Recent and upcoming tax changes could have a big effect on RIAs and their clients. In addition, revisions of certain Generally Accepted Accounting Principles (GAAPs) could result in higher costs for loans. Our team recently hosted a webinar featuring trusted CPAs who gave insights into what’s coming and encouraged viewers to work with their CPA on long-term planning. Here’s a summary.
Expiration of 2017 Tax Benefits
The President Donald Trump-era 2017 Tax Cuts and Jobs Act had several temporary provisions to reduce taxes as a means of promoting growth. Many of these measures have already expired, and the most recent to begin its “sundown phase” is the full expensing of equipment, also known as 100% bonus depreciation. This benefit dropped by 20% on Dec. 31, 2022, and will continue to drop by 20% per year until completely phased out by the end of 2026.
Business owners planning to take advantage of the now-reduced benefit should be aware that equipment must be “qualified” and be in service, not just purchased, prior to year-end to be eligible. A full list of expiring federal tax provisions can be downloaded here.
Effects of 2022 Inflation Control Act
The main tax change in the 2022 Inflation Reduction Act does not affect individual consumers and investors directly, but RIAs may see their clients experiencing its downstream effects through its impact on prices and the economy.
The act, signed by President Joe Biden in August 2022, aims to pay for green energy initiatives through a new 15% alternative minimum tax on corporations that have reported average book income of $1 billion or more for each of the previous three years. Prior to the act, corporate taxes were assessed on organizations’ taxable income. This measure will levy the new AMT on high-revenue corporations’ book income—the revenue shown on their financial statements. Corporations will have to pay the higher of the tax amounts calculated under both methods. Critics are concerned that financial statements will lose their “halo status” for reliability if organizations start pressuring the Financial Accounting Standards Board to change its requirements to more tax-favorable ones. They fear that such changes could undermine investors’ confidence in corporations’ financial statements.
Forbes estimates that 33 of the largest corporations in the U.S. will be subject to the new 15% AMT. Many companies that make up a significant portion of the average person’s spending are on that list, including telecommunications giants T-Mobile, Verizon, AT&T, Qualcomm, and Nvidia. Others include Amazon, FedEx and UPS, along with numerous energy suppliers. If increased taxes are passed on to customers in the form of higher prices, consumer spending could fall, possibly triggering a recession.
Increase in IRS Interest Charge on Late Payments
The somewhat questionable strategy of intentionally paying taxes late in order to allow those dollars to earn interest elsewhere may be at an end. At one point, the IRS interest rate on late payments was only 3%, but now the IRS has increased the rate to 7% for individuals and 6% for corporations as of the first quarter of 2023.
Investors may want to look for alternative ways to gain the advantages previously offered by strategic late payment of taxes.
Change in Accounting for Leases
A 2021 change in the GAAPs for leases is now fully in effect, and it could lead to higher loan interest rates for lessees, depending on how loans are structured. Under the new standard, a lessee must report a lease as a right-of-use asset on its balance sheet with a corresponding liability. This change can be significant for entities that have borrowing arrangements that depend on certain debt ratios to determine interest rates.
As discussed in our webinar, if a borrower has covenants related to various ratios based on its balance sheet, that could have a major impact on whether the borrower can meet those covenants. The borrower could be required to pay higher interest rates if it cannot meet those covenants, even if its underlying business health remains unchanged.
Borrowers with leases may wish to discuss these GAAP changes with their lender and determine if changes to the loan structure are possible to maintain interest rates at previous levels.
Increases in Unified Tax Credit Exemptions
As of Jan. 1, 2023, exemptions for the Unified Tax Credit have increased. Business owners looking to transfer ownership or assets to family or trusted employees can take advantage of this combination of tax exemptions in their succession and estate planning. The new limits allow individuals to gift up to $12.92 million in in their lifetimes or after death, and be exempt from federal estate and gift taxes. This increase is temporary, however, as limits revert to previous levels ($5 million, or approximately $7 million adjusted for inflation) in 2026.
Business owners and individuals contemplating transfers of assets may wish to consider the 2026 expiration of these increased limits in their succession and estate planning.
Looking Ahead
Changes to the tax code happen frequently and often have phase-out periods or expiration dates. It can be challenging to keep up with the shifts. We’re hearing CPA partners discuss maintaining long-term outlooks that involve strategizing for the next five to 10 years forward. As you navigate the constantly shifting currents of tax policy, it’s critical to work with a trusted financial partner who can help keep you on course.
Rick Dennen is the founder, president and CEO of Indianapolis-based Oak Street Funding, a First Financial Bank company with customized loan products and services for specialty lines of business including certified public accountants, registered investment advisors and insurance agents nationwide.