CPAs help navigate state and federal tax changes
CPAs walk businesses through significant changes at tax time with advice on how to proceed
As New Hampshire companies navigate their way through the upcoming tax season in 2023, they will encounter a myriad of changes at the state and federal level. By working with some of New Hampshire best CPA firms, they can count on a partner who will take the stress and uncertainty out of the equation to best protect their earnings. New Hampshire Business Review consulted with one of the state’s leading CPA firms to get the inside strait on the some of the most significant changes businesses will encounter at tax time and advice on how to proceed.
Alyssa M. Hodges, CPA, Business Tax Manager, Mason + Rich, masonrich.com
Q: What are some of the new tax regulations that NH businesses will encounter this year?
A: New Hampshire has some new tax laws going into effect for 2022 taxes. First, there are higher thresholds for the NH Business Profits Tax (BPT) and Business Enterprise Tax (BET) filing requirements. The threshold for BPT is increasing from $50,000 to $92,000, and the threshold for BET is increasing to $250,000 of gross re ceipts or “enterprise value tax base.” Previously, the BET thresholds were $222,000 and $111,000, respectively. It is possible that, due to these higher thresholds, some small taxpayers may no longer need to file tax returns with the state.
Another change with the state is the calculation of Net Operating Losses (NOLs) for businesses that file tax returns in multiple states. Previously, the calculation was done in a way where the NOL would be reduced in the original year based on income allocable to New Hampshire, and then also reduced in the year the NOL was utilized. Now, the NOL will only be reduced once in the year it is generated.
Q: What are some of the not-sorecognizable deductions businesses can take to reduce their tax liability?
A: One great deduction for taxpayers that owe state taxes is to take advantage of NH tax credits. The Education Tax Credit and Community Development Finance Authority (CFDA) tax credits allow for charitable contribution deductions but also flow through as a tax credit allowing some taxpayers to double-dip on the benefit.
The education tax credit allows for a credit up to 85 percent of the amount of the donation, whereas the CFDA tax credits are for 75 percent of the contribution. If a New Hampshire corporation can benefit from a charitable deduction, the decrease in taxes is 28.6 percent (21 percent federal taxes and 7.6 percent NH Business Profits Tax), added to an 85 percent credit, a corporation can actually benefit from more than their original contribution. If the business is a flow-through and the individual taxpayers are in a high tax bracket and itemize, they could potentially benefit even more.
Q: Will we see significant changes on the federal side or state side?
A: Major federal tax legislation passed during 2022 includes the Inflation Reduction Act of 2022 and the Consolidated Appropriations Act, which includes the muchtalked-about Secure 2.0.
The Inflation Reduction Act of 2022 is significantly smaller than any proposed version of the Build Back Better Act. As such, nearly all of the revenue-generating provisions of prior proposals have been eliminated. Only the corporate alternative minimum tax, the excise tax on stock repurchases and increased IRS funding have survived from prior versions. Other items of note include the expansion of the research credit for small business and green energy incentives in the form of tax credits. In tax years beginning after 2015, certain qualified small businesses are allowed to claim a limited amount of the research credit against payroll taxes. Under the Inflation Reduction Act of 2022, in tax years beginning after 2022, the amount of this limitation is increased from $250,000 to $500,000. The majority of the outlays in the Inflation Reduction Act of 2022 are devoted to incentives for green energy. A large share of those outlays are in the form of tax credits for green energy. In some cases, the credits are extensions and expansions of current credits, such as those for electric vehicles or residential energy property.
The Consolidated Appropriations Act does not include any major tax provisions or tax extenders. However, the bill does include the long-awaited Secure 2.0 Act. This Act builds upon the provisions of the original Secure Act from 2019 and further ensures that more Americans can save for retirement and increase the amount they are able to save. The Act does this by expanding upon automatic enrollment programs, helping to ensure that small employers can easily and efficiently sponsor plans for employees, and enhance various credits to make saving for retirement beneficial to both plan participants and plan sponsors. The Act also improves various investment options for plan participants, streamlines plan administration for plan fiduciaries, and makes important changes to required minimum distributions that will help retirees with plan selections and decisions that will enhance their ability to make better use of their retirement savings.
Q: Should I be concerned about a higher audit risk with the hiring of many new IRS auditors?
A: Assuming you are an honest taxpayer doing your best to properly report all of your business activity, probably not. However, you can take action to make an audit easier if it does happen.
One major IRS red flag is mileage or automobile expense. To support that deduction, make sure to document any business mileage and retain all of your records. Many business vehicles have some level of personal use, so you’ll want to be able to show that you tracked the breakout.
Another red flag is paying contractors but not filing 1099s. Make sure to report 1099s if you have a filing requirement. You should request W-9 forms from all of your vendors so if you do not have a filing requirement, you’ll need those forms for support.
IRS auditors can ask for a wide range of information and often begin audits two years behind, so you may want to save bank or credit card statements if they are not retained online that long. In the cases of payments to specific contractors, it is likely the auditors will want to see original bills, so be sure to save those as well.
The more documentation you have easily available, the easier an audit will go.
Marcum LLP, marcumllp.com
Q: What type of Impact could the CHIPS Act have in New Hampshire?
A: The intent of this law is to encourage investment in advanced computer chip manufacturing facilities. Given New Hampshire’s tax advantages, the Granite State could benefit from this program. Would-be chip manufacturing investors would benefit in the following ways:
An investment tax credit (the advanced manufacturing investment credit) equal to 25 percent of a qualified investment for any advanced manufacturing facility of an eligible taxpayer. Qualified property includes depreciable tangible property that is constructed, reconstructed or erected by the taxpayer; acquired by the taxpayer if the original use of such property commences with the taxpayer; and integral to the operation of an advanced manufacturing facility. Qualifying costs can include buildings and structural com ponents, except for the portion used for offices, administrative services or other functions unrelated to manufacturing.
Q: As New Hampshire businesses incorporate more climate change technologies and practices, how could the new federal credits help them?
A: The law includes modifications to existing tax credits and the creation of new credits to address climate change, including those related to the purchase of new and used electric vehicles.
Some of these provisions have a potential impact in 2022, including:
• The restoration of the clean energy production tax credit (which had lapsed for facilities whose construction had begun before January 1, 2022).
• The restoration of the IRC sec. 45L for Energy Efficient Home Credit. All home developers and owners of multifamily structures should review the potential applicability of this credit.
Many of the clean energy credits and deductions utilize a two-tier structure where there is an increased base credit equal to five times the base amounts if Prevailing Wage and Apprenticeship Requirements are satisfied. The IRS is to issue guidance as to what constitutes compliance with the requirements. However, these rules will not be applicable for facilities where construction has begun before 60 days following issuance of this guidance. Facilities where construction has begun prior to this date are deemed to comply with these rules and are eligible for the higher credit or deduction amounts. This creates an incentive to begin construction before the new rules become effective.
Q: How can Granite State businesses manage the way that research and experimentation costs are handled?
A: For tax years beginning in 2022 and later, taxpayers are required to capitalize these costs and amortize them over a five-year period (15 years for research and experimentation costs that are foreign). Any unamortized costs are not permitted to be written off or applied against sales proceeds if a related asset is disposed of or abandoned.
Instead, amortization must continue.
While there was a provision in the proposed Build Back Better Act that would have deferred the effective date until 2025, this did not pass. It is hoped that this will be addressed during year-end legislation, but a change could carry a large price tag in lost tax revenue.
Businesses should be addressing before year-end how research and experimentation costs will be separated from typical ordinary business expenses on their books. The definition of these expenses under IRC section 174 are more expansive than those that may be separated and used in determining a federal research and development credit.