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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.

The Arkansas Secretary of State is once again collecting franchise taxes for all companies registered with the State of Arkansas. Due to the recent transition of franchise taxes from the Department of Finance and Administration back to our office, Secretary of State John Thurston has waived the penalty and interest on 2021 franchise taxes until July 15th.

Arkansas state law requires all Corporations, LLCs, Banks, and Insurance Companies registered in Arkansas to pay an annual franchise tax. Failure to pay can result in the imposition of additional fees, penalties and interest, or even revocation of the authorization to do business. Franchise taxes continue to accrue, even for revoked businesses, until the business is dissolved, withdrawn, or merged. Any additional filings with our Business & Commercial Services division will be prohibited for persons or entities that fail to pay the franchise tax.

by Patricia M. McDermott, Esq.

Arkansas Governor Asa Hutchinson has signed legislation creating the Logging and Wood Fiber Transportation Job Creation Incentive Act, which creates the Arkansas Wood Energy Products and Forest Maintenance Income Tax Credit. The credit provides an incentive for businesses to locate new, or expand existing, qualified wood energy products and forest maintenance projects in Arkansas. (L. 2021, H1706 (Act 594), effective for tax years beginning on or after 01/01/2021.)

Definition. “Qualified wood energy products and forest maintenance project” means a project specified in the incentive agreement to include one or more Arkansas facilities in the same ownership group: (1) for which the taxpayer commenced construction by the date specified in the incentive agreement, but no earlier than January 1, 2020; (2) that supports the Arkansas timber industry by using low-value wood, including without limitation sawmill residuals, unwanted treetops, and damaged or diseased trees, to produce high-efficiency, high-energy wood energy products; (3) in which the taxpayer has a total investment in excess $50 million; (4) that is undertaken by a taxpayer who has entered into an incentive agreement with Arkansas in which the taxpayer commits to creating at least 100 net new full-time permanent employees with an average annual wage of at least $60,000; (5) that will provide a positive cost-benefit analysis to the state as determined by the Arkansas Economic Development Commission and the Office of Economic Analysis and Tax Research; (6) that is certified as having a closing date before December 31, 2023, for all facilities; and (7) that is undertaken by a taxpayer that has elected, by agreement with the state, for the taxpayer’s facilities to be classified as a qualified wood energy products and a forest maintenance project.

Credit amount. The credit is equal to 30% of the of the costs of wood energy products equipment purchased for use in Arkansas after the date specified in the incentive agreement by a taxpayer that is engaged in the business of collecting, separating, treating, pulverizing, drying, modifying, or manufacturing wood energy products and has been certified as owning a qualified wood energy products and forest maintenance project.

Sale or transfer. No more than $5 million of the tax credits may be sold or transferred each year. Tax credits sold or transferred for value to the state of Arkansas are extinguished upon payment of the purchase price as if claimed against the tax. If the credits are sold or transferred for value to a third party, the purchaser’s credits will not expire before the end of the third taxable year following the year in which the credits were sold or transferred for value.

Public retirement system. If the wood energy project is partially owned by a public retirement system of the state of Arkansas, the $5 million of credits per year may be purchased back by the state of Arkansas at 80% of the face value of the credits each year.

Carryforward. Any unused tax credit that cannot be claimed in a tax year may be carried forward indefinitely to apply the unused tax credit to future tax liability.

 

Several important tax changes to the deductibility of charitable contributions have occurred as a result of the Coronavirus Aid, Relief and Economic Security Act (CARES Act).

1. All taxpayers, regardless of whether you itemize or use the standard deduction, can deduct $300 as an “above the line” reduction of net income for 2020.
2. If you itemize your deductions and use the charitable deduction as part of your total itemized deductions strategy, in year’s past you were limited in how much you could deduct each year to 60% of your adjusted gross income. In 2020, you can deduct up to 100% of your adjusted gross income and can carry forward the balance.
3. Donation of amounts from IRA’s. If you are taking distributions from your IRA, you can donate amounts directly from your IRA’s to a charity. You will not receive a tax deduction in this transaction, but you also will not have to claim the distribution as income. This is a way to draw down or reduce your balance in your IRA’s, possibly reducing future RMD’s (required minimum distributions) give to a charity and not have to pay tax on the distribution.
If you have any further questions, feel free to call our office 870.364.8992 or e-mail me at craig@maxwellcpa.com

#CARES #taxtips #CPA