This move can actually help clients come out ahead with their taxes in the long run. In the future, any qualified dividends or long-term gains distributions from the investment would be taxed at capital gains rates. If the investment recovers and is sold more than one year after the in-kind distribution, long-term gains rates would apply. Had the asset remained in the traditional retirement account, ordinary tax rates would have applied to all these forms of income when withdrawn.
Figuring out the exact amount to transfer can be tricky, particularly when it involves mutual fund shares or other assets that price at the end of the day. To make sure the required minimum is met, an investor can either distribute a little more than is likely to be necessary, Keil says, or make it a “two-step transaction in which tomorrow you may have to make up a shortfall with a cash distribution.”
An in-kind distribution can take time to process. Keil says advisors should prompt clients to start these transactions sooner, not later, if they’re appropriate.
Help Business Owners
A tax advantage disappearing in 2023 is business owners’ ability to write off 100% of qualified asset purchases via bonus depreciation. The write-off will drop to 80% on January 1. “We are advising business owners to evaluate their cash flow and consider expediting purchases of large assets so they can be placed in service by year-end and qualify for 100% bonus depreciation,” says Nicole DeRosa, senior tax manager at Wiss & Company LLP, an accounting firm in Florham Park, N.J. The equipment, machinery or other qualified property can be new or used.
DeRosa is gently reminding clients with significant research and development activity that domestic R&D costs must now be amortized over five years. The ability to deduct them in the year incurred expired at the end of 2021. However, that provision has a bona fide shot at being resurrected by Congress, according to Luscombe at Wolters Kluwer. “There’s been a lot of lobbying for it,” he says.
Although it isn’t specifically tied to the year’s end, business owners’ biggest tax-saving opportunity—and a potential black pit—might be to claim the lucrative employee retention tax credit for 2020 or 2021 if they have yet to do so. Payroll tax returns can still be amended for those years. “But even if you amend today, because of significant processing delays at the IRS you’re probably looking at eight months to get the refund,” DeRosa says.
Clients need ultra-competent advice when claiming this bounteous credit because, well, it’s complicated. “There is significant interplay between balancing forgiveness of Paycheck Protection Program loans and maximizing the employee retention credit. We have run into several business owners who unfortunately did not consult a tax advisor prior to submitting for PPP loan forgiveness. They handled it themselves and limited their benefits,” DeRosa says.
Other clients are disregarding their tax advisor when told their business doesn’t qualify for the credit. They then turn to so-called “employee retention credit retrieval firms,” says Colorado tax attorney Bradley Burnett. “These mills pester businesses with repeated emails and sales calls. Sports talk radio features their commercials. Multilevel marketing schemes to peddle the credit have even emerged,” Burnett warns.
These outfits often charge a hefty percentage of the credit they nab for the client, incentivizing them to take aggressive positions that may not hold up under audit. The IRS started auditing returns with this credit in September, according to Burnett, “asking hard-driving questions as to how the business qualifies for the credit and for backup documentation to prove it.”
Advisors should instead steer clients to reputable, established practitioners. The conventional wisdom is that law firms and CPA firms are a cut above.
Urging clients to get help—the right help—may be the best way to assist them as 2022 draws to a close, says Brenda K. Lowe, a CPA in White Bear Lake, Minn. “Frequently, the biggest mistake clients make is not spending the time and money to have their accountant run various scenarios to find the most prudent tax plan,” she says.