Build Back Better Act: Proposed Retirement Changes

Since earlier this year the Biden administration has been focused on passing several pieces of comprehensive legislation designed to address the COVID-19 crisis while accelerating economic recovery. While the President has announced several new initiatives, only the American Rescue Plan Act has been passed into law to date. As the pandemic continues to abate, the White House and Congress are now focused on passing the Build Back Better Act. This Act is designed to lower healthcare, education, and housing costs for working Americans through various tax changes targeted at high-net-worth taxpayers. In fact, the House Ways and Means Committee published a funding plan which outlines specific changes. Although the legislation still needs approval from the House, the following details provide important insights on the impact of the Act for the purposes of tax planning if the Act is passed and signed. To help clients, prospects, and others, Selden Fox has provided a summary of the key retirement planning changes below.

Key Retirement Provisions

IRA Contribution Limits

Under existing regulations, a taxpayer can continue to make contributions regardless of how much is already saved. This allows high net worth individuals to make IRA contributions to shield income from taxation. This proposed legislation will prohibit further contributions if the total value of IRA and defined contribution plan accounts exceed $10 million at the end of the prior tax year. These limits would apply to single and married filing jointly taxpayers with over $450,000 in income, and heads of households with over $425,000 in income. If passed, the new limits would become effective after December 31, 2021.

Required Minimum Distribution (RMD) Increases

When an individual’s IRA, Roth IRA, and defined contribution retirement account exceeds $10 million at the end of the year, a special RMD would need to be taken in the following year. This RMD is only required if income exceeds the thresholds mentioned above. The amount of the distribution would be equal to the amount by which the combined retirement account balance exceeds the $10 million limit.

In addition, if total account balances exceed $20 million, the excess is required to be distributed to the lesser of the amount needed to bring total balances in all accounts down to $20 million, or the aggregate balance in Roth designation accounts in defined contribution plans. If passed, this change would become effective after December 31, 2021.

IRA Rollovers

There would be an elimination of Roth conversions for both IRAs and employer-sponsored retirement plans for single/married filing jointly taxpayers with taxable income over $400,000, and heads of household with income over $425,000. The change would apply to distributions, transfers, and contributions made after December 31, 2031.

Prohibition of IRA Self Investments

Under existing regulations, an IRA account holder is not permitted to invest IRA assets in a business, trust, or estate, where they retain a 50% or greater interest. However, the rule still allows this “self-dealing” to occur where the accountholder owns less than 50% interest. To prevent this, there would be a significant reduction in the limit to 10%. There is also a provision in the Act which prevents investment in situations where the accountholder is also an officer in the company. If passed, this provision would become effective after December 31, 2021, but also includes a two-year transition period.

IRA Noncompliance

There is a proposed expansion to the statute of limitations for IRA noncompliance for valuation related misreporting and prohibited transactions. This means there would be a significant time extension, from three years to six years. If passed, this would apply to taxes to which the current three-year period ends after December 31, 2021.

Additional IRA Limitations

There is a provision that would make owning a foreign sales corporation (FSC) or domestic international sales corporation (DISC) a prohibited transaction. This means an IRA account holder found to be in violation of the rule could lose the account’s tax-exempt status.

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It is clear the proposed tax changes will have a significant impact on high-net-worth Chicago families and individuals. Although the above details could change before the House votes to pass the legislation, it does provide important insight into potential changes. If you have questions about the information outlined above or need assistance with a tax or retirement planning issue, Selden Fox can help. For additional information call us at 630.954.1400 or click here to contact us. We look forward to speaking with you soon.

New Illinois Law Trims Small Business Taxes with SALT Deduction

On August 27, 2021, Illinois Governor Pritzker signed into law Senate Bill 2531, which provides small businesses a work around to the $10,000 cap placed on their state and local income tax deductions. The bill creates an elective pass-through entity (PTE) level tax for businesses. Currently, small business owners must report their share of business income on their individual income tax making them subject to this $10,000 cap—not applicable to large corporations. The PTE tax election is an annual election that allows partnerships, S Corporations, and limited liability companies to pay a new “entity level” tax at 4.95%.

Illinois PTE Election

By making a PTE tax election to pay Illinois income tax at the entity level, it is allowed as a deduction by the pass-through entity on its federal income tax return – effectively resulting in a bypass of the $10,000 SALT deduction cap. Once the PTE tax is paid, each owner of the pass-through entity receives a credit on their individual state income tax return equal to its share of the amount paid by the pass-through entity to offset the tax incurred at the partner/shareholder level. This new law also grants a PTE level tax credit for similar entity-level taxes paid to other states.

However, making this PTE tax election may not always be advantageous. Particularly if you have shareholders or partners who are a mix of Illinois residents and non-residents, making the pass-through entity tax election can be advantageous for some and disadvantageous for others. Other disparate outcomes can arise when NOLs, state apportionment, credit carryovers, and other items are considered as well.

The law does sunset in five years consistent with the sunset of the federal SALT deduction limit. The law is effective “retroactively” as it can be applied to taxable years ending on or after December 31, 2021, and beginning prior to January 1, 2026.

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As an owner or partner of an Illinois pass-through entity, if you are considering taking this election, we are able to assess your current situation and provide tax planning support to determine if this election will create tax savings. If you have questions about this latest change or need assistance with a tax planning or compliance need, Selden Fox can help. For additional information call us at 630.954.1400 or click here to contact us. We look forward to speaking with you soon.

Considerations for Nonprofit Startups

While in many ways similar to for-profit corporations, nonprofit organizations are bound by legal, tax, and accounting laws that are unique to them and them alone. As they navigate through their business lifecycles they will face many different challenges, of which the startup phase is an especially crucial time. It is riddled with obstacles that, if not overcome, could stall a nonprofit’s progress or perhaps halt it all together. Fortunately, leaders who plan well for their startup’s launch will be better prepared for whatever comes their direction. To help clients, prospects, and others identify the key issues in the startup phase, Selden Fox has compiled a list of key legal, accounting, and tax considerations below.

Legal Considerations

Before nonprofit startups commence business, they must first ensure that all their legal ducks are in a row. This begins with entity selection.

Entity Selection

Contrary to popular belief, 501(c) is not a legal designation; it is a federal tax designation. For ventures to be treated as nonprofit organizations for legal purposes, they need to organize themselves as “nonprofit corporations” with their states. The benefits of having a state-recognized nonprofit designation varies by jurisdiction. Most states will provide nonprofit organizations with income tax exceptions. However, some states will also provide certain nonprofits with relief from property and sales taxes. A nonprofit’s tax-saving potential will depend heavily on where they choose to set up shop. Nonprofit leaders should have a good-quality attorney and CPA in their corner to help them figure out their best move.

Business Plan

Nonprofit leaders should ensure that their business plans are fully formed before they officially open for business. To receive nonprofit tax treatment by the IRS, nonprofit organizations need to prove that they have a strong mission, a well-defined consumer population, and reliable funding. A well-developed business plan will also help ensure a nonprofit organization can sustain operations and will be able to weather the ups and downs of running a business.

Tax Considerations

Legal and tax concerns often go together, so the nonprofit organization should assemble a team that will address their legal and tax concerns holistically.

Income Tax

To receive tax-exempt status at the federal level, nonprofits can elect to be treated as 501(c) organizations by filing Form 1023 (Charitable Organizations) or Form 1024 (Other Tax-Exempt Organizations). Each year thereafter, the organization must file annual informational tax returns – Form 990 – and follow certain guidelines required by the IRS, which generally include:

  • Limiting political and other lobbying activities.
  • Keeping all related activity at arm’s length so that leaders and employees are not given special treatment; and,
  • Restricting their non-exempt activities.

Nonprofit organizations who generate more than $1,000 from non-exempt activities detached from their organization’s exempt purpose, are subject to income taxes on that non-exempt revenue, which must be reported on Form 990-T. If this return is not filed, the organization will incur fines and penalties, and the IRS could potentially even revoke their tax-exempt status.

Sales Tax

While certain nonprofits may receive an exemption from paying sales taxes when they make purchases on behalf of their organization, oftentimes they will not be exempt from collecting and remitting sales taxes. When nonprofit organizations sell taxable goods and services to the public, they must charge sales tax just like any other business, and unfortunately, sales tax compliance can be both costly and time consuming.

Employment Taxes

Similar to other entities, nonprofit organizations must withhold Medicare, social security, and federal and state withholdings employees’ paychecks each pay period. Nonprofit organizations are also required to follow all employment laws, including those for unemployment insurance and disability benefits.

Accounting Considerations

Nonprofit organizations share many of the same accounting considerations than other entities do, but they are also subject to their own rules and regulations.

Oversight

While nonprofit organizations are governed by the same oversight board as for-profit entities (the Financial Accounting Standards Board – FASB), they must comply with different standards. The FASB regularly releases standards that are specific to nonprofit organizations, for instance there is a specific standard on how nonprofit organizations should present their financial statements (ASC 2016-14). They must also comply with their states’ laws and the laws of the states in which they do business. For example, each state grants nonprofit charitable organizations the privilege to solicit for donations in their state, so nonprofits hoping to ask for donations even temporarily from other states’ residents need to apply for the appropriate licenses.

Financial Statement Audit

The IRS does not require nonprofit organizations to obtain independent financial statement audits, but many state and local governments do. These requirements typically kick in once the entity reaches a certain size. Many banks, contributors, and granting agencies may require a nonprofit to have a financial statement audit as well. Such audits should be performed by a reputable CPA firm with experience in the nonprofit sector. In addition to reporting on their financial statements, CPA firms will oftentimes identify areas where a nonprofit organization can improve its business practices. Even if an audit is optional, it can provide nonprofit leaders with the peace of mind that they are doing things as they should.

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If you are considering starting a nonprofit organization and would like additional information, please contact us. We help nonprofits navigate all parts of their growth cycle and understand just how exciting it can be to see a dream come to fruition!

Illinois Back to Business (B2B) Grant Program

As part of the federally funded American Recovery Plan Act (ARPA), the Illinois Department of Commerce and Economic Opportunity is offering an economic stimulus program—Back to Business (B2B) grant program for those organizations and businesses that meet the program’s eligibility guidelines.

The $250 million B2B grant program seeks to provide small businesses hit hardest by the COVID-19 pandemic with recovery grants.  B2B is part of Governor Pritzker’s $1.5 billion economic recovery plan, aimed toward a swift and equitable deployment of ARPA funds that have been designated for Illinois to assist in business recovery from the COVID pandemic.

For more information on the B2B grant program, including eligibility requirements and online application, visit the State of Illinois website.

Report Looks at Fraud Occurring at Government Entities

The harsh reality is that fraud is an ever-present threat that can drain funds needed to provide services, programs, and maintain the functions and responsibilities of government entities. It can be difficult to imagine the sense of betrayal which is aroused when a trusted employee, contractor, or vendor, is found to have committed fraud. Despite the presence of certain anti-fraud controls, dozens of government agencies find themselves in such a position each year. The amount of loss arising from fraud can be devastating.

According to the ACFE 2020 Report to the Nations – Government Edition, the median loss from fraud was $100,000 per incident. This number highlights the importance of regularly reviewing and enhancing fraud prevention programs and the associated savings potential available. To help clients, prospects, and others, Selden Fox has provided a summary of the key insights and findings from this report here.

Most Common Fraud Schemes

To design controls that provide maximum protection, it is imperative to understand the most common fraud schemes used. For this reason, the survey wanted to understand which schemes were most frequently used. It was found that 51% of respondents indicated corruption, 18% non-cash fraud, 17% billing fraud, 14% expense reimbursements, 14% payroll, 9% skimming, 7% financial statement fraud, 5% check and payment tampering, and 4% cash larceny. Given the high rate of corruption, it is essential to develop controls that can check such behavior.

Fraud Detection

It is also important to understand the most effective detection methods. According to the survey, 43% indicated fraud was uncovered from a tip, 15% internal audit, 9% external audit, 8% management review, 5% notified by law enforcement, 3% surveillance and monitoring, 3% account reconciliation, 2% by accident, and only 1% by confession. It was also found that the top three tips sources were 54% from employees, 13% anonymous parties, and 10% vendors.

Common Anti-Fraud Controls

The survey was seeking to understand the most common anti-fraud controls used. It was found that 85% undergo an external audit of financial statements, 83% a code of conduct, 82% internal audit department, 76% management certification of financials, 65% employee support programs, 62% hotline, 54% fraud training, and 53% anti-fraud policies.

What is interesting to note here, organizations identify an external audit of financial statements as their most common anti-fraud control mechanism yet only 8% of the time was an external audit the catalyst for uncovering existing fraud. Financial statement audits are designed and intended to obtain reasonable, rather than absolute assurance about whether the financial statements are free of material misstatement, whether caused by error or fraud.  The auditor should not be considered a component of your fraud detection and internal control systems.

Fraud Red Flags

There are often common patterns of behavior or situational conditions which indicate a high likelihood fraud may occur. According to the survey, in 43% of cases, the fraudster was living beyond their means, 25% experienced financial difficulties, 22% had a close association with a vendor/customer, 17% had significant control issues, and 15% exhibited a “wheeler-dealer” attitude. It was also found that only 4% of perpetrators had a prior fraud conviction.

Perpetrator Position

There was interest in understanding where perpetrators worked within the government agency. It was found that 16% worked in operations, 11% accounting, 10% executive or upper management, 8% administrative support, and 7% in purchasing.

Perpetrator Punishments

There were also questions asked about how fraud perpetrators were punished. It was found that 49% were immediately terminated, 16% probation or suspension, 12% were no longer with the organization, 11% were permitted or required to resign, 10% reached a settlement agreement, and 8% received no punishment. In terms of recovery, 57% recovered nothing, 15% recovered all losses, and 28% received a partial recovery.

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The survey findings provide important “real-time” insights which local government entities can use to evaluate and enhance existing fraud prevention programs. If you have questions about the information outlined above or need assistance with a fraud or forensic accounting issue, Selden Fox can help. For additional information call us at 630.954.1400 or click here to contact us. We look forward to connecting with you soon.

Highlights from Treasury Inspector General’s Audit Report for 2021 Tax Filing Season

The Treasury Inspector General for Tax Administration (TIGTA) issued the Interim Results of the 2021 Tax Filing Season (issued May 6, 2021). The purpose of the audit was to provide information regarding the 2021 Filing Season, including the impact that the COVID-19 has had on the IRS tax return processing.

Status as of December 2020

As of the end of calendar year 2020, the IRS had a backlog of more than 11.7 million paper-filed individual and business tax returns which still needed to be processed. The total individual returns which still needed to be processed, including paper-filed, errors, rejects, unpostables, and amended returns, was more than 8.3 million. When compared to the total for the end of calendar year 2019 this was a 1,200% increase.

Causes for the backlogs

According to the report, the main causes for the backlog of tax returns are as follows, all attributed to COVID-19.

Limited Capacity due to Social Distancing

In 2020, the IRS Tax Processing Centers were not always able to operate at full capacity due to social distancing requirements. Since the work done at these Centers (receiving, sorting, and distributing mail, and processing tax returns, including manually entering information from the returns into the IRS system) is not conducive to telework, not working at full capacity caused delays in processing times.

Limited Contractors’ Visits to Sites

In addition to IRS employees not being in the Centers at full capacity, contractors faced similar restrictions due to COVID-19 concerns. One major result was a lack of working printers and copiers to IRS employees. Not being able to come into the sites to replace ink or waste cartridge containers resulted in almost 42% of devices used by the Submissions Processing functions to be unusable. This significantly impacted different areas of the IRS, but particularly the Return and Income Verification Services functions, with some locations reporting 70% of their devices being unusable. Consequently, as of March 20, 2021, the inventory was over 413,000, with requests dating back to May 2020 for information such as tax return and account information transcripts, verification of non-filing, and requests for wages and income information.

Staffing Shortages

The IRS has also reported a staffing shortage and hiring delays. As of March 9, 2021, the IRS had only met 37% of its hiring goal. There is both a lack of applicants, as well as delays in fingerprinting and processing applicants. Once hired, additional factors prevent the employees from beginning to work promptly. Additional training is required once the person is hired, but since many of the new hires are not provided with a computer, they need hard copies of the training materials. Due to the shortage of working copiers and printers discussed above, it is difficult to prepare training packages for the new hires to complete these trainings.

2021 Delays

As a result of the Consolidated Appropriations Act, certain taxpayers were eligible for Economic Impact Payments (EIPs) which were to be paid by the end of December 2020. The IRS reported issuing 168.2 million EIPs as of December 31, 2020. However, as the focus was on making these payments, additional delays resulted which affected the 2021 tax returns. Programming required to update the IRS’ processing systems was delayed due to the IRS’ focus on issuing these EIPs. As a result, the 2021 Filing Season started on February 12, 2021, almost two weeks later than the prior filing season.

The IRS also stores copies of tax records at Federal Records Center locations. Due to COVID-19, many of these locations were shut down and reopened with reduced capacity as well. Consequently, the IRS has not been able to access tax records stored in these locations, delaying requests for copies of tax returns from taxpayers and financial institutions. As of March 2021, the IRS estimated there were 70,000 outstanding tax return requests as a result.

Due to the Federal Records Centers not being accessible, the IRS began using trailers to store documents. In addition to the storage of tax documents, the IRS faced issues with storing mail that was not able to be processed. As of March 2021, there were approximately seven trailers of these documents at the Kansas City, Missouri IRS location. As of the same date, there were 12 trailers being used at the Ogden, Utah location with returns and documents being moved from the Centers to the trailers and back and forth as they are needed, causing further delays in processing.

What’s New for 2021?

The IRS is also implementing new processes and previous recommendations from TIGTA.

The IRS issues an Identity Protection Personal Identification Number (IP PIN) to taxpayers who are confirmed identity theft victims if the case is resolved before the start of the following filing season. Beginning in the calendar year 2021, the IRS also began issuing IP PINs to taxpayers who request them. These can be requested through the “Get an IP PIN” function through IRS.gov.

There has also been an increase in unemployment identity theft fraud. The IRS has issued guidance to States to issue corrected Form 1099-G showing the correct amount of benefits received by the recipient. The IRS has also told taxpayers to file their tax returns reporting the correct amount of benefits they received, even if a corrected 1099-G is not received by the time of filing. Additionally, the IRS has instructed taxpayers not to file Form 14039 Identity Theft Affidavit with the IRS unless the tax return is rejected due to their Social Security Number having already been used on another tax return.

In addition to the above, the Report indicated that there will be a follow-up assessment of previous recommendations that the IRS agreed to in regard to the following three areas.

  • The IRS has submitted programming changes to reject tax returns with claims for the Child Tax Credit (CTC) and the Additional Child Tax Credit (ACTC) when that child has an Adoption Taxpayer Identification Number or Individual Taxpayer Identification Number.
  • There will be additional assessment in a follow-up report analyzing the number of tax returns that received a Qualified Business Income deduction without supporting schedule or other documentation that the taxpayer was entitled to the deduction.
  • The IRS is continuing to monitor and verify the alimony recipient’s TIN was issued by the Social Security Administration or the IRS. Returns containing invalid TINs will be sent to the Error Resolution function employees and potentially subject to penalties.

The IRS is also requiring appointments for assistance through TACs. There can be delays with visitation to TACs due to 72 of the 358 locations still being closed as of March 2021. However, to assist taxpayers and alleviate some of these delays, the IRS has instructed the employees making the appointments to provide assistance through the phone wherever possible. The IRS reported that as of the end of February 2021, 302,575 out of 484,465 calls to schedule appointments at a TAC were assisted over the phone, resulting in only the remaining 181,890 needing the taxpayer to visit the TAC in person.

How Does this Affect my Return?

There is a higher likelihood for delays in tax returns being processed. Whether due to a discrepancy between what is reported on the return and what the IRS has in their system, or a return being paper filed, delays in processing are longer than usual as well.

If there is a discrepancy or question on the return, it will typically cause the return to be sent for review. This will be subject to delays due to the backlog since it needs to be reviewed by a person. For example, if there is a discrepancy between what was submitted on the return for the number of stimulus checks received compared to what the IRS has in their system, the return is flagged with an error, and an IRS agent will manually recalculate the amounts the taxpayer is eligible for on their 1040.

Additionally, taxpayers had the option to calculate the Earned Income Tax Credit (EITC) and/or the ACTC using the prior year earned income. As of March 31, 2021, the IRS had more than 2.8 million returns with this election. However, these returns would have a discrepancy between what was shown on the return and what was in the IRS system. Therefore, these returns would also be sent to the Error Resolution function for manual recalculation because of this discrepancy, facing significant delays in processing.

Also, up to $10,200 (or $20,400 for married filing joint taxpayers), unemployment compensation can be excluded from taxable income for taxpayers who meet certain criteria. However, this exclusion was not enacted until after the 2021 Filing Season had begun. There are approximately 7.3 million tax returns filed before this law was enacted that reported unemployment compensation and would likely be eligible to exclude a portion of it. The IRS confirms that taxpayers do not need to amend returns just to correct this as it will be recalculated by the IRS – however, once again this means that this group of returns will be delayed. Additionally, if the exemption was not claimed and a taxpayer would be eligible for a credit due to lower AGI because of the exemption, they will need to file an amended return to claim those credits. These amended returns will also face delays as they will need to be paper-filed.

Business returns that need to verify prior year AGI when being electronically filed are also being rejected. If a 2019 tax return has not been processed yet due to the 2020 backlog, it would result in an e-filing error on the 2020 return as the AGI wouldn’t match up. Again, these returns would have to be paper filed and be subject to a delay. One workaround the IRS suggested to this issue is to try to use $0 as the AGI if the 2019 return has not been processed yet. However, if this does not allow for e-filing then the return will need to be paper filed.

Conclusion

Overall, there has been a significant backlog of tax returns, documents, and requests to be processed by the IRS. As many issues which arose due to COVID-19 restrictions are still being resolved, the IRS is still significantly delayed with processing tax returns from the 2020 and 2021 Filing Seasons. This will likely affect taxpayers whose tax returns fall outside of the automated electronic filing process, and if a return needs to be paper filed or has an error or discrepancy, taxpayers can expect delays in the return being processed by the IRS.

If you have questions about the information outlined above or need assistance, Selden Fox can help. For additional information call us at 630.954.1400 or click here to contact us. We look forward to speaking with you soon.

Understanding Business Meal and Entertainment Deduction Rules

Does your business provide meals and entertainment for employees, clients/customers, or partnership representatives? How the IRS allows businesses to handle meal and entertainment costs in relation to their taxes has had quite a few changes over the last few years. The 2018 Tax Cuts and Jobs Act (TCJA) eliminated deductions for most business-related entertainment expenses. And now since the pandemic, the IRS temporarily changed the tax-deductible amount allowed for some business meals to encourage increased sales at restaurants. With the easing of restrictions, your leadership may be considering company picnics for employee appreciation or starting up business lunches with clients again.

Given all of these changes, putting a system in place to accurately track business food and entertainment expenses becomes essential. Best practices should include requesting detailed receipts and separately tracking which costs fall under the 50 percent deduction, 100 percent deduction, or not deductible categories. Training team members who handle the food and entertainment charges will help your bookkeeping team, as well.

In addition to keeping excellent records, below are some additional things to keep in mind about the business meal and entertainment deduction rules, including a helpful chart highlighting the deduction category particular meal and entertainment expenses fall under.

Meal and entertainment expense changes

Under the TCJA, the IRS no longer allows businesses to deduct most entertainment expenses even if they were a cost of doing business. Food and beverage related to entertainment venues are only covered with detailed receipts separately stating the price of the meal.

Another change from the TCJA is that spouse or guest meals are not covered from travel unless the business employs the person. So, if your spouse accompanies you on a work trip, their meals are not deductible for the business.

The Consolidated Appropriations Act of 2021 (CAA) temporarily increased the deduction for business meals provided by restaurants to 100 percent for tax years 2021 and 2022. Not all meals are created equal, however. The 100 percent deduction is only available for meals provided by restaurants, which the IRS defines as: “A business that prepares and sells food or beverages to retail customers for immediate consumption, regardless of whether the food or beverages are consumed on the business’s premises.” Prepackaged food from a grocery, specialty, or convenience store is not eligible for the 100% deduction and would be limited to a 50% deduction.

Also, as has always been the case, expenses must be considered ordinary (common and accepted for your business) or necessary (helpful and appropriate) and cannot be considered lavish or extravagant. An employee of the business or the taxpayer must be present during the meal, as well.

A quick guide to business meal deductions

*Meals are only deductible in the 2021 and 2022 tax years if provided by a restaurant, as defined by the IRS in the above article.

Entertainment expenses are notoriously targeted by auditors. Considering the law change, we anticipate these expenses to be a heightened area of concern during an audit. The professionals in our office can help ensure you are in compliance, call us today.

If you have additional questions as it relates to meal and entertainment deductions or need help creating a system to track expenses or seek clarification on whether certain expenses are tax-deductible, Selden Fox can help. For additional information please call us at 630.954.1400 or click here to contact us.

Manufacturing Executive Orders Pave the Way for Domestic Production

Early in President Biden’s administration, he signed several executive orders aimed at strengthening manufacturing in Chicago and across the United States. Some of those were focused on COVID-19 recovery and resilience, while others are set to have a more lasting impact on the role of manufacturing in federal procurement and supply chain diversity. Executive Order Ensuring the Future Is Made in All of America by All of America’s Workers (“Made in America”) was signed just a few days into his presidency, and the following month, Executive Order on America’s Supply Chains (“Supply Chains”) solidified a U.S. focus on strengthening manufacturing.

It is estimated that the federal government spends around $600 million annually on contracting. While much of this amount is supposed to go towards American companies, loopholes and waivers often mean that more foreign-produced content can be purchased than what might otherwise be allowed. To ensure that American-made goods are prioritized, these Executive Orders outline the appropriate changes which need to be made. To help clients, prospects and others, Selden Fox has provided a summary of the key details of both Executive Orders below.

 Made in America Executive Order

The Made in America Executive Order signifies a coordinated push to strengthen U.S. manufacturing by requiring federal agencies to buy more domestic products. There is a limited impact now in the short-term but that could be changing soon as the deadline nears for the Federal Acquisition Regulatory Council to propose tightened rules to the Federal Acquisition Regulation (FAR).

Component Test and Other FAR Rules

These proposed rules center around the component test, which certifies compliance of domestic products; requirements for how much end products and construction materials constitutes ‘made in America;’ and increases price preferences for domestic products and construction materials. The component test in Part 25 of FAR currently measures domestic content by whether it is manufactured in the U.S. with at least 50 percent of American-made components unless it is an off-the-shelf item. President Trump’s EO 13881 raised the numerical threshold to 90 percent for iron or steel and from 50 to 55 percent for other products, and these numbers could increase again.

New rules, which have yet to be released, will seek to measure domestic content by value-adds from U.S.-based production or U.S.-based economic activity. It is likely that once final guidelines are released, manufacturers will need to conduct a per-product analysis to determine if it meets the revised standard. This will be especially true for any components that are sourced overseas.

Once implemented, these new rules should close existing loopholes in how content is measured. Federal agencies will likely ramp up efforts to find more domestic manufacturers, especially small to mid-size companies, that can help increase the domestic output. The potential result is an expected opportunity for Chicago manufacturers.

Jones Act

The EO also mandates that only U.S. ships may carry cargo between U.S. ports consistent with securing and prioritizing American supply chains. Some believe that including the Jones Act is a sign that federal infrastructure projects will be getting a boost surrounding ports, maritime interests, and offshore renewable energy.

Waivers

Waivers, already mentioned as a way to avoid domestic procurement requirements, will likely be more difficult to come by in the future. The EO didn’t explicitly revoke any existing waivers, like if there are unreasonably high prices for U.S. products. However, instructions were given to federal agencies to review their own waivers and consider suspending, revising, or rescinding any inconsistent with Made in America priorities. In the short term, the process of obtaining waivers will probably be longer.

Made in America Office

To help usher new guidelines into practice, the EO established a Made in America office and developed a website to increase federal procurement transparency. The Made in America office will have greater oversight over potential waivers of domestic preference laws. According to Celeste Drake, Director of the Made in America Office, “the short- and long-term goals of the initiative are as much about increasing the goods and services bought from American companies as they are about data around how agencies make buying decisions.”

Supply Chains Executive Order

The purpose of this EO was to create an initial step to gather information on the global supply chains and subsequently provide potential reforms and strategies after key information is collected.

The Order requires two assessments by government agencies:

(1) An initial 100-Day Supply Chain Review focusing on key supply chain risks relating to semiconductors, batteries, strategic minerals, and pharmaceuticals; and

(2) Sectoral Supply Chain Assessments in certain critical business sectors (e.g., national defense, public health, information and communication technology, energy, transportation, and agriculture), which will determine the extent to which these critical sectors are reliant on products from so-called “competitor nations.”

Each assessment requires coordination among various executive agency heads.

In June, the 100-Day Supply Chain Review assessment was issued. While each segment was noted as facing its own unique challenges, some of the common elements were lack of domestic production and/or reliance on foreign nations, diversity in the supply chain network, sustainability, and technology and innovation. Particularly, the report recommended increased support for small and medium-sized manufacturers and disadvantaged firms in the supply chain. Cybersecurity remains a top priority across all industries, not just in this EO but in other presidential and government actions.

Next year, an in-depth review of more supply chain sectors will be published, which will cover transportation, public health, energy, and agriculture, to name a few.

Current State of Manufacturing

Reflecting some of the priorities laid out in the Made in America EO, many U.S. manufacturers struggle to remain competitive with foreign markets. Especially for manufacturers of semiconductors, communications equipment, precision tools, metals and chemicals, and autos and parts, they are losing ground compared to global production. On the other hand, R&D-and design-driven sectors like computer-systems design and scientific R&D have grown substantially.

The manufacturing industry is growing, even if growth has stalled somewhat in recent weeks. According to the Institute for Supply Management’s most recent manufacturing business index, the PMI fell slightly in June to 60.6%, which still represents growth mode. Production continues to grow while the rate of new orders slowed down; difficulty filling jobs ranks high on many manufacturers’ priorities. Despite a national focus on supply chain resilience, disruptions continue.

Manufacturers are also still waiting on the outcome of the federal infrastructure bill, which has been modified from its original proposal.

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While these Orders provide general guidance on how procurement will be addressed and other changes implemented, the devil is in the details. In any case, Chicago manufacturers will have a new opportunity to take advantage of the renewed domestic focus in the coming months. If you have questions about the information outlined above, or need assistance with a tax or accounting issue, Selden Fox can help. For additional information call us at 630.954.1400 or click here to contact us. We look forward to speaking with you soon.