2023 Marcum Year-End Tax Guide

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THE MARCUM YEAR-END TAX GUIDE 2023

• How to calculate the percentage of completion for long-term contracts using the IRC section 460 percentage of completion method. This method determines taxable income based on the percentage of costs incurred to date over the total expected costs to be incurred over the contract’s life. The Notice indicates that new regulations must be issued under sec 460 and the numerator should only include the amortized portion of the SREE to determine the gross revenue for the year. The Notice notes that new regulations would need to be issued under sec 460 and indicates that the numerator should include only the amortized portion of the SREE to determine the gross revenue for the year. However, it is silent as to what portion of these costs should be included in the denominator and that the deduction is limited to the amortized deduction. The initial part of the original draft concerned the position that amounts incurred would be used for both the numerator and the amount allowed as a deduction, which produces a significantly different result. • The treatment of contract research providers was uncertain under the new amortization rule. While the contract research recipient must amortize what it pays for the SREE performed by the contract research provider, must the service provider also amortize its costs related to the research services? The result would cause both parties

to amortize SREE costs. The Notice indicates that where the contract research provider bears no economic risk for the services and has none of the benefits related to the research produced, it will not be subject to the amortization rule and can deduct its costs. The Notice also provides guidance on what items constitute SREE and methods for allocating indirect costs to SREE, which must be capitalized. Several issues were not addressed, including whether for the IRC sec 199A qualified business income deduction (QBID), if W-2 wages (which can affect the amount of the QBID allowed) are affected if they relate to SREE, which is not 100% deductible in the current year. Since the final guidance will be issued late this year or in 2024, the IRS may defer the application of the rules it develops until the 2024 tax year. We will need to keep monitoring developments in this area. All businesses must consider the applicability of the new IRC sec 174(a) to its operations. Even if a company has not taken a research and development credit under IRC sec 41 in the current or prior year, it must analyze its operations to determine what activities constitute research and experimentation. It should be noted that the SREE costs are more extensive than those eligible for the R&D credit. If one has taken the credit previously, it may be difficult to argue that all research activities have ceased. The expectation is that when the Service starts auditing returns, which

are covered by the new capitalization rule, this will constitute an area of the examiner’s audit program. ESTATE AND GIFT TAX Due to increased inflation, effective January 1, 2023, there was a significant change in the federal gift/estate tax exemption and the generation-skipping tax (GST) exemption from $12,060,000 in 2022 to $12,920,000 in 2023. This is an increase of $860,000 per gift donor or estate. For a married couple, the combined exemptions for both spouses are $25,840,000 for 2023, up $1,720,000 from 2022. This creates a significant amount of available exemption, which can be used to shelter gift tax on transfers made before the end of 2023. Additionally, the federal gift tax annual exclusion for transfer of a present interest gift per donee has increased from $16,000 in 2022 to $17,000 in 2023. For a married couple, this amount is doubled. Estate and gift tax planning for 2023 should be done knowing that a potential reduction in the federal gift and estate tax lifetime exemption and GST exemption looms for periods after December 31, 2025. Most estimate the exemption amount will be reduced to around $7 million per person. The potential for making gifts before year-end should be explored. Furthermore, given the higher interest rate environment, certain planning devices become increasingly attractive. These include Qualified Personal Residence Trusts (QPRTs) and Charitable Remainder Trusts (CRTs).

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