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Starting with Reflection – Our Journey to Becoming More Inclusive

By Our Culture, Uncategorized

How can L&B do what is right by our employees, our clients, and our society? This is the question we asked ourselves as we embarked on our strategic initiative on diversity, equity, inclusion and belonging in January of 2022.  Like many firms, over the past several years we have read the news, held internal dialogue, and implemented new programs. But as we looked ahead to the future of the firm, we knew that this was not enough. 

It is not enough because our firm is growing. The strong culture that we pride ourselves on has been grown from the love and commitment of our founding partners. We want this culture to be as strong a part of our future as it has been of our past.  

It is not enough because our firm is hybrid-remote. Our connection to one another happens differently in today’s online collaboration. With the impact of COVID on our office-based work, we transitioned our firm to become hybrid- remote including fully  remote employees. This has been amazing for the quality and diversity of our team, but it means we must provide for the connection and collaboration that we value in more intentional ways. We don’t always bump into one another at the coffee machine. Instead, we come together around shared experiences and values. 

It is not enough because our society demands it. Historically, resources have been distributed unequally. Our firm works with affluent people and businesses. Finding our integrity in serving wealthy clients and actively contributing our time and talent to the community is a part of making a difference in the world. We want to be a place where employees can not just build their technical skills but also explore the question, “Why does what I do matter?” and “Where can my skills truly make a difference?”  We want to be a place where clients come not just for sound tax and accounting advice, but also for guidance in shaping a legacy for causes they care about.

So we embarked on an equity audit to begin our journey and better understand ourselves. 

First, we started by selecting a consultant who we thought could meet our needs. We chose Humble Oak, a woman-owned small business whose founder was supported in starting her business by her advisor at L&B. “I help historically white organizations think big about how they can expand the scope of their mission, remove barriers to access, and build coalitions across lines of difference,” says founder Lucretia Witte. This was important to us because we wanted our consultant to kickstart a journey of reflection, education and outreach at all levels of the organization and we knew that she had been on similar learning journeys herself and with other organizations. 

Our equity audit process included a broad and deep analysis of the firm based on four pillars of data.  Our consultant worked with us to collect relevant data from every stage of the employee life cycle and draw connections between existing policies and DEI goals. She also led five focus groups with almost half of our organization participating and piloted a DEI training with fifteen recent hires. At the end of the research process, she presented the equity audit to the partners and senior managers of L&B. 

We were really proud to see that she noticed some key strengths of the organization that we felt reflected our efforts and our philosophy over the past thirty years.  We also felt her Strategic Opportunities reflected an accurate summary of where we know we can improve. She left our partner group with a set of recommendations which we are currently planning into our strategic priorities for the coming months. 

We’ve already scheduled training and dialogue to begin after the busy season and will culminate our leadership training by setting 2-3 strategic goals related to DEI&B for the next year.  We wanted to share this communication to be transparent about what we’re doing across the firm, with current and prospective employees, and with clients, because we know it’s important and we want to share our learning journey in the hope that it inspires others to join us in this conversation. 

“Even though L&B has never measured itself against a DEI standard before, much of the work you already do to help all employees succeed and advance is related to DEI,” says Witte. “From the mentor program to individual development plans, any program that exists to give employees personalized support and a sense of connection is part of DEI strategy.”  Our new challenge is to see all the work our team does through this lens.

Stay tuned to our Culture Conversations page on our website for further updates on our work to make L&B the most inclusive firm we can be.

 

Update on State Tax Deduction Limitation Workaround for Owners of Passthrough Entities

By Uncategorized
We are writing to update you on the California Passthrough Entity Tax election, commonly referred to as the “AB 150” election. This is an update to our July 23rd eblast.
Background
Federal tax reform in 2017 established a limit, or “SALT cap,” on the amount of state and local taxes that could be deducted by individuals. The SALT cap is currently $10,000 for both single and married filing joint filing statuses, and is scheduled to sunset after the 2025 tax year.
The IRS approved a workaround to the SALT cap in late 2020, and on July 5, 2021, the California legislature passed AB 150. Under AB 150, qualifying PTEs can elect to pay a 9.3% income tax and owners of the entities who pay personal income tax can claim a credit equal to the tax the entities pay. The election is available for the 2021 through 2025 tax years.
Please see our previous AB 150 eblast sent on July 23rd with more information on how to pay the tax, when the tax is due, who is eligible to participate and more details.
AMT Limitation
Subsequent to our original AB 150 eblast, we learned that the Franchise Tax Board has taken the position that the income tax credit taken by a participating owner of a passthrough entity is limited to California tentative minimum tax. In other words, the credit is not allowed for California alternative minimum tax (“AMT”).
Unfortunately, this seriously limits the benefit of AB 150. We have found that some of our clients are still projected to receive an overall benefit by electing AB 150 for their passthrough income, while others are projected to experience an overall tax increase and will not elect AB 150.
The tax benefit (or detriment) that a passthrough entity owner would experience by electing AB 150 is highly dependent on their individual tax circumstances. If you are considering participating in an AB 150 election, we strongly recommend that you consult with your L&B advisor to determine and quantify whether (and by how much) you will benefit by electing AB 150.
Proposed SALT Cap Increase
On November 19, 2021, the House of Representatives passed the Build Back Better Act (H.R. 5376) (the “BBB Act”). Beginning with the tax year 2021, the House version of the BBB Act would raise the cap on the SALT deduction from $10,000 to $80,000 and extend the cap through the 2030 tax year. The BBB Act bill was recently sent to the Senate for its consideration.
If the proposed SALT cap increase becomes law, we anticipate that a passthrough entity owner will still be able to elect AB 150.
Communicating With Your Investors
If you are responsible for filing a partnership or S corporation return and wish to offer your investors the option to participate in an AB 150 election, we recommend you contact them right away to ask if they wish to participate.
When communicating with your investors, matters to consider include but are not limited to:
1. When is the tax payment due? (To secure a 2021 tax benefit for the participating owners, a calendar year passthrough entity must pay the tax by December 31st if it is on the cash basis for tax reporting purposes or March 15th if it is on the accrual basis.)
2. How will the investor notify you if they wish to participate and what is the deadline to notify you?
3. How will the entity source the funds to pay the elective tax? Options include paying the tax from cash on hand and reducing future distributions accordingly to each participating member or requiring that each participating member send a check to the entity for their share of the tax.
If you would like assistance with drafting a communication to your investors regarding AB 150, please contact your L&B Tax Advisor.
Planning for 2022 – Action Needed by June 15th
For the 2022 tax year, a passthrough entity that wishes to make the AB 150 election for one or more of its owners must make a tax payment by June 15th, 2022. The amount of the payment must be the greater of $1,000 or 50% of the elective tax paid in the prior taxable year.
If you have any questions, please reach out to your L&B Tax Advisor.

The Build Back Better Act

By Uncategorized
The House Ways and Means Committee has introduced the tax proposal connected to the budget reconciliation bill, the Build Back Better Act. While we are still digging through the almost 900 pages of legislation, here are some highlights of what is included and notably what is not included in this bill introduced on September 13th.
Increase in corporate tax rate. This provision replaces the flat corporate income tax with a graduated rate structure. The rate structure provides for a rate of 18 percent on the first $400,000 of income; 21 percent on income up to $5 million, and a rate of 26.5% on income thereafter.
Limitation on certain special rules for Section 1202 gains. The special 75% and 100% exclusion rates for gains realized from certain qualified small business stock will not apply to taxpayers with adjusted gross income equal or exceeding $400,000. The baseline 50% exclusion in 1202(a)(1) remains available for all taxpayers. The amendments made by this section apply to sales and exchanges after September 13, 2021, subject to a binding contract exception.
Increase in top marginal individual income tax rate to 39.6%. This marginal rate applies to married individuals filing jointly with taxable income over $450,000, to heads of households with taxable income over $425,000, to unmarried individuals with taxable income over $400,000, to married individuals filing separate returns with taxable income over $225,000, and to estates and trusts with taxable income over $12,500. Applicable to taxable years beginning after December 31, 2021.
Increase in capital gains rate for certain high income individuals to 25%. Applicable to gains recognized after September 13, 2021. There is an exception for gain recognized after this date subject to a binding contract prior to September 13th.
Surcharge on high income individuals, trusts, and estates of a tax equal to 3% of a taxpayer’s modified adjusted gross income in excess of $5,000,000 (or in excess of $2,500,000 for a married individual filing separately). Applicable to taxable years beginning after December 31, 2021
Reduction in the amount of the unified credit against estate and gift tax to the 2010 level of $5m adjusted for inflation. Applicable beginning January 1, 2022.
There is no mention of the elimination of Section 1031 deferred exchanges for real estate.
There is no mention of the elimination of the step up in the basis of assets at death.
There is no elimination of the SALT cap, but there is pressure to include relief on the deduction of state and local taxes.
This is a big step in the legislative process, there will be more to follow. You can read the Ways and Means press release here. 
Please contact your L&B advisor for more information.

State Tax Deduction Limitation Workaround for Owners of Passthrough Entities

By Uncategorized

By Neil McCarthy, CPA – Tax Manager at Lindsay & Brownell

Background on the SALT Workaround

Federal tax reform in 2017 established a limit, or “SALT cap,” on the amount of state and local taxes that could be deducted by individuals. The SALT cap is currently $10,000 for both single and married filing joint filing statuses, and is scheduled to sunset after the 2025 tax year.

Many states, including California, considered legislation that would mitigate the effect of the SALT cap. IRS promulgated guidance that they would challenge these workarounds; however, on November 9, 2020, IRS issued Notice 2020-75 stating their position that would not challenge an approach first adopted by Connecticut. This approach, which is available to owners of passthrough entities (“PTEs”), has two components: an optional entity level tax on the PTE; and a corresponding credit by the owners of the PTE.

Since the tax is assessed at the entity level and the SALT cap does not apply to entities, this permits the PTE to fully deduct the state tax for federal tax purposes. This flows through to the individual owners as a reduction to AGI, bypassing the SALT cap.

California SALT Workaround

Overview. The California legislature passed AB 150, which includes the SALT Workaround, on July 5, 2021 and the Governor signed it into law on July 16, 2021. Under AB 150, qualifying PTEs can elect to pay a 9.3% income tax and owners of the entities who pay personal income tax can claim a credit equal to the tax the entities pay. The election is available for the 2021 through 2025 tax years but will be eliminated sooner if the federal SALT cap is repealed.

About the Election. The election is an annual election and, once made, is irrevocable and binding on all owners of the PTE. The election is made on an original timely filed return.

Who is a Qualifying PTE? A PTE qualifies if it is an entity taxed as an S corporation or partnership and has exclusively corporations, individuals, trusts or estates as owners. A PTE does not qualify if it is publicly traded, subject to combined reporting, or is owned by one or more partnerships.

Tax Calculation. The tax is 9.3% of qualified net income which includes 100% of the distributive share for California residents, and only the California-source portion for nonresidents. While a partnership can elect the SALT Workaround if it has owners which are corporations, the tax is not assessed on corporations’ share of distributive income; it only applies to individuals, trusts and estates.

Payment of Tax. For taxable years beginning on or after January 1, 2021 and before January 1, 2022, the PTE tax is due on or before the due date of the return without regard to extensions. For taxable years beginning on or after January 1, 2022 and before January 1, 2026, the PTE must pay $1,000 or 50% of the elective tax paid in the prior year, whichever is greater, by June 15th of that year and pay the remaining tax due for the year by the due date of the return without regard to extensions. If the required payment is not made by June 15th, the entity can not elect to apply the tax for that year.

Credit. AB 150 allows a credit against net tax to the qualified taxpayers of the electing PTE. The amount of the credit is equal to 9.3% of the qualified taxpayer’s distributive share of qualified net income subject to the PTE election. If the credit exceeds the taxpayer’s net California income tax, the excess is not refundable; instead, it is carried forward for up to five years.

Benefits. Since an entity’s state tax deduction is not subject to the SALT cap, electing the SALT Workaround allows taxpayers to bypass the SALT cap to the extent of the tax paid by the PTE. In addition, the elective tax payment due dates contrast favorably to estimated tax payment due dates for individuals.

Law. The new California law that allows the elective tax is here and the corresponding credit to the individual owners is here.

If you have any questions, please reach out to your L&B advisor!

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