to any updates on the requirements. If you would like our firm to handle the filing for you, please let us know.
If you currently have an audit at the agent level, the process moving forward may change and you need to be prepared for skipping a traditional step in the process. Proposed changes to the IRS Appeals office could result in more taxpayers needing to resolve disputes with the IRS through litigation.
Traditionally, if your audit is not resolved at the agent level, the audit goes to Appeals. The Appeals office is designed as an alternative to resolving tax controversies through litigation. A key portion of the proposed regulations describe 24 circumstances when controversies are not eligible for consideration by Appeals.
The proposed rules are overly restrictive, and don’t give taxpayers many options to resolve issues with the agency pre-tax court litigation. If you are in an audit and need help understanding the process and strategies for resolving your audit pre-litigation, reach out to our tax department for guidance.
As we reported earlier in the year, the IRS lists what it deems to be “potentially abusive arrangements that taxpayers should avoid.” The list of arrangements is identified by the IRS as “The Dirty Dozen” (the “TDD”). If you participate in the Dirty Dozen, it is likely you will end up in an audit.
In the first quarter of 2022, the IRS Office of Chief Counsel announced it will hire up to 200 additional attorneys to combat transactions deemed abusive by the IRS. Additionally, the Biden Administration’s Inflation Reduction Act provides funding for 87,000 new IRS agents.
The IRS views the TDD transactions as potentially abusive, and on the IRS “enforcement radar screen.” The use of “Dozen” is misleading this year as the IRS identifies about 17 items of scorn.
Eight of the transactions which we commonly come across include:
- Charitable remainder annuity trusts,
- Maltese individual retirement arrangements,
- Foreign captive insurance,
- Monetized installment sales,
- Concealing Assets in Offshore Accounts and Improper Reporting of Digital Assets,
- High-income individuals who don’t file tax returns,
- Abusive Syndicated Conservation Easements, and
- Abusive Micro-Captive Insurance Arrangements.
If you are solicited by anyone to partake in a “transaction” of any sort, be cautious and feel free to contact us to piece through the potential issues relating to the proprietary of the structure.
If you have not completed annual gifting for 2022, you need to get it done. The annual gifting exclusion for 2022 is $16,000 per person. This means a person can gift $16,000 to anyone, free from gift tax. The gift is not deemed to be income to the recipient. A person can gift to an unlimited number of persons. This means in 2022 a husband and wife can gift $32,000 to each child. If the child is married, the gift can be up to $64,000.
There are ways to substantially turbo-charge the gifting to reduce the taxable estate. For instance, if the gift consists of an equitable ownership of an asset likely to appreciate in value, the growth in the appreciating asset will be outside of the taxable estate. Gifting into an irrevocable life insurance trust to fund premiums in a whole life policy creates liquidity outside of the estate to cover estate tax. In 2023, the annual exclusion will increase to $17,000 per person. If you need help in planning the maximum utility of your annual exclusion, we are here to assist.
Passed in 2017, the Tax Cuts and Jobs Act (TCJA) allows for 100% bonus depreciation on a wide variety of capital assets that are considered “qualified property.” The bonus depreciation rules were set to expire at the end 2019, however the TCJA extended the rules and increased the top deduction benefit to 100% for certain assets placed into service between September 27, 2017, and January 1, 2023. Unless Congress changes the law, the amount will reduce by 20% annually until reaching 0% in 2027.
What is Qualified Property? Depreciation is available for property that is acquired for use in a business or another income-producing activity and is expected to last more than one year. The TCJA allows businesses to accelerate the depreciation so that the full cost may be taken in the year in which it is placed into use. Property that qualifies for bonus depreciation includes assets such as vehicles, furniture, manufacturing equipment, and heavy machinery. Further, many interior building upgrades are eligible for bonus depreciation as “qualified improvement property.”
What does placement into service mean? In addition to the property being qualified, it must also be placed into service before the end of the year. The IRS considers property to be placed into service when it is ready and available for a specific use. It does not actually have to be used at the time. For example, equipment purchased for use and available for use is placed in service when it is ready and available to use, even if it is not actually used during the year in which the deduction is taken.
The year is almost over. If you want to take advantage of the 100% bonus depreciation rules before the depreciable amount is lowered, the time to act is now. Since bonus depreciation will reduce by 20% each year until 2027, a 100% deduction can generate significant tax savings. The reduction of 20% from December 2022 to January 2023 can be significant.
Finally, excess losses generated from utilizing the bonus depreciation this year do not disappear. Such losses are carried forward and applied to capital gains in future years.
More Tax Planning: Make sure you have one last video conference or in person meeting with your tax team to discuss any loose ends which need to be cleaned up before the end of the year. For instance, the marginal tax rates for individuals and companies at the federal level should be considered low. There should be no expectation the rates will go lower and every expectation that they will go up at some point in the future. Should there be some consideration to accelerate gain into 2022? With the House of Representatives going to the Republicans and a presidential election on the horizon, it is not likely the marginal rates will be raised in the next two years. So, deferring taxable income into 2023 should be a safe move.
One item which should be discussed is cost segregation. In is important to update fixed asset components into classes that have recovery periods of less than 20 years to maximize available bonus depreciation. The shorter depreciable period allows the recovery of costs over a shorter period versus the longer building depreciation period.
Another item of possible discussion concerns the Internal Revenue Code (IRC) Section 179 rules. Certain improvements to nonresidential real property (roofs, heating, ventilation, and air-conditioning property, fire protection and alarm systems, and security systems), that may not be eligible for bonus depreciation, are eligible under Section 179. This section permits an expense deduction of up to $1,080,000 of business use personal property and certain real property improvements in the year they are placed into service. There is a total equipment purchase limit of $2.7 million.
Businesses should check for subnormal goods in inventory. Subnormal goods are goods that are unsalable at normal prices or unusable in the normal way due to damage, imperfections, shop wear, changes of style, odd or broken lots, or other similar causes, including second-hand goods taken in exchange. If a business has subnormal inventory as of the end of 2022, a deduction can be taken for any write-downs associated with that inventory provided it is offered for sale within 30 days of the inventory date. The inventory does not have to be sold within the 30-day timeframe.
A charitable contribution deduction is available to businesses. A corporation is generally allowed to deduct charitable contributions up to 10% of its taxable income for cash contributions made in the calendar year 2022. Under the CARES Act, the corporate limitation was temporarily increased to 25% of taxable income for cash contributions made in calendar year 2021. Contributions made by pass-through entities are allocated to individual equity interest holders and are subject to the individual’s limitations. Certain contributions of property are subject to certain limitations as well as additional recordkeeping and substantiation requirements.
The items discussed in this section are just a sampling of the issues which need to be considered before we get too deep into December 2022. As always, if you have any questions as we wind down 2022, feel free to give us a call.