Following the challenges of the pandemic, CPAs approaching 2023’s tax season can perhaps take solace in a less frantic year. Of course, tax season is never easy, and 2023 is likely to be no exception.
While pandemic relief measures that figured only on 2021 returns were welcomed by taxpayers and their advisers, those provisions’ absence from 2022 returns might mean that CPAs can get through those returns more straightforwardly. These lapsed measures include the advance payments and other enhancements and expansions relating to the child tax credit under Sec. 24, as amended by the American Rescue Plan Act (ARPA), P.L. 117-2. Also, no longer available for tax year 2022 are ARPA’s temporary increase in the earned income tax credit’s phaseout percentage to 15.3% and the increased phaseout range for taxpayers without children. ARPA’s increases in the child and dependent care credit also expired at the end of 2021.
One ARPA-enacted change, however, still applies to 2022 returns — the expansion of the availability of the Sec. 36B premium tax credit, by its increase in the applicable percentage amounts in Sec. 36B(b)(3)(A). Also, the IRS in October issued final regulations (T.D. 9968) that base the premium tax credit’s affordability test for employer-sponsored minimum coverage on the cost of covering an employee’s family members in addition to the employee, a change from previous regulations that had based the affordability test on the cost of self-only coverage in such instances.
Other changes for 2022, including some unrelated to COVID-19, could be a concern for certain taxpayers, including those with cryptoasset transactions. For businesses with vehicle expense deductions, a midyear increase in the optional standard mileage rate will be a factor, and businesses with research or experimental (R&E) expenditures will face the new requirement to amortize those costs.
For a handy reference for checking important tax year 2022 credit and deduction amounts, phaseout thresholds and ceilings, and other commonly encountered benchmarks for individual returns, see the “Filing Season Quick Guide — Tax Year 2022.”
LOWER FILING THRESHOLD FOR FORM 1099-K POSTPONED
One issue that had loomed large for 2022 returns for many taxpayers was the new filing requirements for Form 1099-K, Payment Card and Third Party Network Transactions. For tax years before 2022, the de minimis amount of reportable payment transactions below which thirdparty settlement organizations had no Form 1099-K filing requirement was, for any payee, the lesser of 200 transactions or an aggregate gross amount of $20,000. But beginning with the 2022 tax year, the reporting threshold became $600, with no minimum number of transactions — another ARPA change. However, on Dec. 23, 2022, the IRS in Notice 2023-10 postponed the change's implementation until 2023, to be reflected in Forms 1099-K filed in early 2024. The added transition period allows CPAs and affected clients to prepare to meet the provision's difficulties, which remain. A problem for some taxpayers will be that the Form 1099-K could reflect transactions besides those involving the provision of goods and services, such as for reimbursements, charitable contributions, and personal payments (for more, see “New, Lower Form 1099-K Threshold Prompts Cautions, Criticisms,” JofA, March 10, 2022).
CPAs with tax clients in the gig economy therefore will be more likely to have to reckon with the form and with the fact that it may report transactions that do not involve the provision of goods and services and are therefore nontaxable. Electronic payment facilitators, which process payments, do not necessarily have a relationship with a participating payee and must obtain the payee’s tax identification number from the third-party settlement organization that connects buyers and sellers of goods or services (see “Tax Clinic: Form 1099-K Information Returns: New Rules Beginning 2022,” The Tax Adviser, Jan. 2022; also IRS, Form 1099-K Frequently Asked Questions (FAQs)).
Moreover, participating payees (generally, persons who accept a payment card as payment or a payment made by a third-party settlement organization) may not be able to distinguish payments that are for goods or services from those that are not, unless the third-party settlement organization allowed the payer to designate payments that were not for goods or services, such as for reimbursements or personal payments. Such errors on Form 1099-K generally require payee taxpayers to contact the filer or payment settlement entity and request a corrected form (see IRS FAQs: General).
What can such taxpayers expect from the new increased Form 1099-K reporting? For one thing, the gross amount reported does not reflect the cost of goods sold or deductible business expenses.
“The IRS expects amounts reported on the Form 1099-K to include things like credits, refunds, fees, and other adjustments,” said Wendy Walker, principal of tax information reporting for Sovos, a provider of tax and regulatory compliance solutions, and chair of the Information Reporting Subgroup of the IRS Advisory Council (IRSAC). “However, getting to what is actually taxable is far from easy, especially when you receive a 1099-K form.”
CPAs should inform their gig economy clients that they will, in many cases, need to file Schedule C, Profit or Loss From Business (Sole Proprietorship). Not reporting net income from activities such as Uber driving, dog-walking, and similar activities could spawn assessments and penalties, Walker pointed out.
“The IRS is constantly on the lookout for gaps in income tax reporting,” she said. Increasingly, that scrutiny may turn to independent contractors, including those receiving Form 1099-K.
MBO Partners, an online workforce management platform, released a report that found that the number of U.S. independent contractors rose by 34% to 51 million in 2021, in an ever-wider range of occupations and work settings — even including accounting firms.
“Many CPA professionals are independent contractors,” Walker said. “And if they’re using a freelancer platform, they should expect to receive a Form 1099-K from the platform company.”
MIDYEAR STANDARD MILEAGE RATE CHANGE
Speaking of common small business deductions, CPAs need to keep in mind that clients using the standard mileage rate for business use of a vehicle will need to present them with two sets of mileage figures for 2022 for the deduction to be computed correctly, one for miles traveled Jan. 1, 2022, through June 30, 2022, and the other for miles traveled in the remainder of the year. That’s because, in Announcement 2022-13, the IRS increased the rate of 58.5 cents per mile applicable to the first half of the year by 4 cents to 62.5 cents per mile for the second half of the year. The same goes for taxpayers claiming an itemized medical deduction that includes travel for medical care. The rate for deductible medical or moving expenses also increased by 4 cents, from 18 cents per mile to 22 cents. The increases were only the third midyear adjustment since 2008, in response to increases in the price of fuel, the IRS said.
For 2022 returns, the IRS has again changed the question on the draft Form 1040, U.S. Individual Income Tax Return, and some other returns in the 1040 series about a taxpayer’s cryptoasset transactions. In 2021, the question was: “At any time during 2021, did you receive, sell, exchange, or otherwise dispose of any financial interest in any virtual currency?” In 2022, the question is: “At any time during 2022, did you: (a) receive (as a reward, award, or payment for property or services); or (b) sell, exchange, gift, or otherwise dispose of a digital asset (or a financial interest in a digital asset)?” Noting the potential confusion for taxpayers that the 2022 version of the question could cause, the AICPA has made comments and recommendations to the IRS about simplifying and providing guidance on the question.
IRS RETURN PROCESSING
IRS officials have stated they are committed to being able to process returns in a timely fashion this season, having made preparatory efforts during 2022, such as the broad penalty relief for failure to file individual and corporate returns for the 2019 and 2020 tax years granted under Notice 2022-36. That relief was intended partly to allow the Service to focus its resources on processing backlogged returns and correspondence to help return to normal operations in 2023, then-IRS Commissioner Charles Rettig said. As of Nov. 2, 2022, however, the IRS still had 4.2 million unprocessed individual returns received during 2022.
In late October 2022, the IRS said it had hired 4,000 customer service representatives and would hire 1,000 more before tax season to improve the Service’s telephone assistance to taxpayers and their representatives. Thus, time will tell whether refunds are issued and error corrections are made promptly and tax preparers and taxpayers calling the IRS with questions will be able to get through without spending long stretches on hold.
R&E EXPENDITURE AMORTIZATION
One law change beginning with the 2022 tax year that preparers of returns for companies engaged in research and development are likely to encounter is the amortization now required for R&E expenditures. This change, which was enacted by the law known as the Tax Cuts and Jobs Act, P.L. 115-97, in late 2017, but with a delayed effective date, requires taxpayers with R&E costs to amortize them over five years, or 15 years if the expenditures relate to foreign research. (For more, see “Amortizing R&E Expenditures Under the TCJA,” JofA, Nov. 2022.)
Ernst & Young’s National Department principal and former U.S. Treasury attorney-adviser Alexa Claybon believes it’s a problem CPAs must tackle head-on, particularly given the propensity for confusion.
“On both spectrums, CPAs must be careful not to exaggerate expenses. There’s also a tendency to equate research expenses to credit expenses, so being careful and deliberate with your clients about what this means is vital,” Claybon said.
This change will affect a variety of industries. Minimizing research expenses will be a vital strategy to offset the loss of current deductions caused by the requirement to amortize expenses over as long as 15 years.
“Manufacturing will be hit hardest. Yet this issue affects several industries, so CPAs need to be extremely careful in their advice,” Claybon warned.
Claybon suggested the solution may lie in simple and clear communication with clients.
“It is important to have a well-thought-out strategy of identifying research costs,” she said. “Whether research results in a failure or success is not relevant to whether the costs are included in research costs capitalized under Sec. 174.”
Multiple attempts, attracting bipartisan support, have been made in Congress to delay or repeal R&E amortization. However, at the time of this writing, Congress has yet to pass legislation on the matter, and a lack of regulatory guidance leaves many questions unanswered (see the AICPA letter to IRS Associate Chief Counsel Holly Porter, “Comments on Research & Experimental Expenditures Under Section 174” (May 26, 2022)).
“CPAs must undertake diligent and thorough analysis,” Claybon said. “There may even be some avenues where the taxpayer won’t have to amortize. However, it’s very subtle, and taxpayers’ accountants must think it through.”
About the author
Hugo Johnson- Driscoll is a content writer for AICPA & CIMA, together as the Association of International Certified Professional Accountants.
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