With Tax Legislation in Flux, Staying on Top of New Developments Will Be Key in 2022

As seen in Crain's New York Business

Whether it comes to inflation adjustments, pass-through entity taxes, or estate and gift tax rules, tax law is in transition. Both individual taxpayers and owners of businesses will need to keep a keen eye on the headlines as they make tax planning decisions—and discuss the latest developments with their accountants—to stay on top of their obligations and avoid overpayments.

That’s not to mention the impact IRS understaffing could have on tax filings. The IRS is facing a large backlog of paper filings from 2021, including a reported 6.2 million unprocessed tax forms. Beginning in the summer, it will require taxpayers wishing to access certain tools and applications to provide a selfie to a third-party company to verify their identity.

Still unknown is the impact of groups such as Patriotic Millionaires, whose members are millionaires and billionaires from around the world. In an open letter timed to coincide with the originally planned opening of the World Economic Forum, the group called for permanent wealth taxes on the rich to address income inequality. Among the 102 signers were Disney heiress Abigail Disney and venture capitalist Nick Hanauer, an early investor in Amazon.

“As millionaires, we know that the current tax system is not fair,” the group wrote. “Most of us can say that, while the world has gone through an immense amount of suffering in the last two years, we have actually seen our wealth rise during the pandemic, yet few if any of us can honestly say we pay our fair share of taxes.”

For insight into some of the most important developments on the fast-changing tax landscape, Crain’s Content Studio spoke with three industry professionals.

Here's what Citrin Cooperman Partner and Tax Practice Leader Joe Bublé had to say:

CRAIN’S: How will inflation impact personal income taxes?

JOE BUBLÉ: Inflation is often referred to as a hidden tax. As inflation increases, it causes the average taxpayer’s income to grow in tandem until taxpayers are moved into a higher tax bracket with no adjustment to their spending power. Consequently, more than 60 code sections provide for annual inflation adjustments in an attempt to prevent this. The IRS recently announced the adjustments for 2022, which include increased federal income tax brackets, standard deductions, 401(k) limits, lifetime estate and gift tax exemptions, and annual gift exclusions. To the extent that these adjustments lag behind the actual inflation rate and other code sections that are not inflation-adjusted, the inflation tax is a reality. 

CRAIN’S: What are the key tax inflation adjustments for tax year 2022 that business owners need to consider?

JOE BUBLÉ: The qualified business income deduction threshold and phase-in amounts have been increased for 2022 as follows: The threshold amount is now $340,100 for married couples filing jointly, $170,050 for married individuals filing separately, and $170,050 for all others. The phase-in range amount is $440,100 for married couples filing jointly, $220,050 for married individuals filing separately, and $220,050 for all others.

Average annual gross receipts can’t exceed an average of $27 million for the three-year period ending with the 2022 tax year under an increased threshold for businesses that use the cash method of accounting. The gross receipts test also applies to several other business provisions.

For taxable years beginning in 2022, the threshold amount for excess business losses has been increased. A taxpayer’s excess business loss is the amount over $270,000 ($540,000 for joint returns). 

CRAIN’S: What are the new tax reporting requirements for cryptocurrency?

JOE BUBLÉ: For 2021, the IRS is asking for specific reporting of the sale, exchange or other disposition of all virtual currency assets, including receipts of additional amounts resulting from mining or hard forks. The Infrastructure Investment and Jobs Act further expands such reporting by requiring brokers to document transactions in digital currency beginning in 2023. Businesses must also disclose the receipt of payments in digital assets over $10,000 starting in 2023

CRAIN’S: How does the lack of broad changes to the estate and gift tax rules affect planning discussions with clients now and in the future?

JOE BUBLÉ: Estate planning and business succession planning should always be addressed to assist clients in helping them achieve their goals and objectives. The lack of large-scale changes provides additional time and opportunity, resulting in a “call to action” to continue or begin the planning process. A good starting point would be to review the client’s current plan to see if it still fits the client’s needs.

CRAIN’S: Based on recent developments, the Build Back Better Act legislation appears to be at risk. What impact does this have on closely held businesses?

JOE BUBLÉ: This may be a sigh of relief for those still trying to navigate the multiple tax law changes since late 2017, which has created uncertainty and confusion for many closely held business owners. With all of the tax proposals being discussed, people have spent an inordinate amount of time analyzing tax changes that have not been passed.

CRAIN’S: What state and local tax developments should business owners be aware of concerning the federal income tax deductions available for state and local taxes paid by pass-through entities?

JOE BUBLÉ: Business owners should watch out for changes to the PTET landscape. States that previously enacted such a tax regime are considering legislative changes (for example, New Jersey), while we are hoping for revisions to the laws or further guidance on troublesome issues in other states (for example, California). In addition, a number of states have PTET effective dates starting in 2022 and there is a possibility of more states coming on board in the future. This is not a static environment; therefore, it should be closely monitored.