If there’s one constant in the world of tax, it’s change. Tax regulations continue to evolve at a local, state, and federal level, with implications for businesses and individuals alike. This article reviews what’s new, what’s changed, and what you can do.

Staying up-to-date with this constant stream of updates can be challenging for busy entrepreneurs and business professionals. But at the same time, it’s important to keep a current working knowledge of the key regulations. Fail to do that, and you may end up overpaying taxes or failing to take advantage of credit opportunities that apply to your business.

Key Updates:

  • SECURE Act 2.0
  • Section 174 Changes
  • Kentucky Tax Updates
  • State Pass-Through Entity Tax Legislation
  • Inflation Reduction Act
  • Evolving State Nexus Standards
  • Kentucky Sales Tax Update

SECURE Act 2.0

The SECURE Act, originally signed into law in 2019, made several changes to retirement account regulations. These changes have been built on by the SECURE Act 2.0, which aims to strengthen the ability of Americans to financially prepare for retirement.

Key changes in the SECURE Act 2.0 include:

  • The Required Minimum Distribution (RMD) age is now 73, rising to 75 in 2033.
  • RMDs are no longer required for Roth 401(k) accounts
  • Measures to promote increasing plan participation, including:
    • 401(k) automatic enrollment requirements for some plans from 2025 onwards
    • Increased ability to make catch-up contributions
    • Incentives for small businesses (100 or fewer employees) with retirement plans based on plan contributions and administration costs as well as for implementing an automatic enrollment feature
    • Matching for Roth accounts
    • The ability for employers to match student loan payments with payments to a retirement account

If you’re unsure about what this means for your retirement plans, contact a tax advisor today to explore how these updates impact your strategy.

Section 174 Changes

Before the 2022 tax year, R&D expenses incurred by a business, such as employee salaries and raw materials, were generally tax deductible through an R&D tax credit. However, under the changes to Section 174 that went into effect from the 2022 tax year onwards, expenses such as these are now no longer deductible.

Instead of deducting these expenses, businesses must now amortize them over a number of years. Domestic activities must be amortized over 5 years, and foreign activities must be amortized over 15 years.

This change affects all businesses, not just those that claim R&D tax credits. All businesses are required to amortize qualified expenses according to these schedules, regardless of whether they pursue R&D tax credits or not. It’s expected these changes will be repealed, but as of today, they are the law.

To understand the impact to you or your business, contact your tax advisor at LBMC today.

Kentucky Tax Updates

In March 2023, Kentucky passed HB 360: an important piece of legislation that made several changes to state taxes in Kentucky. The law serves to make corrections and add clarity to several sales tax issues stemming from HB 8.

Key changes include:

  • The KY income tax rate is decreased to 4.5% in 2023 and 4% in 2024
  • Pass-through entities can now elect to pay state income tax at the entity level
  • Updates Kentucky’s conformity with the Internal Revenue Code

These updates are the next step in a long-term economic strategy to eliminate personal state income tax in Kentucky.

State Pass-Through Entity Tax

Many states, including Kentucky and Indiana, have enacted state Pass-Through Entity Taxes (PTET) in an effort to eliminate the negative impact of the $10,000 SALT cap put in place by the Tax Cuts and Jobs Act.

These allow pass-through entities to opt to pay state income tax at the entity level, rather than the individual level. In essence, this allows the partners, members, and shareholders of a pass-through entity to lower their federal income tax liability by deducting state income tax expenses in excess of the federal $10,000 SALT deduction cap.

The IRS has essentially blessed this position, although several issues still remain unresolved, and the decision to pay PTET does not make sense in every scenario. To discuss how this impacts you, contact your LBMC tax professional.

Inflation Reduction Act

The Inflation Reduction Act, signed into law in August 2022, contains a wide variety of tax provisions. Here are some of the most notable:

  • Corporate Alternative Minimum Tax: introduces a 15% minimum tax for C Corporations with more than $1 Billion in Corporate Adjusted Financial Income (AFSI) over a three-year period.
  • Excise Tax on Repurchase of Corporate Stock: imposes a 1% tax on the fair market value of stock repurchased after 2022 by a publicly traded US corporation during the taxable year.
  • Extension of Limitation on Excess Business Losses of Noncorporate Taxpayers: extends limitation of excess business losses of noncorporate taxpayers by two years and disallows excess losses for taxable years 2021 through 2028.
  • Extension and Modification of Nonbusiness Energy Property Credit: extends the nonbusiness energy property credit through 2032 and updates the credit rate to 30% for qualified energy efficiency improvements and residential energy property expenditures. The $500 lifetime limit was also replaced with a $1,200 annual limit.
  • Extension and Modification of Residential Energy Efficiency Property Credit: the residential property efficiency credit is extended through 2034 and renamed the residential clean energy credit. This credit replaces existing credits for biomass fuel property expenditures with a new credit for battery storage technology credit expenditures.

Evolving State Nexus Standards

Nexus, which determines whether a business has sufficient economic connection to a state to pay taxes there, has become an increasingly important tax issue in recent years as standards have evolved across states.

It’s important for businesses to evaluate their nexus to ensure compliance with state tax laws, preventing double taxation while exploring potential tax credits. If your business is not in compliance, partner with a tax advisor to determine your exposure and evaluate voluntary disclosure opportunities.

To learn more about evolving state nexus standards, read these two articles from one of our Tax Managers here at LBMC:

  • What is Nexus And Why You Should Care If Doing Business in Different States
  • How to Determine If Your Business Has Nexus in a State

Kentucky Sales Tax Update

HB 360 also expanded the types of service businesses that now must collect sales tax in Kentucky. Long-term, this will enable Kentucky to continue decreasing personal income tax rates.

The additional categories of service businesses that must now collect sales tax include:

  • Cosmetic surgery services
  • Executive employee recruitment services
  • Extended warranty services
  • Lobbying services
  • Storage
  • Telemarketing services
  • And more

To view a complete list of these categories, visit the Kentucky Tax Answers website. If your business is affected and needs assistance implementing new accounting systems to track its sales tax obligations, LBMC’s tax advisors can help.

Of course, interpreting these complex tax laws is a task best left to experienced tax professionals. At LBMC, our tax advisors serve businesses of all shapes and sizes, as well as private individuals, with a wide range of tax planning services. Our professionals work diligently to stay up to date on unfolding developments in tax.

LBMC tax tips are provided as an informational and educational service for clients and friends of the firm. The communication is high-level and should not be considered as legal or tax advice to take any specific action. Individuals should consult with their personal tax or legal advisors before making any tax or legal-related decisions. In addition, the information and data presented are based on sources believed to be reliable, but we do not guarantee their accuracy or completeness. The information is current as of the date indicated and is subject to change without notice.