Federal Tax Update.

SECURE 2.0 Affects RMDs and More

The 2022 Setting Every Community Up for Retirement Enhancement 2.0 Act (SECURE 2.0 or the Act), enacted Dec. 29, 2022, affects required minimum distributions (RMDs) and other retirement plan and tax provisions. Selected highlights follow.

RMDs

Old Law: Under IRC Sec. 401(a)(9), the following retirement plans are subject to the RMD rules, requiring benefits to be distributed, or commence to be distributed, by the required beginning date (RBD):

* Employer-sponsored qualified retirement plans [e.g., under Sec.401, 403(b) or 457(b)];

* Traditional IRAs [Sec. 408(a)]; and

* Individual retirement annuities [Sec. 408(b)].

RBDs are as follows:

* IRAs: April 1 following the calendar year in which the IRA owner attains 72.

* For employer-sponsored qualified plans:

* Non-5 percent employee owners: April 1 following the later of the calendar year in which the employee attains age 72 or retires.

* 5 percent employee-owners: Same as for IRAs, even if the employee continues to work after age 72.

New Law: For distributions required after 2022, for individuals attaining 72 after 2022, the age used to determine RBDs is increased to age 73 starting Jan. 1, 2023 (for individuals attaining age 72 after 2022 and age 73 before 2033), and to age 75 starting Jan. 1, 2033 (for individuals attaining age 74 after 2032).

Reduced Excise Tax

Old Law: Under Sec. 4974(a), a 50 percent excise tax was imposed on a payee under a qualified plan, IRA or eligible deferred compensation plan [under Sec. 457(b)] if a distribution during the payee's tax year is less than that year's RMD.

New Law: The Act reduces this 50 percent tax to 25 percent. The Act also adds Sec. 4974(e), providing that if the failure to take the RMD is timely corrected, the 25 percent tax is reduced to 10 percent.

New Sec. 4974(e) specifies that if during the "correction window," a taxpayer receives a shortfall of distributions from a plan causing the excise tax and files a return during this window showing this tax, the failure to receive the proper RMD will result in only a 10 percent excise tax.

The "correction window" begins when this excise tax is imposed on an RMD shortfall and ends on the earliest of:

* The date a notice of deficiency regarding this tax is mailed;

* The date this tax is assessed; or

* The last day of the second tax year beginning after the end of the tax year in which this excise tax is imposed.

These provisions apply to tax years beginning after Dec. 29, 2022.

Surviving Spouses

Old Law: A surviving spouse that was designated as the beneficiary of an employee who died before the RMDs began under the employer's plan received a more favorable distribution period of the deceased spouse's interest in that plan if the surviving spouse rolled that interest into an IRA.

New Law: Effective for calendar years beginning after 2023, if an employee dies before RMDs began under the employer's plan and designated the surviving spouse as the sole beneficiary, the surviving spouse may elect to be treated as the employee for RMD purposes.

Distributions must begin not earlier than when the deceased employee would have attained the age used to determine the RBD. If the surviving spouse dies before distributions begin, that spouse is treated as the employee to determine the distribution period.

This election must be made in the time and manner prescribed by the IRS, must include a timely notice to the plan administrator and cannot be revoked without IRS consent.

The IRS is directed to amend Regs. Sec. 1.401(a)(9)-5, Q & A 5 (or successor regulations) to provide that if the surviving spouse is the employee's sole designated beneficiary and elects to be treated as the employee (as described above), the distribution period for distribution calendar years after the distribution calendar year, including the deceased employee's date of death, is determined under the uniform lifetime table [Act Sec. 327(b)].

Note: Thus, a surviving spouse who is the designated beneficiary can have a similar distribution period for lifetime distributions under an employer's plan as permitted if the spouse rolls the amount into an IRA.

Tax-Free Rollovers

Old Law: No provision

New Law: Effective for distribution after 2023, the Act permits beneficiaries of Sec. 529 saving accounts for qualified tuition programs, open for more than 15 years, to make trustee-to-trustee rollovers from these accounts to Roth IRAs, without tax or penalty, of any balance after education is completed.

The rollover cannot exceed contributions to the account plus earnings more than five years before the rollover. Total rollovers cannot exceed $35,000 over the beneficiary's lifetime. Rollovers are subject to the Roth IRA annual contribution limits, except the limit based on the taxpayer's adjusted gross income.

IRS Provides Relief and Guidance for Certain Required Minimum Distributions

IRS Notice 2023-54 (IRB 2023-31, July 31, 2023) provides transition relief concerning the change in the RBD for RMDs under Sec. 401(a) (9) pursuant to Section 107 of the Act.

Background

Sec 401(a)(9) requires qualified retirement plans to make minimum distributions starting by the RBD, as well as minimum distributions to beneficiaries if the employee dies before the RBD.

Individual retirement accounts and annuities (IRAs) described in Sec. 408(a) and (b), annuity contracts, custodial accounts and retirement income accounts described in Sec 403(b), and eligible deferred compensation plans under Sec. 457(b) also are subject to Sec. 401(a)(9)'s rules.

RBD: Act Section 107 amended Sec. 401(a)(9) to change the RBD for qualified retirement plans under Sec. 401(a) and other eligible retirement plans including IRAs.

Instead of defining the RBD by reference to April 1 of the calendar year following the calendar year in which the individual attains age 72, the new RBD for an employee or IRA owner is defined by reference to April 1 of the calendar year after the calendar year in which the individual attains the applicable age--which is either 73 or 75, depending on the individual's birth date.

RMD Distribution Period: Sec. 401(a)(9) provides rules for RMDs from a qualified plan during the employee's life in Sec. 401(a) (9)(A) and after the employee's death in Sec. 401(a)(9)(B). In addition to prescribing an RBD for distributions, these rules set forth the period over which the employee's entire interest must be distributed.

Sec. 401(a)(9)(A)(ii) provides that an employee's entire interest in a qualified plan must be distributed beginning not later than the employee's RBD, in accordance with regs, over the employee's or over the lives of the employee and a designated beneficiary (or over a period not extending beyond the life expectancy of the employee and a designated beneficiary).

Under Sec. 401(a)(9)(B)(i), if the employee dies after distributions began, the employee's remaining interest must be distributed at least as rapidly as under the method of distributions the employee used under Sec. 401(a)(9)(A)(ii) as of the date of the employee's death.

Sec. 401(a)(9)(B)(ii) and (iii) provide that, if the employee dies before RMDs began, the employee's interest must be distributed:

* Within five years after the employee's death (five-year rule); or

* Over the designated beneficiary's life or life expectancy (in accordance with regs.) with distributions beginning not later than one year after the employee's death--subject to an exception in Sec. 401(a)(9)(B)(iv) if the designated beneficiary is the employee's surviving spouse.

New 10-Year Rule: The Act added Sec. 401(a)((9)(H) which replaced the five-year rule with a 10-year rule. Regs. proposed Feb. 24, 2022, deal with the 10-year rule and, when finalized, would apply beginning with the 2022 calendar year. This new 10-year rule and these proposed regs also were discussed in IRS Notice 2022-53 and were covered in the December 2022 California CPA Fed Tax column, Page 29.

Eligible Rollover Distributions: Notice 2023-54 also discusses rules pertaining to these distributions.

Final Regs.' Applicability Date

Final regs. regarding RMDs under Sec. 401(a)(9) and related provisions will apply for calendar years beginning not earlier than 2024.

Guidance for Specified RMDs for 2023

A defined contribution plan that failed to make a specified RMD, defined below, will not be treated as failing to satisfy Sec. 401(a)(9) merely because it did not make that distribution.

If a taxpayer did not take a specified RMD, the IRS will not assert that the Sec. 4974 25 -percent excise tax is due. If a failure to take an RMD is corrected by the end of the correction window (generally, the end of the second year beginning after the year of the missed RMD), this tax is reduced to 10 percent.

Specified RMD: For Notice 2023-54 purposes, a specified RMD is any distribution that under the Proposed Regs.' interpretation would be required to be made in 2023 under a defined contribution plan or IRA, subject to Sec. 401(a)(9)(H)'s rules, for the year in which the employer or designated beneficiary died--if that payment would be required to be made to:

A. An employee's or IRA owner's designated beneficiary if:

1. The employee or IRA owner, died in 2020, 2021 or 2022 and on or after the employee' or IRA owner's RBD; and

2. The beneficiary is not using the lifetime or life expectancy payments exception under Sec. 401(a)(9)(B)(iii); or

B. An eligible designated beneficiary's beneficiary if

1. The eligible designated beneficiary died in 2020, 2021 or 2022; and

2. That beneficiary was using the lifetime or life expectancy payments exception.

ERC Pitfalls: IRS Alerts Businesses of Warning Signs for Misleading Employees Retention Credit Scams

IR-2023-105, May 25, 2023, renewed an IRS alert for businesses to watch out for tell-tale signs of misleading Employee Retention Credit (ERC) claims--as aggressive marketing continued.

The IRS and tax professionals continue to see a barrage of ERC aggressive broadcast advertising, direct mail solicitations and online promotions. While this credit is real, aggressive promoters are wildly misrepresenting and exaggerating who qualifies for the ERC.

The IRS has increased audit and criminal investigation work involving these claims. Businesses, tax-exempt organizations and others considering applying for this credit must carefully review the official requirements for this limited program before applying. Those improperly claiming this credit face follow-up IRS action.

"This aggressive marketing of the Employee Retention Credit continues preying on innocent businesses and others," said IRS Commissioner Danny Werfel. "Aggressive promoters present wildly misleading claims about this credit. They can pocket handsome fees while leaving those claiming the credit at risk of having the claim denied or facing scenarios where they need to repay the credit."

The ERC is legitimate and many businesses can apply for this pandemic era credit. The IRS has added staff to handle ERC claims, which are time-consuming to process because they involve amended returns.

"Advertisers' continual marketing barrages means many invalid claims are coming into the IRS, which also means it takes our hardworking employees longer to get to the legitimate Employee Retention Credits," Werfel said. "The IRS understands the importance of these credits, and we appreciate the patience of businesses and tax professionals as we continue to work hard to get valid claims processed as quickly as possible while protecting against fraud."

The IRS has been warning about aggressive ERC scams since 2022, and it made its list of 2023 Dirty Dozen tax scams that people should watch out for.

This is an ongoing priority in many ways, and the IRS continues to increase ERC compliance. The IRS has trained auditors examining ERC claims posing the greatest risk and its Criminal Investigation Division is working to identify fraud and fraudulent claim promoters.

The IRS reminds anyone improperly claiming the ERC that they must pay it back, possibly with penalties and interest. A claimant could find itself in a much worse cash position if the credit has to be repaid than if it was never initially claimed. So, it is important to avoid getting scammed.

When properly claimed, the ERC is refundable--designed for businesses that continued paying employees while shut down due to the COVID-19 pandemic or that had a significant gross receipts decline during the eligibility periods. This credit is unavailable for individuals.

Warning Signs of Aggressive ERC Marketing

* Unsolicited calls or advertising an "easy application process."

* Statements that the promoter or company can determine ERC eligibility within minutes.

* Large upfront fees to claim the credit.

* Fees based on a percentage of the refund of ERC claimed. This is a similar warning for average taxpayers, who should always avoid tax preparers basing their fees on the refund's size.

* Aggressive claims from the promoter that the business receiving the solicitation qualifies before any discussion of its tax situation. In reality, the ERC is complex and requires careful review before applying.

* The IRS also sees wildly aggressive suggestions from marketers urging businesses to submit the claim because there is nothing to lose. In reality, those improperly receiving the credit could have to repay it--along with substantial interest and penalties.

These promoters may lie about eligibility requirements. Also, those using these companies could be at risk of someone using this credit as a ploy to steal the taxpayer's identity or take a cut of the taxpayer's improperly claimed credit.

Properly Claiming the ERC

There are very specific eligibility requirements for claiming the ERC. These are technical areas requiring review. The ERC can be claimed on an original or amended employment tax return for qualified wages paid between March 13, 2020, and December 31, 2021. However, to be eligible, employers must meet the criteria set forth in Sec. 3134(c). For further details, see the Federal Tax Column on Page 24 in the June 2022 California CPA.

More Information

IR-2023-105 also contains discussions on the following topics:

* How promoters lure victims; and

* How businesses and others can protect themselves.

Updates

IR -2023-169, Sept. 14, 2023, announced that the IRS has suspended processing ERC claims through, at least, Dec. 31, 2023.

In addition, IR-2023-193, Oct. 19, 2023, also announced a withdrawal process for helping businesses concerned about ineligible ERC claims amid aggressive marketing scams.

New R&E Rules: 2017 Tax Law Eliminates Immediate Deduction of R&E Expenditures Paid or Incurred in Tax Years Beginning After 2021

Section 13206 of the 2017 Tax Cuts and Jobs Act (the "Act") amended Sec. 174, for research and experimental (R&E) expenditures paid or incurred in tax years beginning after 2021.

Old Law

Under the old law, a taxpayer could treat R&E expenditures paid or incurred during a tax year in connection with the taxpayer's trade or business as expenses--which were allowed as a current deduction.

New Law

Sec. 174(a)(1) no longer allows current deductions for specified R&E expenditures for any tax year except for the amortization deduction allowed under Sec. 174(a)(2)--which provides that these expenditures be:

* Charged to a "capital account"; and

* Amortized ratably over five years, or fifteen years if attributable to research conducted outside the U.S., Puerto Rico or any U.S. possession [Sec. 41(d)(4)(F)], beginning with the midpoint of the tax year in which the expenditures are paid or incurred.

This capital account must be a separate account for these expenditures [Rev. Proc. 2023-11 (IRB 2023-3, Jan. 17, 2923), Footnote 2].

Specified R&E expenditures are those paid or incurred by the taxpayer for a tax year in connection with the taxpayer's trade or business [Sec. 174(b)]. R&E expenditures include amounts paid or incurred to develop software [Sec. 174(c)(3)].

Note: IRS Notice 2023-63, Sept. 8, 2023, provides interim guidance on amortizing specified R & E expenditures under Sec. 174.

Treatment Upon Disposition, Retirement or Abandonment

If any property, with respect to which specified R&E expenditures are paid or incurred, is disposed, retired or abandoned during the period these expenditures are being amortized, no deduction is allowed for these expenditures on account of that disposition, retirement or abandonment. However, the amortization deductions continue for those expenditures [Sec. 174(d)].

Change in Method of Accounting

Under Act Section 13206(b), the Act's amendments to Sec. 174 are treated as an accounting method change for Sec. 481 purposes and that this change is:

(1) Treated as initiated by the taxpayer;

(2) Treated as made with the IRS' consent; and

(3) Applied only on a cut-off basis for any R&E expenditures paid or incurred in tax years beginning after 2021.

Also, no Sec. 481(a) adjustments are made. Rev. Proc. 2023-11, Section 2.03(4), pertinently states that when an accounting method change is made on a cut-off basis, no amounts are duplicated or omitted, and therefore, a Sec. 481(a) adjustment is not necessary or permitted.

Note: Rev. Proc. 2023-24, June 15, 2023, provides the latest annual List of Automatic Accounting Method Changes.

Automatic Method Change

Section 3 of Rev. Proc.2023-11 contains procedures for an automatic change in method of accounting to comply with amended Sec. 174. Under these procedures, a statement must be filed with the taxpayer's original federal income tax return for the first tax year beginning after 2021 -- in lieu of Form 3115.

This statement must contain the six categories of information required to make this accounting method change that is set forth in Rev. Proc. 2023-11, Section 3.02(4)(a)(ii).

Other rules apply if the year of change is later than the first tax year beginning after Dec. 31, 2021. [See Rev. Proc. 2023-11, Section 3.02(4)(b).]

Transition Rule

Rev. Proc. 2023-11, Section 3, also provides a transition rule for taxpayers who filed a federal income tax return on or before Jan. 17, 2023, for a tax year beginning after 2021. Under this transition rule, those taxpayers are deemed to have complied with the accounting method change procedures under Sec.446 and the relevant rev. procs., if the taxpayer properly reported the amount of specified R&E expenditures on Form 4562, Part VI, filed with that return, and properly capitalized and amortized those expenditures in accordance with amended Sec. 174.

Audit Protection

A taxpayer that changes the method of accounting for specified R&E expenditures will receive limited audit protection under Section 8.01 of Rev. Proc. 2015-13. But audit protection will not apply for expenditures paid or incurred in the years beginning:

* Before 2022; and

* After 2021 -- if a change in method is made for the tax year immediately subsequent to the first tax year for which Sec. 174 becomes effective, which generally is the tax year beginning after, 2021.

Despite these audit protection rules, the IRS may still change the characterization or classification of expenditures as specified R&E expenditures in order to apply Sec. 174 and the change in accounting method procedures under the relevant rev. procs. to determine the proper amount of expenditures paid or incurred in each tax year beginning after Dec. 31, 2021.

Inapplicability

This automatic method change does not apply to a change in the treatment of:

* Acquired, leased or licensed computer software under rev. procs. 2000-50 and 2007-16, or

* R&E expenditures under old Sec. 174, or software development expenditures, paid or incurred in tax years beginning before 2022.

New Reporting Requirements

The corporate transparency (CTA) was enacted as part of the National Defense Act for fiscal year 2021. Under the CTA, millions of entities must report their beneficial ownership information to the Financial Crimes Enforcement network.

For further details, see this month's Fed Tax column on Page 25.

Social Security Tax

The maximum amount of earnings subject to the Social Security tax will increase from $160,200 for 2023 to $168,600 for 2024.

Preparer Tax Identification Numbers

The IRS announced that it is now PTIN renewal season for 2024 and that there is a $19.75 non-refundable renewal fee for 2024 PTINs. 2023 PTINS expire Dec. 31.

Private Letter Rulings (PLRs)

Rev. Proc. 2023-26 (IRB 2023-33, Aug. 14, 2023) describes a program that provides an opportunity for fast-track processing of certain PLR requests solely or primarily under the jurisdiction of the Associate Chief Counsel (Corporate). This new program replaces the pilot program established by Rev. Proc. 2022-10 (2022-6 IRB 473).

Corporate Alternative Minimum Tax (CAMT)

IRS Notice 2023-64, Sept. 12, 2023, provides additional interim guidance regarding the application of the CAMT under secs. 55, 56A and 59.

BY STUART R. JOSEPHS, CPA

Stuart R. Josephs, CPA, has a San Diego-based Tax Assistance Practice that specializes in assisting practitioners in resolving their clients' tax questions and problems. Josephs, a past chair of the Federal Subcommittee of CalCPA's Committee on Taxation, can be reached at (619) 469-6999 or [email protected].

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Title Annotation:	2023 Tax Season Toolkit
Author:	Josephs, Stuart R.
Publication:	California CPA
Date:	Dec 1, 2023
Words:	3350
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Topics:	Employers Tax policy Individual retirement accounts