2024 New Law on Reporting Requirements for New Entities
Effective 2024, most new and existing business entity formations will require the business to file a Beneficial Ownership Information (BOI) Report. The reporting is focused on ownership transparency, and it must be completed online via the FinCEN (Financial Crimes Enforcement Network) website. The reporting requirement was created to try and enhance U.S. national security by making it more difficult for criminals to exploit legal structure to launder money and commit serious tax fraud that could harm the American taxpayer. The initial BOI reporting will have no fee, if it is submitted accurately and timely (see below).
The law was initially drafted to require all entities created or registered to do business before January 1, 2024, to file the BOI Report by January 1, 2025, and entities on or after January 1, 2024 to file the BOI Report 30-calendar-days after receiving notice of the company’s creation. Due to the strain that would have put on small business entities the date was changed to a later date (see below) to allow for more time to gather the information and to hopefully receive more guidance.
Technically, the report is only required to be filed once. However, note that any changes to either the company information or beneficial owner information must subsequently be reported within the timeline described below. In terms of scope, most small corporations, LLCs, and partnerships with fewer than twenty employees will be required to report their beneficial ownership information. There is a lot of commentary on who should file the BOI Report on behalf of the business and because of the legal implications involved, the weight is currently pointing to the legal profession.
When Do You File:
A reporting company created or registered to do business before January 1, 2024, will have until January 1, 2025, to file its initial beneficial ownership information report. A company created or registered on or after January 1, 2024, and before January 1, 2025, will have 90-calendar-days after receiving notice of the company’s creation or registration to file its initial BOI report. Any entity created after January 1, 2025, will have 30-calendar-days after receiving notice of the company’s creation or registration to file its initial BOI report. As previously mentioned, an updated report will also be required for any change in information about your company or its beneficial owners from the most current BOI report that was filed. The company would need to file an updated BOI report no later than 30-days after the date on which the change occurred.
Who’s A Beneficial Owner
FinCEN states that a beneficial owner is any individual who directly or indirectly exercises substantial control over the reporting company, or directly/indirectly controls or owns 25% or more of ownership interests of the reporting company. According to current guidance, a beneficial owner will typically exercise substantial control over a reporting company if they “direct, determine, or exercise substantial influence over important decisions the reporting company could make.” For example, any senior officer is deemed to have “substantial control” over the company and would need to be included in the reporting even if they are not an owner.
The BOI Report will include company and beneficial ownership information, current U.S. address, assigned unique identifying number (U.S. Passport, State Driver’s License, Social Security number), a copy of documentation for the unique identifying number, and the individuals date of birth.
FinCEN will penalize any person who willfully provides false or fraudulent information to a reporting company or willfully fails to file a complete initial or updated report with FinCEN via a $500-per-day fine up to $10,000 and imprisonment for up to two years. Senior officers of an entity that fail to file a required BOI report may be held accountable for that failure. Additionally, a person may be subject to civil and/or criminal penalties for willfully causing a company not to file a required BOI report or to report incomplete or false beneficial ownership information to FinCEN. Civil or criminal penalties carry harsher monetary penalty than what has been previously described.
It is estimated that over 32-million reports will be filed initially with another 5-million filings annually for new entities created. The new reporting requirement will affect most of our clients and for some, the information gathering and filing of required reports, although a pain, will be relatively easy. For others it might have a more time-consuming impact.
Conversation continues regarding the complaints by some businesses of the onerous task of identifying all beneficial owners, so it may end up that there is a further delay in the existing businesses’ filing date or modifications on the information requested. S&G will continue to monitor this new filing requirement, providing additional guidance when available. As always, if you have questions about this or any other tax questions, please don’t hesitate to contact a member of the S&G team!
Massachusetts Tax Reform (Nov 2023)
On October 4, 2023, Governor Maura Healey signed into law “An Act to Improve the Commonwealth’s Competitiveness, Affordability, and Equity” (the Act), a sweeping $1 billion tax package modifying a wide range of Massachusetts tax laws, the highlights of which include changes to the Commonwealth’s estate tax threshold and a reduced short-term capital gains rate among many others. S&G’s tax experts have been following these developments closely and after reviewed the newly finalized comprehensive legislation, which goes into effect for the 2024 tax year, we have summarized a curated selection of the most notable components that will be relevant to our clients. They are as follows:
Estate Tax Changes
Prior to the passage of the Act, the Massachusetts estate tax applied to any person with assets in excess of $1 million at death. For most New Englanders who have experience dramatic increases in their land values over the past decade and beyond, this threshold had become untenable in applying the tax indiscriminately to those not otherwise intended, particularly when you factored in other investment holdings. Thereafter, entire estates were then subject to tax, not just the portion in excess of that threshold. This had come to be known as a “cliff tax” and been a target among many in the state house dating back to the previous 2006 changes.
Under the recently enacted tax reform the threshold amount is effectively doubled such that no estates under $2 million will be subject to the Massachusetts estate tax. Additionally, the Act stipulates that only assets in excess of $2 million will be subject to the tax and this change is effective for decedent estates triggered on or after January 1, 2023. This means that unlike other portions of the reform, if a family member has died in 2023 the increased threshold and changes to the tax base are effective immediately.
Short Term Capital Gains Rate Reduction
Massachusetts has long been criticized by would-be investors for its highly punitive rate applied to gains from the sale of capital assets held for a year or less. Other states provide a more favorable rate for passive short term capital gains, and even the IRS approach treats these gains the same as ordinary income taxed on a graduated scale to ensure that lower earners are less burdened. Meanwhile, Massachusetts has historically applied an astronomical 12% to these transactions (e.g., more than twice the regular rate) and imposed the tax equally among all types of earners. However, the Act slashes the tax rate for short-term capital gains from 12% to 8.5% while maintaining the long-term capital gains rate 5%. Similar to the estate tax changes, the new rate will be effective for the 2023 tax year.
Millionaires’ Tax Loophole
After the Fair Share Amendment was approved by Massachusetts voters in November of 2022, the so-called “Millionaires’ Tax” went into effect by imposing a 4% surcharge on incomes over $1 million. In response to this, taxpayers who couldn’t otherwise flee or circumvent the levy sought to minimize its impact by insulating one spouse’s income from another by filing separately. It was previously possible to file a joint return federally and a separate return at the state level, albeit rare. Still, the practice had seen an immediate uptick in such filers who otherwise would have additional income become subject to the surcharge. Now, Massachusetts has caught up with this tax avoidance scheme.
Effective January 1, 2024, the Act requires taxpayers to file a joint Massachusetts return in any year they file a joint Federal return. Clearly, this new rule is specifically designed to dissuade couples from taking inconsistent positions year to year or between Federal and State filings.
Chapter 62F Changes
Nearly all Massachusetts taxpayers will remember receiving an extra refund check last year when a seldom-used 1986 law forced the State to return excess tax revenue. Pursuant to Chapter 62F, the Commonwealth was required to refund each taxpayer from the over-accumulated collections in proportion to what they paid. This represented a total of roughly $3 billion back to residents with the highest-earning Bay Staters receiving the lion’s share. Seeking to rectify the perceived inequity of this result, the Act does not repeal but rather replaces the proportional system with one where future rebates would be disbursed equally among every taxpayer regardless of how much the individual paid in tax that year.
Other Miscellaneous Provisions
Finally, no comprehensive tax reform bill would be complete without a smattering of other various changes that facilitated the necessary votes for passage. Below is a sampling of those that might interest you:
- Single Sales Factor – As of the 2025 tax year, multistate businesses that apportion their income will no longer be penalized for their in-state property and payroll percentages but rather the multiplier will be based solely on the proration of Massachusetts sales to their sales total everywhere;
- Dependent Credit – Increases the tax credit for a dependent child, disabled adult or senior from $180 to $310 for 2023. The credit increases to $440 for taxable years beginning in 2024;
- Renter’s Deduction was increased from $3,000 to $4,000;
- Senior Circuit Breaker Credit doubled from $1,200 to $2,400;
- Lead Paint Abatement Credit doubled to $3,000 for full abatement and $1,000 for partial abatement; and
- Title V (Septic) Tax Credit tripled maximum credit to $18,000, increases percentage of eligible expenses from 40% to 60%; and allows taxpayers to claim up to $4,000 in any year, ($1,500 under the prior law). However, the property still must be used as a principal residence in order to claim the credit.
Overall, this is the most substantial state tax reform in Massachusetts in decades and should be a welcome reprise from the usual money grab trend. As always, if you have questions about any of these provisions and how they may impact your tax position in the coming year please contact a member of the S&G team!
Nexus – Do You Have State Tax Liability Exposure?
Hot Topics and Discussion Points
We have summarized some of the hot topics and discussion points relating to multistate nexus considerations that all business owners should be aware of. If you have any questions or would like further clarification, please let us know, as we would be more than happy to help you out. One of our expertise’s, is running State Nexus Studies.
- What is Nexus/Why It’s Important?
- “Nexus” refers to a state’s ability to compel businesses to file tax returns based on their having a sufficient connection with that jurisdiction. However, each state can have varying rules on what rises to the level.
- For businesses that are rapidly growing, navigating the compliance landscape can be tricky, particularly among several jurisdictions and rapidly changing rules. Thus, this fluid regulatory framework and the constant flux that small businesses are faced with in their day-to-day operations often times results in neglecting certain filing obligations. Unfortunately, even unintentional or unforeseen missteps can create tax exposure as well as related penalties. This is compounded more so for those businesses in the northeast where crossing state lines is a common occurrence.
- In addition, for those planning exit strategies they should be aware of potential tax exposure that could become an obstacle in the sale process as potential buyers will almost certainly uncover these issues upon due diligence. The ramifications: potential delays in the due diligence process and closing; purchase offers could be adjusted down; higher amounts potentially might have to be put in escrow to cover the potential tax liability (although there is no statute of limitations).
- Recent Developments
- To complicate things further, there have been significant developments in the “nexus” interpretation over the past few years, most notably the adoption of nexus without any physical presence (called “economic nexus”) which was a response to the evolution of eCommerce where operations are not necessarily within a fixed geographical location.
- States are becoming increasingly aggressive in trying to assert nexus as a means to raising revenue and will likely continue given the economic struggles during the pandemic.
- There have been certain special Covid-19 provisions relating specifically to nexus and remote employees which are still being adjudicated and will undoubtedly have tangible impacts on business owners’ filing obligations.
- Nexus studies/voluntary disclosures/limitations periods
- S&G can perform a nexus study to determine whether a business has any outstanding filing obligations and how to become compliant. This is important because there is no statute of limitations for unfiled returns so sticking your head in the sand could result in a decade’s worth of unfiled returns, exposing you to taxes and accumulated interest and penalties.
- In the event that S&G does uncover some exposure, we can negotiate a ‘voluntary disclosure agreement’ with states on your behalf anonymously through a process they have established as a means of bringing businesses into compliance while reducing the liability owed.
Employee Retention Credit (ERC) – Robust Tax Incentive Credits
Retroactive Application of the Employee Retention Credit
With the passage of recent tax reform, Congress made the application of the Employee Retention Credit (ERC) retroactive to include recipients of Payroll Protection Program (PPP) loans in 2020. Prior to this date, the law only allowed taxpayers to claim either the PPP or ERC. Current law allows taxpayers to amend previously filed 2020 payroll tax returns to claim the ERC credit. Please note that businesses cannot utilize the same wages under both the PPP and ERC programs. For example, if a company had $150,000 in wages during 2020 and then utilized $100,000 of those wages to substantiate their PPP loan forgiveness, they could only claim $50,000 of qualified ERC wages.
What is the Employee Retention Credit?
The ERC is a fully refundable tax credit for employers equal to 50% of qualified wages (including allocable qualified health plan expenses) that eligible employers pay their employees. In 2020 the ERC is applicable for qualified wages paid after March 12, 2020, and before January 1, 2021, however the maximum amount of qualified wages taken into account with respect to each employee for all calendar quarters is $10,000, so that the maximum credit for qualified wages paid to any employee is $5,000. Expanding on the prior example where the business had $50,000 in available ERC wages, if there were five employees each making $10,000, the company could claim a $25,000 ERC credit (5-employees * $10,000 employee limit * 50%). If the company only had one employee who was paid the full $50,000 in qualified ERC wages, they would be limited to only a $5,000 ERC credit ($10,000 employee limit* 50%).
There is good news to report on the 2021 ERC version, as the limits have been increased. The ERC is computed similarly but the amount of the credit for 2021 is now 70% of qualifying wages paid up to $10,000 per quarter/per employee throughout all four quarters of 2021. Keeping with the one employee example above, the company is eligible for a maximum $7,000 credit for a total of $28,000, in comparison to the 2020 ERC where the company was limited to $5,000 for the year.
In 2021 the credit limit changes depending on the size of the company:
- For employers with more than 500 employees, this credit is only available for wages paid to employees that were paid not to work. An exclusion exists for “severely financially distressed employers,” defined as those experiencing a gross receipts reduction of more than 90% as compared to the same quarter in 2019, who will be able to ignore this limitation regardless of the size of the employer and number of employees.
- For employers with 500 or less employees, all wages qualify for the credit without regard to whether the employee worked. In 2020 the size for the different qualifications was over/under 100 employees.
Are you eligible for the credit?
Eligible employers for the purposes of the Employee Retention Credit are employers that carried on a trade or business during calendar year 2020, including tax-exempt organizations, that either:
- Fully or partially suspended operations during any calendar quarter in 2020 due to orders from an appropriate governmental authority limiting commerce, travel, or group meetings (for commercial, social, religious, or other purposes) due to COVID-19. See IRS FAQ’s for additional guidance.
- Experience a significant decline in gross receipts during the calendar quarter, which for the 2020 credit is defined as 50% or greater decline in gross receipts compared to the same calendar quarter in 2019. For 2021, the decline in gross receipts is reduced from 50% to 20% as compared to the same calendar quarter in 2019. See IRS FAQ’s for additional guidance.
Note: If you do not meet one of these two criteria, you are illegible for the credit in 2020 and/or 2021. The new law also made the ERC available to businesses that started after February 15, 2020 with the following classification: “recovery start-up business”. They must meet certain criteria to qualify (mainly average annual gross receipts less than $1,000,000). The credit is capped at $50,000 per quarter.
How to claim the credit?
Eligible Employers can claim the ERC with their payroll tax filing, Form 941. Given the retroactive applicability to 2020, taxpayers may amend their previously filed 941 Forms to take the credit. For 2021 employers will claim the 2021 ERC with their quarterly payroll tax filing, Form 941. If the employer’s employment tax obligations are less than the computed ERC, the employer may receive an advance payment from the IRS by submitting Form 7200, Advance Payment of Employer Credits Due to COVID-19. We recommend that you discuss this with your payroll provider.
Is there anything else I should know?
If you received or anticipate receiving PPP forgiveness, and you believe that you might qualify for the ERC as an Eligible Employer due to one of the aforementioned factors, we are here, ready to help, please give us a call.