Be prepared, strategic and proactive: This is the advice voiced by several industry experts as tax and accounting firms gear up for another tax season and navigate regulatory and legislative changes, new technologies, and staffing constraints.
"There are some new things that are going to be impacting taxpayers going into the 2024 tax year, but I think that the bigger thing for tax professionals to be keeping their eye on are the potential changes coming to the Tax Code in 2025. In 2017, there were sweeping tax changes and a lot of those provisions are set to change in 2025, if there aren't [legislative] changes," said H. Randy Hughes, chairman and CEO of Counting Pennies, a boutique accounting firm based in West Palm Beach, Florida. "So, this is an opportunity for tax professionals to prepare their clients. Let them know what is on the horizon. By letting them know what is on the horizon, it is an opportunity for tax professionals to get their clients used to being proactive and strategic about how they look at taxes, so that they can lower their overall tax liability."
The good news is that many expect this tax season to be a fairly "normal" tax season. However, that's not to say there won't be a few twists and turns along the way. Again, being prepared, strategic and proactive are key during this busy time of year.
Energy tax credits
A major area of focus this tax season is energy tax credits. The Inflation Reduction Act, which was signed into law in August 2022, includes a series of tax breaks for eligible taxpayers that aim to boost clean energy.
"The biggest credits are going to be in clean energy: solar panels, investing in solar panels and getting tax credits for that, electric vehicle purchases. … If your taxpayer is looking for a new household vehicle, could electric be an option for them? If so, there's tax credits associated with that. And then, of course, there's credits for construction of buildings and homes that are efficient, energy-efficient construction. So, those are things that taxpayers would need to be aware of, and so tax professionals want to be in a position to provide that guidance because now we're talking about [tax] planning," Hughes said.
Nadia Rodriguez, senior tax analyst programmer for Intuit, agreed that energy tax credits will be a significant area of focus and said, "We have some updates on the home energy credits because now we have them in two components: One is the $1,200 annual limit, and the other is the $2,000 annual limit. So, we just need to be familiar with which appliances and which repairs fall under each of those components."
The passage of the Inflation Reduction Act amended two credits for energy-efficient home improvements: the Energy Efficient Home Improvement Credit and the Residential Clean Energy Credit.
The Energy Efficient Home Improvement Credit (formerly known as the Nonbusiness Energy Property Credit) is equal to 30% of the costs for all eligible home improvements made during the year. It is allowed for qualifying property placed in service on or after Jan. 1, 2023, and before Jan. 1, 2033. The previous $500 lifetime limit has been replaced by a $1,200 annual limit on the credit amount for energy property costs and certain energy-efficient home improvements. There are annual limits on doors ($250 per door and $500 total per year), windows ($600), and home energy audits ($150).
Furthermore, there is a separate aggregate yearly credit limit of $2,000 per year for electric or natural gas heat pumps, electric or natural gas heat pump water heaters, and biomass stoves and boilers.
It should be noted that for eligible home improvements made after 2024, no credit will be allowed unless the item was produced by a qualified manufacturer that creates a product identification number for the item, and the taxpayer includes that number on their tax return.
Then there's the RCE Credit, which is worth 30% of certain qualified expenses for residential clean energy property installed through 2032. The credit percentage rate phases down to 26% for property placed in service in 2033, and 22% for property placed in service in 2034. No credit will be available after Dec. 31, 2034.
Equipment that qualifies for the RCE Credit includes:
- Solar electric panels;
- Solar water heaters;
- Wind turbines;
- Geothermal heat pumps;
- Fuel cells; and,
- Battery storage technology.
Electric vehicles are also taking the spotlight, and for good reason: According to a Global Market Insights report, the U.S. electric vehicle market was valued at $49.1 billion in 2022, and, by 2032, the market is projected to hit $215.7 billion. Given the growing popularity of electric vehicles, it comes as little surprise that related tax incentives are on the rise.
As of 2023, taxpayers who purchased all-electric, plug-in hybrid, and fuel cell electric vehicles in 2023 or after may be eligible for a federal income tax credit of up to $7,500. The Inflation Reduction Act changed the rules for this credit for vehicles purchased from 2023 to 2032.
As stated on the FuelEconomy.gov web site, "The availability of the credit will depend on several factors, including the vehicle's MSRP, its final assembly location, battery component and/or critical minerals sourcing, and your modified adjusted gross income."
As further explained by Intuit's Rodriguez, "Be very familiar, because, for 2023, we do continue to have the $7,500 maximum credit amount for the clean vehicle credit but it is comprised of two portions: One is allocated to the battery life of the vehicle and one actually to the vehicle. So, it's the battery life and then the other component of that $7,500 is the actual vehicle. … There is a limitation also on the modified adjusted gross income on who can qualify for these energy credits on vehicles. We did not have that in the past. There was no income limitation and now there is."
Furthermore, those who buy a used electric vehicle may qualify for a credit of up to $4,000.
Beginning Jan. 1, 2024, the Clean Vehicle Tax Credits may be initiated and approved at the point of sale. This provision of the Inflation Reduction Act essentially provides the buyer with an upfront down payment on their clean vehicle at the point of sale, versus having to wait to claim their credit on their tax return the next year. According to the Treasury Department, researchers have found that consumers overwhelmingly prefer an immediate rebate at point of sale.
There's also a new Energy Credits Online portal that enables registered dealers to submit clean vehicle sales information to the IRS and receive payment for transferred credits. Dealers will also use the portal to submit "time of sale" reports, which will confirm vehicles' eligibility for a credit, whether or not the buyer chooses to transfer the credit to the dealer.
While these energy tax credits may be among the most talked-about credits, they are certainly not the only energy tax credits preparers should have on their radar screen.
R&D tax credits
Another area that is top of mind for many tax professionals and their clients is the changes to Section 174 and the impact on the R&D tax credit.
"Starting in 2022, businesses can no longer take an immediate deduction for R&D expenditures under [Sec.] 174. Instead, taxpayers are now required to capitalize and amortize those expenditures over a period of either five years attributable to domestic research, or 15 years if it is foreign research," said Steven Grodnitzky, managing editor and practice lead for U.S. income and procedure at Bloomberg Tax & Accounting.
Additionally, the changes under the Tax Cuts and Jobs Act require that companies treat software development costs as R&E expenditures. They can no longer choose to amortize software development costs over a multiyear period.
The changes have sparked much debate, and attempts to change the law back to its prior form have, so far, proven unsuccessful. Said Grodnitzky, "We were expecting legislation at the end of 2021, beginning of 2022, and never got it. We've been expecting it or hoping for it. Businesses, I know, are hoping for it. From what I gather, there's been kind of a hit to their bottom line. I've been reading where some businesses are slimming down the amount of R&D they are getting involved in potentially as a result of the law."
The IRS did recently issue a notice providing interim guidance on the capitalization and amortization of specified research and experimental expenditures until the IRS issues proposed regulations.
Meanwhile, in September 2023, the IRS released a preview of proposed changes to certain sections of Form 6765, "Credit for Increasing Research Activities," to solicit feedback from stakeholders in advance of the formal draft release process for form changes.
The service is considering making the changes as early as the 2024 tax year and, if implemented, they could place a greater burden on taxpayers looking to claim the R&D credit.
As outlined by the IRS, the proposed changes to Form 6765 include:
- A new Section E with five questions seeking miscellaneous information;
- A new Section F for reporting quantitative and qualitative information for each business component, required under Section 41 of the Internal Revenue Code; and,
- Moving the "reduced credit" election question and the "controlled groups or businesses under common control" question from Line 17 and Line 34 to the top of Form 6765.
- The IRS is also requesting feedback on whether Section F should be optional for certain taxpayers, including those:
- With qualified research expenditures less than a certain dollar amount at a controlled group level;
- With a research credit less than a certain dollar amount at a controlled group level; or,
- That are a qualified small business for the Payroll Tax Credit.
Crypto and BOI
In addition to energy tax and R&D tax credits, there are further developments that tax professionals are watching very closely. These include cryptocurrency reporting and beneficial ownership information reporting (see page 17).
"I think that there's also some ambiguity around cryptocurrency reporting that may impact people and people may be looking for clarification [on that] as well," said Cathy Rowe, senior vice president and segment lead for the U.S. professional market of Wolters Kluwer Tax & Accounting North America.
As part of a broader effort to close the tax gap and address the tax evasion risks posed by digital assets, the IRS and the Treasury Department recently proposed regulations that cover a range of digital asset issues, including defining brokers. It would also require brokers to provide a new Form 1099-DA.
Under current law, taxpayers owe tax on gains and may be able to deduct losses on digital assets when sold, but for many taxpayers it can prove difficult and costly to calculate their gains. According to the Treasury, the proposed rules would help taxpayers determine if they owe taxes and also help them avoid having to make complicated calculations or pay digital asset tax preparation services in order to file their tax returns.
If approved, brokers would be required to report any information on sales and exchanges of digital assets beginning in 2026, for sales and exchanges in 2025.
"At the end of August [2023], the Treasury and IRS published rules on information reporting. There were almost 300 pages of proposed regs. Requirements came from the 2021 Infrastructure Investment and Jobs Act. So, we're looking at almost two years after the act was passed to really add some clarity to tax reporting by brokers whether it is a sale or exchange of some type of digital asset," said Grodnitzky. "The industry, from what I gather, has just exploded over these rules. My understanding is that the IRS has received thousands of comments regarding the new reporting rules."
In order to ensure compliance, if approved, systems would need to be implemented in 2024 so they are ready to go come 2025.
Meanwhile, the new beneficial ownership information reporting requirement is expected to unlock additional revenue-generating opportunities for firms. "Tax advisors will be looked upon from their clients to help understand reporting requirements for entities that need to file under the new beneficial ownership requirements. … I think that is also adding some concern and some unknowns in terms of what that will look like for the firm's clients and how are they going to get the help that they need, and what do they need to do so they don't face fines and penalties?" Rowe said.
Under the Corporate Transparency Act, the rule requiring BOI reporting goes into effect Jan. 1, 2024. The reporting requirements will impact tens of millions of small businesses, and most will need help from their advisors to handle reporting and gathering the data required for accurate reporting.
In late November, the Financial Crimes Enforcement Network issued a final rule that gives reporting companies created or registered in 2024 an additional 60 days to file their initial beneficial ownership information report. With the extension, these entities now have within 90 calendar days of receiving notice of their creation or registration to file their initial BOI report.
Staffing constraints
It likely comes as little surprise that staffing constraints continue to be an area of concern for many firms.
To ease the strain and broaden bandwidth during tax season, many firms are hiring seasonal staff, turning to offshoring or outsourcing, and leveraging technology to improve efficiencies and drive greater automation.
Randy Crabtree, co-founder and partner of Schaumburg, Illinois-based Tri-Merit Specialty Tax Professionals, believes the "biggest thing" that firms continue to deal with is staffing.
He noted that, while many firms are no doubt leveraging more automation capabilities to drive efficiencies, they are also looking outside the firm for assistance. "I've seen more and more firms offshoring, outsourcing, building strategic relationships, allowing them to concentrate on the things that they are really good at, the things they are passionate about, the things that are the high-value things for them," Crabtree said. "From that standpoint, I think the staffing has helped them in other ways, the lack of staff."
Rowe agrees that staffing remains a key challenge and said, "I think it is being able to maximize technology to help with that. Are they getting the most out of the technology that they have purchased? Are they getting the most out of the automation that they can, both within the tax workflow as well as making sure that they have the best client experience using their software with limited staff? So, I think that will probably continue to be one of their bigger issues."
Innovative technologies
Leveraging the right tools and resources — such as cloud-based software, project management solutions, secure client portals, and CRM systems — are among the key technologies that firms need to drive success during tax season.
However, one would be remiss to overlook the role that artificial intelligence and, more recently, generative AI are playing within the profession.
"KPMG has been investing in AI for years, incorporating the technology into our proprietary platforms to enhance how we serve our clients. Now, with the advent of generative AI, we've put AI capabilities in the hands of all our people, which is positioning us for even greater success," said Rema Serafi, vice chair of tax at the Big Four firm.
Added Serafi, "If you think about the day in the life of a tax practitioner, they're juggling so much at once — client deliverables, meetings, managing workflows, problem-solving and more. Generative AI is changing the way we work and the ways in which we deliver for our clients. We view the technology as a 'co-pilot' — or a digital member of the team — which can help summarize meetings and calls, organize and make sense of large data sets, enhance work plans, and more … . Really, it is helping elevate the strategic value our tax professionals are delivering, every day."
Echoing the sentiment, Intuit's Rodriguez said that she uses generative AI to draft emails to clients, to draft correspondence with the IRS, etc. She encourages others within the profession to also become familiar with it, and leverage the benefits to be gained.
"It helps me draft the bones of what the email and correspondence will look like — without using any client-specific data, of course," said Rodriquez. "There's already a lot of tools that use AI that can help us with the mundane task of tax preparation. It can save us time and be more efficient."
Again, it all comes back to being prepared, strategic and proactive.
