by Patricia M. McDermott, Esq.

Arkansas Governor Asa Hutchinson has signed legislation that cuts the top individual income and corporate tax rates; conforms with IRC § 179, which provides an income tax deduction for the expensing of certain property; and provides an inflationary relief income tax credit for full-year Arkansas residents. (L. 2022, S1 (3rd Extra. Sess.) (Act 2), effective 08/11/2022 and as otherwise noted.)

Rates. The top individual income tax rate in Arkansas is reduced from 5.5% to 4.9% for tax years beginning on or after January 1, 2022, and the corporation income tax rate imposed on both domestic and foreign corporations is reduced from 5.9% to 5.3% for tax years beginning on or after January 1, 2023. The change accelerates rate reductions that originally were scheduled to take effect in the 2025 tax year.

Individual income tax bracket adjustments. The legislation recalculates the bracket adjustments based on the reduced tax rates. Every resident, individual, trust, or estate having net income greater than or equal to $84,501 but less than $89,100 (previously, $90,600) will reduce their income tax due by the appropriate bracket adjustment amount.
Deduction for depreciation and expensing of property. The legislation conforms with IRC § 179 as in effect on January 1, 2022, for the purpose of computing Arkansas income tax liability for property purchased in tax years beginning on or after January 1, 2022. This raises the Arkansas depreciation deduction limitation for the expensing of certain property from $25,000 to $1,000,000. Furthermore, prior to amendment, Arkansas reduced the deduction available in any year based on the amount by which the cost of property placed into service by the business during that year exceeded $200,000. Under IRC § 179, the threshold is $2.5 million.

For the tax year beginning January 1, 2022, a resident individual taxpayer who files an Arkansas full-year resident income tax return, other than a joint return, having net income up to $101,000 is allowed an individual income tax credit. The top credit amount is $150 for individual taxpayers with net incomes up to $87,000. The credit gradually decreases and fully phases out for individual taxpayers with net incomes of $101,001 or more.

Spouses filing separately: Spouses filing separately on the same income tax return each may claim one credit against the tax on the return of each spouse.

Joint returns: For the tax year beginning January 1, 2022, resident individual taxpayers who file a joint Arkansas full-year resident income tax return having net income up to $202,000 are allowed an individual income tax credit. The top credit amount is $300 for taxpayers with net incomes up to $174,000. The credit gradually decreases and fully phases out for individual taxpayers with net incomes of $202,001 or more. Spouses filing jointly on the same income tax return will only receive one credit against their aggregate tax.

Claiming the credit: The credits cannot be claimed by a taxpayer for any tax year other than the tax year beginning on January 1, 2022, or who files a nonresident return or a part-year resident return. The amount of the income tax credit that may be claimed by the taxpayer in a tax year must not exceed the amount of income tax due by the taxpayer.

 

In our current economic environment, I got to thinking about the parallels to the early 1980’s. Having graduated from high school in the Rust Belt, my economic ideas were heavily influenced by the recession, stagflation and gasoline crisis of the times.

Inflation is caused by an imbalance of supply and demand or when you have too many dollars chasing around items of limited supply. I don’t buy all the current rhetoric of supply chain crisis, labor shortages, etc. and started to look at what my hero Paul Volcker did at the Fed to beat down the last inflation. He constricted the money supply and raised interest rates.

I looked at the Fed M2 growth and saw some startling data. The M2 which is a broad measure of the dollars that our in our banking system grew by 36% from the start of the pandemic March 2020 until this year. Compare that to the same time period prior to the 1981 recession, when monetary growth was only 13%.

The solution is obvious, but painful, we must limit money supply growth going forward and look to higher interest rates. Pain is on it’s way.

If you think you can benefit from the combined features of using an LLC to own and operate your small business and then having it be taxed like an S corporation, the possibility exists to establish your business as an LLC, but then make the election to have it treated as an S corporation by the IRS for tax purposes. You’ll have to make the special election with the IRS using Form 2553. Here are some things to remember:

• From a legal standpoint, your enterprise will be an LLC rather than a corporation. Therefore, you will have the benefit of ease of administration—fewer formal meetings and record-keeping requirements. I can hear your sigh of relief!
•  From a tax perspective, your enterprise will be treated as an S corporation. You’ll still have the pass-through of income, avoiding double taxation, same as if your LLC was treated as a proprietorship or partnership.
• The business entity can pay wages and salaries to you or to other owners. This amount will be subject to FICA tax and other withholding requirements. But then, it can distribute the remaining net earnings to you and the other owners as passive dividend income, not subject to SECA tax.
• Being treated as an S corporation may provide opportunities for tax planning to minimize the overall tax liability for your business and you.

Obviously, you need to carefully consider the pros and cons of different forms of business organizations and the different ways these organizations can be taxed. Seeking professional advice from a CPA or tax attorney is always a wise practice when making choices like this that can affect your business for many years to come.

But setting up an LLC and then electing treatment as an S corporation may just give you the best of both worlds—the ease of administration of the LLC and the tax planning opportunities of the S corporation. Talk to your professional advisor today.

by Patricia M. McDermott, Esq.

Arkansas Governor Asa Hutchinson has signed two identical tax cut bills, which will gradually reduce the top individual and corporate income tax rates. The legislation also amends the income tax tables and brackets, increases the annual standard deduction for individuals by the cost-of-living adjustment, provides an income-based personal income tax credit, provides for income tax due under the Elective Pass-Through Entity Tax Act, updates the exclusions from gross income, and changes the name of the Long Term Reserve Fund to the Catastrophic Reserve Fund (reserve fund). (L. 2021, S1 (2nd Extra. Sess.) (Act 2), effective 12/09/2021, and as noted below; L. 2021, H1001 (2nd Extra. Sess.) (Act 1), effective 12/09/2021, and as noted.)

Corporate income tax. The top corporate income tax rate will be reduced from 5.9% to 5.3% for tax years beginning on or after January 1, 2023, and ending January 1, 2025, if the state doesn’t have to transfer money from the reserve fund. The top rate is 5.7%, effective January 1, 2023, and, dependent upon whether the state must tap into the reserve fund, 5.5%, effective January 1, 2024, and 5.3%, effective January 1, 2025. If money is transferred from the reserve fund, the reduced rates for tax years 2024 and 2025 will not take effect. The legislation similarly reduces the top foreign corporation income tax rate for tax years beginning or after January 1, 2023.

Individual income tax. The top individual income tax rate will be reduced from 5.9% to 4.9% by January 1, 2025, dependent upon whether the state must tap into the reserve fund. The top rate is 5.5%, effective January 1, 2022, and 5.3%, effective January 1, 2023. If on or after July 1, 2022, but before January 1, 2024, no funds are transferred from the reserve fund, the top rate will be reduced further to 5.1%, effective January 1, 2024, and 4.9%, effective January 1, 2025. If money is transferred from the reserve fund, the reduced rates for tax years 2024 and 2025 will not take effect. The legislation requires the Secretary of the Department of Finance and Administration to notify the public and the Bureau of Legislative Research about whether the 2024 and 2025 tax rate reductions take effect.

Income tax tables and brackets: The legislation restructures and consolidates the lower and middle-income tax tables into one standard income tax table so that there are only two income tax tables for tax years beginning on or after January 1, 2022. The income tax brackets are divided into smaller income ranges. The applicable income brackets are adjusted annually to reflect changes to the consumer price index. For tax year 2022, individuals with net taxable income of more than $84,501 but less than $90,601 will reduce their income tax due by the appropriate bracket adjustment amount. The bracket adjustments for tax years 2023, 2024, and 2025 and following are adjusted annually to reflect changes to the consumer price index and the reduced income tax rates.

Standard deduction: Effective for tax years beginning on or after January 1, 2022, the Secretary of the Department of Finance and Administration will increase annually the standard deduction for individuals provided under Ark. Code Ann. §26-51-430(b) by the cost-of-living adjustment for the current calendar year, rounding the amount to the nearest $10.

Personal tax credit: Effective for tax years beginning on or after January 1, 2022, a nonrefundable income tax credit is provided for individual taxpayers with net incomes up to $24,700 who timely file their income tax returns. Taxpayers with net incomes up to $23,600 will receive a $60 credit against their income tax due, with the credit reduced for every $100 of additional net income. The table providing the applicable credit amount will be adjusted annually to reflect changes to the consumer price index.

Income tax due under the Elective Pass-Through Entity Tax Act: Currently, a tax of 5.9% is levied on the net taxable income of an affected business entity, including any applicable basis adjustments, to the extent that the income is reported to the secretary as business income derived from the affected business entity. Effective for tax years beginning on or after January 1, 2022, the legislation amends the tax so that the pass-through entity tax rate reflects the reductions in the income tax rate. The tax will be equal to the top marginal income-tax rate.
Exclusions from gross income. The definition of “gross income” does not include payments received under the Coronavirus Food Assistance Program 1 or Coronavirus Food Assistance Program 2, as it existed on January 19, 2021, or under any successor program or programs.
Long Term Reserve Fund name change: The bill renames the Long Term Reserve Fund to the Catastrophic Reserve Fund and updates references to the reserve fund throughout the Arkansas Code.

Document Title:Arkansas Governor Signs Income Tax Cut Measures into Law (12/13/2021)
Checkpoint Source:State Tax Updates
© 2021 Thomson Reuters/Tax & Accounting. All Rights Reserved.

Recently, there were changes made to the child tax credit that will benefit many taxpayers. We have received many inquiries and are issuing this summary.

As part of the American Rescue Plan Act that was enacted in March 2021, the child tax credit:
• Amount has increased for certain taxpayers
• Is fully refundable (meaning you can receive it even if you don’t owe the IRS)
• May be partially received in monthly payments
The new law also raised the age of qualifying children to 17 from 16, meaning some families will be able to take advantage of the credit longer.

The IRS will pay half the credit in the form of advance monthly payments beginning July 15. Taxpayers will then claim the other half when they file their 2021 income tax return.

Though these tax changes are temporary and only apply to the 2021 tax year, they may present important cashflow and financial planning opportunities today. It is also important to note that the monthly advance of the child tax credit is a significant change. The credit is normally part of your income tax return and would reduce your tax liability. The choice to have the child tax credit advanced will affect your refund or amount due when you file your return. To avoid any surprises, please contact our office.

Qualifications and how much to expect

The child tax credit and advance payments are based on several factors, including the age of your children and your income.
• The credit for children ages five and younger is up to $3,600 –– with up to $300 received in monthly payments.
• The credit for children ages six to 17 is up to $3,000 –– with up to $250 received in monthly payments.

To qualify for the child tax credit monthly payments, you (and your spouse if you file a joint tax return) must have:

• Filed a 2019 or 2020 tax return and claimed the child tax credit or given the IRS your information using the non-filer tool
• A main home in the U.S. for more than half the year or file a joint return with a spouse who has a main home in the U.S. for more than half the year
• A qualifying child who is under age 18 at the end of 2021 and who has a valid Social Security number
• Income less than certain limits

You can take full advantage of the credit if your income (specifically, your modified adjusted gross income) is less than $75,000 for single filers, $150,000 for married filing jointly filers and $112,500 for head of household filers. The credit begins to phase out above those thresholds.
Higher-income families (e.g., married filing jointly couples with $400,000 or less in income or other filers with $200,000 or less in income) will generally get the same credit as prior law (generally $2,000 per qualifying child) but may also choose to receive monthly payments.
Taxpayers generally won’t need to do anything to receive any advance payments as the IRS will use the information it has on file to start issuing the payments.

IRS’s child tax credit update portal

Using the IRS’s child tax credit and update portal, taxpayers can update their information to reflect any new information that might impact their child tax credit amount, such as filing status or number of children. Parents may also use the online portal to elect out of the advance payments or check on the status of payments.
The IRS also has a non-filer portal to use for certain situations.

Let us help you.

With any tax law change, it’s important to revisit your full financial roadmap. We can help you determine how much credit you may be entitled to and whether advance payments are appropriate. How you choose to receive the credit (partially advanced via monthly payments or solely on your next year’s return) could have many impacts to your financial plans.
Please contact our office today at 870.364.8992 to discuss your specific situation. As always, planning ahead can help you maximize your family’s financial situation and position you for greater success.

Businesses have a wide range of financial statement users who make decisions based on the information provided and therefore expect it to be timely, accurate, and understandable. Businesses often engage CPA’s to provide assurance services not only to meet requirements of lenders and licensing agencies but also to lend credibility to their financial reporting and status as they make this information available owners, partners and shareholders.

CPAs can perform various services that address multiple needs of businesses This article describes the four most common types of assurance engagements including pros and cons of each.
As a reminder, CPAs can obtain a level of “assurance” about whether the financial statements are in accordance with the financial reporting framework by obtaining evidence. The levels of assurance range from no assurance at all (as in a compilation) to the highest level of assurance (as in an audit). A business’s assurance requirements will depend on the needs and requirements of its financial statement users. Regardless of the level of service, the financial statements are the responsibility of management.

Audit
A financial statement audit provides management and those charged with governance with an independent auditor’s report stating whether, in their opinion, the financial statements present fairly the business’s financial position, changes in financial position, and cash flows in accordance with the applicable financial reporting framework. In an audit, CPAs obtain reasonable assurance (defined as high but not absolute) about whether the financial statements are free from material misstatement, whether caused by error or fraud.

Pros:
• Compared to other types of assurance engagements, the audit provides the highest level of assurance as it is designed to examine, on a test basis, evidence regarding the amounts and disclosures in the financial statements.
• As part of a financial statement audit, CPAs are required to gain an understanding of internal controls and assess whether any identified control deficiencies rise to the level of material weaknesses or significant deficiencies. If so, the auditor will communicate these deficiencies to management and those charged with governance.
• Although not required, auditors may offer additional input based on their evaluations of operations and controls that can help management and the board understand risks and make improvements in their processes and controls.
Cons:
• A financial statement audit places a significant preparatory burden on the business’s accounting staff, so taking availability of resources into account is critical when deciding to engage a CPA for this service.
• Audits tend to be the most expensive of the assurance engagements as they require vastly more effort from audit firms to complete.
Review
A financial statement review provides limited assurance about the financial statements of the business. In this type of engagement, the CPA indicates whether any material modifications are necessary for the financial statements to be in accordance with the applicable financial reporting framework. In contrast to an audit, a CPA performing a review is not required to obtain an understanding of the business’s internal control; assess fraud risk; or test accounting records through inspection, observation, outside confirmation, or the examination of evidence. Review procedures consist primarily of inquiry and analytical procedures to identify unusual items or trends that may need further explanation by management.
Pros:
• Because a review is much narrower in scope than an audit, a review is typically a less costly option.
Cons:
• The assurance level provided by a review is much lower than that of an audit.
• Internal controls are not considered in a review, and as such, management and those charged with governance typically do not receive a formal communication of deficiencies.
• Lenders and other financial statement users might not be willing to accept a review report as a substitution for an audit report, so it is important to communicate with the intended users and understand their needs before engaging a CPA.

Compilation
A compilation does not provide a basis for obtaining or providing any assurance regarding the financial statements. In a compilation engagement, the CPA is required to read the financial statements considering the financial framework being used and let management know whether they are appropriate in form and free from obvious material errors. No detail testing or analytical procedures are performed.

Pros:
• Compilations can provide a business with a second set of eyes and advice on presentation matters.
• They can be especially helpful for smaller organizations whose financial statement users do not require an audit or a review but appreciate the association with a CPA.
Cons:
• No opinion is issued as to whether the financial statements are fairly presented or require any material modifications to be in conformity with GAAP.

Agreed-upon-procedures
In an agreed-upon procedures (AUP) engagement, the CPA firm performs specific procedures agreed upon by the interested parties. The final reporting package provides findings in a specific area of interest, enabling boards and management to make informed decisions. Although they are often performed for internal purposes (for example, merger or acquisition due diligence or gaining comfort over certain transactions), AUPs can be requested and relied upon by third parties.
Pros:
• AUPs can enable a business to dive deeper into an area of concern that might not be covered in such detail by an audit.
• Depending on the subject matter, AUPs can offer timing flexibility, thus reducing the burden on staff.
• Because the procedures are typically more limited in scale than an audit, AUPs offer more cost flexibility for entities (that is, to pick and choose which procedures are performed), yet rely on techniques similar to those used during an audit.
Cons:
• In an AUP engagement, the CPA does not perform an examination or review and does not provide an opinion or negative assurance.
• Because the report does not provide an opinion, it would be the entity’s responsibility to draw conclusions based on AUP engagement findings.

Whether your organization is in need of a more complete examination of your records or is just looking for peace of mind surrounding a disbursement cycle, it is important to remember that no assurance services will offer absolute assurance over the accuracy and completeness of your organization’s records. A strong system of internal controls and clear channels of communication with your board, management, and advisors can help mitigate the risk of errors or fraud in your financial reporting, especially in the remote environment of the current pandemic.