Jones & Roth CPAs & Business Advisors

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  • Bookkeeping for builders: 8 tips to consider

    Bookkeeping for builders: 8 tips to consider

    As you’re no doubt aware, bookkeeping for builders is challenging. Construction companies tend to have unstable workforces, wage rates that can change by location, and multiple ongoing projects with various costs and durations. Here are some bookkeeping tips that can help you stay organized and set up your business for success in the new year.

    Tip 1: Open multiple bank accounts

    Among the easiest ways to track expenses and revenue is to open multiple bank accounts for business use. Reserve one account for receiving payments from customers. From there, you can transfer money into other accounts as needed.

    Use another account exclusively for payroll, and yet another to build a cash reserve. It’s also worthwhile to have an account designated for paying taxes.

    Separate accounts help you better determine how much money is going into your construction business each month. You can then more closely control how much is going out and from which part of your budget. In addition, segregating accounts helps ensure no one is writing checks against, say, payroll funds for nonpayroll expenses.

    Tip 2: Be a stickler for details

    Keeping business receipts is an essential bookkeeping practice. Receipts provide insight into where money is going and serve as proof of expenses in case you get audited. Generally, you should avoid paying for anything in cash because those transactions are harder to track.

    As you record information, whether from expenses you’re paying or revenue you’re receiving, include key details such as the precise name of the other party, account number, date and so forth.

    The best way to log and track transactions is to use up-to-date software. Ideally, you should keep separate bookkeeping journals for:

    • Accounts payable (including rent, utilities, equipment and insurance),
    • Accounts receivable (direct payments from customers and payments from general contractors if you’re a subcontractor), and
    • Project-specific costs (such as on-site worker payroll; subcontractor payments, if you’re a general contractor; and materials purchases).

    Tip 3: Digitally back up records

    Organize and file receipts, invoices and other documents so that they’re easy to find later. Whether storing hardcopies in filing cabinets or saving digital files on a hard drive, it’s important to have backups in case the original documents are lost or damaged.

    A best practice is to make three digital copies of each document, for example:

    1. Save one copy on a secure hard drive,
    2. Save another copy on an external storage device, and
    3. Save a third copy on a cloud-based platform.

    Backing up data weekly is generally sufficient, but how often you should back up data depends on how frequently you update it.

    Tip 4: Use job costing

    The tracking of specific job costs — known simply as “job costing” — is useful because it helps pinpoint the specific costs of each project, which can later lead to more accurate estimates and job budgets. Job costing also can help you determine which types of projects are profitable and which ones to avoid.

    Put simply, the process involves breaking down a project into phases and then listing the tasks needed to complete each phase. Tasks are then divided into three expense categories: 1) labor, 2) materials (direct and indirect costs), and 3) overhead. Those costs are then added together. Going forward, tasks can serve as line items that you can easily add or delete from estimates as the scope of a potential project is defined.

    Tip 5: Tighten up tracking of labor costs

    Your construction company’s labor force might include a combination of salaried employees, union- and nonunion workers, and independent contractors. To truly succeed at bookkeeping, you must diligently track the hours and type of work performed by everyone.

    Unfortunately, the tracking of labor hours and costs on multiple projects can easily become disorganized or, worse, inaccurate, and turn into a number-crunching headache. There are many Web-based tools and mobile apps available for construction companies of all sizes to automate the process and reduce human error and oversight.

    Tip 6: Improve inventory tracking

    It’s not unusual for a job to require more labor or materials than originally anticipated. If you’re constantly taking materials from inventory, you can quickly go overbudget on that project and find yourself short-supplied for others.

    With supply chains in such bad shape recently, maintaining a solid inventory of materials could allow you to stay operational while competitors are waiting for their shipments. But you might need to upgrade your bookkeeping efforts and software to keep a more accurate inventory of materials and their related expenses. Doing so should enable you to more easily see where your resources are going and budget accordingly.

    Tip 7: Don’t let the ink dry

    Many contractors wait until a project is complete or almost done to start recording costs or incoming payments. But your books should always have “wet ink” — that is, recently updated figures and details to keep you apprised of what’s really going on.

    After all, unexpected expenses can occur at any time that require immediate adjustment to a job’s budget or even your company’s overall budget. On a more positive note, a properly documented and processed change order could mean you’ll receive more revenue from a project than expected.

    Tip 8: Ask for help!

    Establishing and maintaining these and other bookkeeping best practices isn’t easy. We’re here to review your ledger, offer advice on better financial recordkeeping, suggest ways to improve payroll management, and even help you identify opportunities for growth.

  • Boost cash flow with savvy accounts payable strategies

    Boost cash flow with savvy accounts payable strategies

    Managing accounts payable is a critical task for any business, but it’s particularly important for construction companies. General contractors juggle payments to a variety of subcontractors, suppliers and other entities. (We’ll refer to them collectively as “vendors.”) And the players involved may differ from job to job, depending on location and other factors.

    As a back-office function, accounts payable doesn’t always get the attention it deserves, but it can have a significant impact on your cash flow and bottom line. Following are some tips and best practices for improving your processes.

    Be strategic

    Too often, contractors take a reactive approach to payables, delaying payments as long as possible to improve short-term cash flow. This approach can backfire, however, if it damages relations with vendors.

    Poor vendor relationships can affect delivery times, quality of services and payment terms. A proactive, strategic approach to payables can help you strike a balance between optimizing short-term cash flow and getting along well with vendors.

    It’s also critical to explore the potential benefits of early payment discounts, volume discounts or other incentives that can improve your cash flow and bottom line. That’s not to say that you should pay sooner or more at once to get every available discount. Whether you should do so depends on whether your cash flow is strong enough so that the benefits of the discount outweigh the downsides of earlier or bigger payments.

    Strengthen selection and review

    Implement policies, procedures and systems to ensure that you properly vet vendors and negotiate the best possible prices and payment terms. Create preferred vendor lists so staff members follow established procedures and don’t engage in “maverick” buying (that is, buying from unauthorized vendors).

    It’s also important to review vendor contracts regularly and to maintain a database of key contractual terms that’s readily accessible to everyone. With an understanding of payment terms and other important contractual provisions, employees can double check vendor compliance and avoid errors (or fraud) that can result in overpayments or duplicate payments.

    Leverage technology

    Automating the accounts payable process offers many benefits. For one thing, an automated, paperless system can significantly increase efficiency, reduce costs and shorten the time it takes to process invoices.

    And, of course, the ability to pay invoices more quickly makes it easier to take advantage of available discounts. (Keep in mind, however, that the viability of a paperless environment depends on the ability and willingness of vendors to accept electronic payments.)

    In addition, automation can provide greater visibility of payables and better control over payments. For example, cloud-based systems provide immediate access to account information, allowing you to review and approve invoices from anywhere at any time. The best automated systems also contain security controls that help prevent and detect fraud and errors.

    Naturally, there’s an upfront cost to buying good accounts payable software and training your staff to use it. You’ll need to find a solution that suits your construction company’s size, needs and technological sophistication. You’ll also incur ongoing costs to maintain the system and keep it updated.

    Take a proactive approach

    Don’t underestimate the impact of accounts payable on your financial performance. A proactive, strategic approach can help a construction business improve its cash flow and profitability. Contact us for help assessing your accounts payable processes and identifying specific ways to improve them.

  • How creditworthy is your construction business?

    How creditworthy is your construction business?

    As you probably know, construction businesses are frequently scrutinized for their creditworthiness and financial stability by sureties, banks, insurers and other parties. Your ability to build and protect your financial reputation is critical to winning work and managing risk.

    Building creditworthiness is a daily and monthly process. But the payoff is worth the effort: easier access to equipment financing and surety bonds, and the ability to negotiate favorable loan terms and conditions. What’s more, contractors with good business credit ratings are likely to win more contracts because they’re usually seen as more reliable by project owners and potential partners.

    8 tips for building and preserving credit

    Review the following eight tips for enhancing your business’s credit:

    1. Separate business and personal credit. Among the first critical steps for anyone establishing a company is to separate business from personal finances. Opening a commercial bank account and credit card, and paying bills in your company’s legal name, will create a distinction between your business and personal credit. You also should apply for a federal Employer Identification Number from the IRS. All of this helps to establish a business credit profile.

    2. Establish lines of credit. It may sound like a Catch-22, but you need credit to build credit. Set up lines of credit with your trade-specific vendors or suppliers and make sure you pay bills in full on time. A positive history of on-time payments shows your company is reliable and can effectively manage its debt. A late payment history, on the other hand, will ding your business credit rating.

    Many lenders don’t consider a company’s credit history to be established until it has three business credit cards, two loans fully paid off and five “trade credit” accounts reporting financial transactions to credit bureaus. You can establish trade credit accounts by securing payment terms, such as net-60 or net-90, with vendors or suppliers that report those payments to business credit reporting agencies.

    3. Get a D-U-N-S number. Dun & Bradstreet (D&B), Equifax and Experian all gather financial information on businesses to generate credit reports. However, D&B is the only credit bureau with which you must register to start tracking your business credit. Registering is important because some insurers require their insureds to maintain specific D&B scores and ratings.

    The D&B application is free and ensures that a credit file is established under your company name. You’ll receive a D-U-N-S number that enables you to review your credit file and make changes to your business and demographics information. Be proactive about maintaining D&B scores. You may need to pay fees to activate your credit report and add trade references (trade credit accounts). But the expense generally makes sense because it helps ensure that businesses are reporting your company’s financial transactions with them to D&B.

    4. Monitor your credit history. Do you know your company’s credit scores? Periodically check your scores and review credit reports for errors and inaccuracies that may lower them. Even simple errors, such as a wrong address, can negatively affect your credit reports. If you do find an error, file a dispute with the credit bureau. Any mistakes should be corrected as soon as possible.

    5. Reinvest in your business. Congratulate yourself on having a profitable business — but don’t just spend the proceeds. Use profits to establish a cash reserve, pay down debt and reinvest for growth. Setting monthly and annual targets will help you meet your reinvestment goals.

    6. Don’t max out accounts. If you consistently max out business credit cards, it can lower your credit score. Aim for a credit utilization (the percentage of available credit you use) of 30% or less and a debt-to-income ratio at 45% or less. You should also know that closing out credit accounts and removing them from your credit report just because they’re paid in full may have an adverse effect on your credit rating. In fact, it may limit the amount of credit at your disposal.

    7. Maintain accurate records. Good recordkeeping and documentation will be critical at tax time. Maintaining accurate records also helps protect your business from fraud losses.

    8. Monitor partners’ business credit. Construction is a collaborative industry. To prevent other companies’ financial troubles from affecting your projects and harming your credit, check the credit reports of customers, partners and suppliers before you agree to work with them.

    Peace of mind

    Building and maintaining creditworthiness is an important objective for every contractor. Your business credit rating plays a key role in providing peace of mind to sureties, lenders, insurers and potential customers that your company is financially sound, reliable and trustworthy.

  • Congress passes legislation to largely prevent Medicare cuts slated for Jan. 1, 2022

    Congress passes legislation to largely prevent Medicare cuts slated for Jan. 1, 2022

    Following is an update from our partners at Oregon Medical Group Management Association regarding the prevention of Medicare cuts.

    On December 9, 2021, Congress passed MGMA-supported legislation which largely averts Medicare physician cuts scheduled to go into effect on Jan. 1, 2022. Specifically, the legislation:

    • Mitigates 3% of the -3.75% impact of the previously delayed 2021 budget neutrality adjustment to the Medicare physician fee schedule conversion factor through CY 2022;
    • Nullifies the imposition of the 4% statutory pay-as-you-go sequester resulting from the American Rescue Plan Act through CY 2022;
    • Delays the reinstatement of the existing 2% Medicare sequester through March 2022, and phases in a 1% sequester through June 2022; and
    • Delays cuts to physician office laboratories and the next round of data reporting.

    As a result, the legislation passed prevented Medicare from imposing 9% of the 9.75% planned payment reductions to physician practices scheduled for Jan. 1, 2022.

  • Why cost codes are critical to construction business success

    Why cost codes are critical to construction business success

    No matter the size of your construction business, cost codes are essential for tracking where and how you incur project costs. Although a job’s overall cost will tell you what was spent and how much was made, it won’t tell you why you spent the money or earned that profit. Cost codes provide an easy and effective way to organize costs by separating them into specific categories. They also show how much specific activities are costing — including which activities are costing too much.

    When you know where money is being spent on each job, you can use that information to create more accurate estimates and bid more effectively on projects. Ultimately, this could help increase profits and spur business growth.

    Improving efficiency and profitability

    Cost codes can improve efficiency in every aspect of your construction company. Here’s how you and your employees can use them effectively:

    Estimating

    Many contractors divide a project into defined jobs or activities, assign a cost code to each and then add up the numbers attached to individual line items to determine the project’s estimated cost. If the scope of a project changes, you simply add or delete line items and recalculate the total.

    Project management

    Job supervisors can use cost codes to document work and track the progress of construction projects in real time. They can compare actual costs to job budgets and make any needed adjustments before money is lost on unnecessary materials or labor. By tracking actual project costs, project managers provide estimators with continuous feedback they can use to create accurate estimates for future jobs.

    Finance and accounting

    Cost codes can help reveal spending trends so that you can better control purchasing and the use of materials and workers. They also enable you to calculate under- and overbillings and pinpoint where costs are generated, which activities generate the most costs and which costs are linked to profits.

    Integrating data

    Generally, accounting software helps contractors automate processes. But the accuracy of data generated by software will be only as good as the data you input. If you decide to implement cost codes, or refine your approach to them, establish a cost code structure and use it consistently across teams so that your software will have accurate data to organize, sort and manipulate. Because accounting software integrates cost codes with transactions — for example, accounts payable bills, invoices, purchase orders and timecards — you can easily analyze budgeted vs. actual costs and revenue. This helps keep projects on time and on budget and provides you with the information needed to eliminate profit fade, a gradual decline in expected gross profits over the course of a job.

    Adding cost types to cost codes allows you to extract specific values related to labor, equipment, material and overhead. Especially important in the current challenging environment, cost types enable contractors to track new items such as personal protective equipment costs and expenses related to employees working from home. If your business has received pandemic-related loans or grants, the ability to track and document these amounts is essential.

    Best way to standardize processes

    Cost codes aren’t the only way to divide costs into categories, but they’re the best way to standardize processes. Using descriptive phrases, however, can lead to typos and errors and make it difficult for you and employees to search for data. By creating a standard cost code list that’s used throughout your business, you’ll simplify searches and enable consistent analysis of information. Many companies use the construction cost codes list provided by the Construction Specifications Institute (CSI). But if the CSI’s list doesn’t meet your business’s needs, you can draw up your own cost codes.

    To learn more about establishing and using cost codes, get in touch with your Jones & Roth CPA & Advisor.

  • Provider Relief Fund Reporting Deadline Extended

    Provider Relief Fund Reporting Deadline Extended

    The U.S. Department of Health and Human Services (HHS) recently announced that the Provider Relief Fund (PRF) Reporting Portal will reopen for the completion or submission of reporting for Reporting Period 1 from Dec. 13, 2021 at 9:00 am ET through Dec. 20, 2021 at 11:59 pm ET.

    Medical groups that already submitted a Reporting Period 1 report and need to correct an error can contact the Provider Support Line to gain access to their report. As a reminder, Reporting Period 2 will begin on Jan. 1, 2022.

    Provider Support Line: (866) 569-3522

    For additional information about PRF reporting, visit: https://www.hrsa.gov/provider-relief.

  • Dos and don’ts of crisis management for contractors

    Dos and don’ts of crisis management for contractors

    From the Great Recession of more than a decade ago to the ongoing COVID-19 pandemic, construction companies have endured some tough lessons over the years. To help you avoid learning some things the hard way, we’ve compiled a list of what contractors have generally done right and wrong when these and other crises have hit.

    First, let’s explore some dos:

    DO develop a contingency plan.

    When COVID-19 hit in March 2020, many of the companies that survived the recession years of 2007 through 2009 had both short- and long-term action plans crafted and ready to implement for the next economic crisis.

    These written plans included where to reduce costs and the types of scenarios that would warrant making deeper cuts, such as slashing budgets related to:

    • Business travel,
    • Payroll (furloughs/layoffs), and
    • Underperforming or breakeven profit centers.

    Many of these contingency plans also noted more aggressive cost-cutting measures, such as pulling out of markets or regions — even eliminating entire units.

    Think back on what your construction company did to weather the Great Recession, if it was operating back then, or how you coped with the initial shock of the pandemic. Articulate and document these things so you can create a contingency plan for the next big crisis.

    DO act quickly.

    Thanks again to hindsight from the Great Recession, many best-in-class construction companies acted promptly to make cost cuts and operational changes early in the pandemic as opposed to waiting until it was too late. Generally, these weren’t knee-jerk reactions. Rather, proactive contractors actively engaged in financial reporting, crisis management and strategic planning.

    Be sure you have strong leadership teams and advisors around you to stay informed about current events and what’s happening in the national and local economy, the construction industry, and your primary markets.

    DO forecast your cash flow regularly.

    When a construction company gets in serious financial trouble, the culprit is typically a gradual, not sudden, lack of cash. The good news is today’s contractors have the financial tools available to track cash flow and project costs in real time and pinpoint when issues can or will arise.

    Prepare for pending cash flow and working capital challenges by spending conservatively, staying on top of accounts receivable, verifying that backlog projects are properly funded, renegotiating loans and financing, building cash reserves, and improving access to liquidity.

    DO leverage technology.

    Just as the Great Recession compelled many construction businesses to adopt new tech so they could do more with less, the pandemic pushed companies toward cloud-based and mobile tools to work, share information and collaborate remotely.

    For example, many HR and payroll departments switched to software-as-a-service platforms to facilitate fast and secure electronic document delivery. They also significantly reduced the time and money spent on manually processing HR benefits and payroll-related transactions.

    Similarly, consider investing in analytics tools that provide deeper financial insights to garner a real-time view of sales, job progress, labor and equipment use, and other key data points. This will enable you to safely take on more projects.

    DO invest in your construction business.

    An economic crisis, or even just a slowdown, is no time to spend money on risky new ventures. During tough times, look inward and invest in new tools, processes and your own people to weather the storm until pent-up work becomes available. For example, the Infrastructure Investment and Jobs Act that was signed into law Nov. 15 could mean a wave of new projects for contractors in many specialties.

    DO engage in strategic planning.

    Pandemic-related shutdowns gave executives time to step back, look at their strategic plans and re-evaluate. Some of those companies were able to pivot as necessary and move forward with great success.

    There’s no doubt that it can be difficult for construction business owners to take time out from overseeing multiple projects and bidding on new ones. However, regularly holding strategic planning meetings with your leadership team and advisors is critical to ensuring your ongoing success.

    Now let’s look at a few don’ts:

    DON’T rely on backlog.

    A strong backlog has always been one of the hallmarks of a healthy construction company. This still holds true to some extent but, in a crisis-afflicted environment, contractors can’t always count on their backlog because projects could be delayed or even canceled.
    Instead, continuously strategize about how to keep work coming, either by focusing on your niche or carefully, thoughtfully expanding into a healthier specialty or market. You also may want to consider offering reasonable discounts to keep your backlog and win new work.

    DON’T get pressured into “survival” bidding.

    When projects start getting paused or shut down permanently, a natural reaction is to want to bid on every job available just to build up a backlog and retain as many workers as possible. Unfortunately, if the project is unprofitable or even potentially costly, the ultimate price of taking it on could lead to disaster. Stick to bidding on profitable jobs that you’re likely to win.

    DON’T neglect the fundamentals of a successful construction company.

    All the things that got your business off the ground and helped it grow are the same fundamentals you must maintain with added vigor when the going gets tough. This includes:

    • Establishing safeguards related to cash flow,
    • Tracking key performance indicators,
    • Reviewing contract language and lien/bond claim rights,
    • Looking for ways to mitigate supply chain disruption and pricing volatility, and
    • Searching far and wide for talent.

    Need some help? Check in with your Jones & Roth CPA and Advisor for advice on how to gather and analyze financial information as part of your effort to develop a strategic plan and a contingency plan.

  • Jones & Roth Announces New Practice Peak Brand for Dental Advisory Team

    Jones & Roth Announces New Practice Peak Brand for Dental Advisory Team

    Jones & Roth CPAs & Business Advisors is pleased to announce that its specialized team of Dental CPAs and Advisors will now be operating under a new brand called Practice Peak Advisors, powered by Jones & Roth.

    The new brand was launched to better position the team’s ability to be recognized for its success serving dental practices and their owners across the United States and has a new website presence at: https://www.practicepeakadvisors.com

    The Practice Peak Advisors’ primary services offering is through a program called the Practice Success Plan. The Practice Success Plan is comprised of a comprehensive financial management advisory service that includes bookkeeping and accounting, practice performance benchmarking, fee analysis, cash flow planning, strategic business planning, retirement planning, and tax services.

    “Originally, our dental team served practices in the areas near our three Jones & Roth offices in Oregon,” said Jeremy Prickel, CPA who leads the Practice Peak Advisors team. “However, the Practice Success Plan has made a significant positive impact on our clients’ practices, so our reputation in the dental industry has quickly developed on a national scale. We are currently working with practices in about 20 states across the country.”

    Dental practice owners and managers implement the Practice Success Plan to make the most of their business and personal financial opportunities.

    “It’s really gratifying to see the impact that the Practice Success Plan has had on our dental clients,” said advisor Elliott Tracy, CPA. “Practice owners are experiencing peace-of-mind knowing that they are on track with superior financial management of their practice, and that they are achieving their personal financial goals.”

    About Practice Peak Advisors powered by Jones & Roth

    Practice Peak Advisors is a specialized team within Jones & Roth. The firm is one of the largest CPA and advisory firms based in the Pacific Northwest. Founded in 1946, the firm serves companies, nonprofits, and individuals from offices in Hillsboro, Eugene, and Bend, Oregon. Services span the areas of tax, business advisory, audit & assurance, and a wide range of business consulting and private client services. Jones & Roth also provides in-depth experience in a variety of specialty industries including private company services, family business, construction, real estate, healthcare, dental, nonprofit, and retirement plan services. Jones & Roth was named to the Oregon Business Best Companies to Work For list in 2015, 2016, and 2017, and was named to the Oregonian’s Top Workplaces list in 2018, 2019, 2020, and 2021.

  • Don’t forget to factor 2022 cost-of-living adjustments into your year-end tax planning

    Don’t forget to factor 2022 cost-of-living adjustments into your year-end tax planning

    Please Note: This blog post contains information that is based on current law as of the date of publishing. This information is subject to change based on the outcomes of legislative negotiations. Please always consult with your CPA Advisor for the most up to date guidance specifically for you and your business.

    The IRS recently issued its 2022 cost-of-living adjustments for more than 60 tax provisions. With inflation up significantly this year, mainly due to the COVID-19 pandemic, many amounts increased considerably over 2021 amounts. As you implement 2021 year-end tax planning strategies, be sure to take these 2022 adjustments into account.

    Also, keep in mind that, under the Tax Cuts and Jobs Act (TCJA), annual inflation adjustments are calculated using the chained consumer price index (also known as C-CPI-U). This increases tax bracket thresholds, the standard deduction, certain exemptions and other figures at a slower rate than was the case with the consumer price index previously used, potentially pushing taxpayers into higher tax brackets and making various breaks worth less over time. The TCJA adopts the C-CPI-U on a permanent basis.

    Individual income taxes

    Tax-bracket thresholds increase for each filing status but, because they’re based on percentages, they increase more significantly for the higher brackets. For example, the top of the 10% bracket increases by $325 to $650, depending on filing status, but the top of the 35% bracket increases by $16,300 to $19,550, again depending on filing status.

    The TCJA suspended personal exemptions through 2025. However, it nearly doubled the standard deduction, indexed annually for inflation through 2025. For 2022, the standard deduction is $25,900 (married couples filing jointly), $19,400 (heads of households), and $12,950 (singles and married couples filing separately). After 2025, standard deduction amounts are scheduled to drop back to the amounts under pre-TCJA law unless Congress extends the current rules or revises them.

    Changes to the standard deduction could help some taxpayers make up for the loss of personal exemptions. But it might not help taxpayers who typically used to itemize deductions.

    Image of table containing 2022 ordinary-income tax brackets

    AMT

    The alternative minimum tax (AMT) is a separate tax system that limits some deductions, doesn’t permit others and treats certain income items differently. If your AMT liability is greater than your regular tax liability, you must pay the AMT.

    Like the regular tax brackets, the AMT brackets are annually indexed for inflation. For 2022, the threshold for the 28% bracket increased by $6,200 for all filing statuses except married filing separately, which increased by half that amount.

    Image of table containing 2022 AMT brackets

    The AMT exemptions and exemption phaseouts are also indexed. The exemption amounts for 2022 are $75,900 for singles and heads of households and $118,100 for joint filers, increasing by $2,300 and $3,500, respectively, over 2021 amounts. The inflation-adjusted phaseout ranges for 2022 are $539,900–$843,500 (singles and heads of households) and $1,079,800–$1,552,200 (joint filers). Amounts for separate filers are half of those for joint filers.

    The maximum benefits of certain education and child-related breaks generally remain the same for 2022. But most of these breaks are limited based on a taxpayer’s modified adjusted gross income (MAGI). Taxpayers whose MAGIs are within an applicable phaseout range are eligible for a partial break — and breaks are eliminated for those whose MAGIs exceed the top of the range.

    The MAGI phaseout ranges generally remain the same or increase modestly for 2022, depending on the break. For example:

    The American Opportunity credit. For tax years beginning after December 31, 2020, the MAGI amount used by joint filers to determine the reduction in the American Opportunity credit isn’t adjusted for inflation. The credit is phased out for taxpayers with MAGI in excess of $80,000 ($160,000 for joint returns). The maximum credit per eligible student is $2,500.

    The Lifetime Learning credit. For tax years beginning after December 31, 2020, the MAGI amount used by joint filers to determine the reduction in the Lifetime Learning credit isn’t adjusted for inflation. The credit is phased out for taxpayers with MAGI in excess of $80,000 ($160,000 for joint returns). The maximum credit is $2,000 per tax return.

    The adoption credit. The phaseout ranges for eligible taxpayers adopting a child will also increase for 2022 — by $6,750 to $223,410–$263,410 for joint, head-of-household and single filers. The maximum credit increases by $450, to $14,890 for 2022.

    (Note: Married couples filing separately generally aren’t eligible for these credits.)

    These are only some of the education and child-related breaks that may benefit you. Keep in mind that, if your MAGI is too high for you to qualify for a break for your child’s education, your child might be eligible to claim one on his or her tax return.

    Gift and estate taxes

    The unified gift and estate tax exemption and the generation-skipping transfer (GST) tax exemption are both adjusted annually for inflation. For 2022, the amount is $12.060 million (up from $11.70 million for 2021).

    The annual gift tax exclusion increases by $1,000 to $16,000 for 2022.

    Retirement plans

    Not all of the retirement-plan-related limits increase for 2022. Thus, depending on the type of plan you have, you may have limited opportunities to increase your retirement savings if you’ve already been contributing the maximum amount allowed:

    Image of table with Types of limitations for tax years '21 and '22

    Your MAGI may reduce or even eliminate your ability to take advantage of IRAs. Fortunately, IRA-related MAGI phaseout range limits all will increase for 2022:

    Traditional IRAs. MAGI phaseout ranges apply to the deductibility of contributions if a taxpayer (or his or her spouse) participates in an employer-sponsored retirement plan:

    • For married taxpayers filing jointly, the phaseout range is specific to each spouse based on whether he or she is a participant in an employer-sponsored plan:
      • For a spouse who participates, the 2022 phaseout range limits increase by $4,000, to $109,000–$129,000.
      • For a spouse who doesn’t participate, the 2022 phaseout range limits increase by $6,000, to $204,000–$214,000.
    • For single and head-of-household taxpayers participating in an employer-sponsored plan, the 2022 phaseout range limits increase by $2,000, to $68,000–$78,000.

    Taxpayers with MAGIs in the applicable range can deduct a partial contribution; those with MAGIs exceeding the applicable range can’t deduct any IRA contribution.

    But a taxpayer whose deduction is reduced or eliminated can make nondeductible traditional IRA contributions. The $6,000 contribution limit (plus $1,000 catch-up if applicable and reduced by any Roth IRA contributions) still applies. Nondeductible traditional IRA contributions may be beneficial if your MAGI is also too high for you to contribute (or fully contribute) to a Roth IRA.

    Roth IRAs. Whether you participate in an employer-sponsored plan doesn’t affect your ability to contribute to a Roth IRA, but MAGI limits may reduce or eliminate your ability to contribute:

    • For married taxpayers filing jointly, the 2022 phaseout range limits increase by $6,000, to $204,000–$214,000.
    • For single and head-of-household taxpayers, the 2022 phaseout range limits increase by $4,000, to $129,000–$144,000.

    You can make a partial contribution if your MAGI falls within the applicable range, but no contribution if it exceeds the top of the range.

    (Note: Married taxpayers filing separately are subject to much lower phaseout ranges for both traditional and Roth IRAs.)

    2022 cost-of-living adjustments and tax planning

    With many of the 2022 cost-of-living adjustment amounts trending higher, you have an opportunity to realize some tax relief next year. In addition, with certain retirement-plan-related limits also increasing, you have the chance to boost your retirement savings. If you have questions on the best tax-saving strategies to implement based on the 2022 numbers, please contact your Jones & Roth CPA and Advisor.

  • Potential tax law changes hang over year-end tax planning for individuals

    Potential tax law changes hang over year-end tax planning for individuals

    Please Note: This blog post contains information that is based on current law as of the date of publishing. This information is subject to change based on the outcomes of legislative negotiations. Please always consult with your CPA Advisor for the most up to date guidance specifically for you and your business.

    As if another year of the COVID-19 pandemic wasn’t enough to produce an unusual landscape for year-end tax planning, Congress continues to negotiate the budget reconciliation bill. The proposed Build Back Better Act (BBBA) is certain to include some significant tax provisions, but much uncertainty remains about their impact. While we wait to see which tax provisions are ultimately included in the BBBA, here are some year-end tax planning strategies to consider to reduce your 2021 tax liability.

    Accelerate and defer with care

    One of the most reliable year-end tactics for reducing taxes has long been to accelerate your deductible expenses and defer your income. For example, self-employed individuals who use cash-basis accounting can delay invoices until late December and move up the planned purchase of equipment or the payment of estimated state income taxes from early next year to this year.

    This technique has always carried the caveat that you generally shouldn’t pursue it if you expect to be in a higher tax bracket the following year. Potential provisions in the BBBA also may make it advisable for certain taxpayers to reverse the strategy for 2021 — that is, accelerate income and defer deductible expenses.

    The current version of the BBBA would impose a new “surtax” of 5% on modified adjusted gross income (MAGI) that exceeds $10 million, with an additional 3% on income of more than $25 million. As a result, the highest earners could pay a 45% federal marginal income tax on wages and business income (the current 37% income tax rate plus 8%). It could be even higher when combined with the net investment income tax, which might be expanded to include active business income for pass-through entities.

    In addition, there’s a proposal to temporarily increase the $10,000 cap on the state and local tax deduction to $80,000. Individuals in high-tax states should consider whether there may be an advantage to accelerating a 2022 property or estimated state income tax payment into 2021, or whether the deduction might be more valuable next year, particularly if they’ll face a higher effective tax rate.

    Leverage your losses

    Taxpayers with substantial capital gains in 2021 could benefit from “harvesting” their losses before year-end. Capital losses can be used to offset capital gains, and up to $3,000 ($1,500 for married persons filing separately) of excess losses (those that exceed the amount of gains for the year) can be applied against ordinary income. Any remaining losses can be carried forward indefinitely.

    Beware, however, of the wash-sale rule. Generally, the rule prohibits the deduction of a loss if you acquire “substantially identical” investments within 30 days, before or after, of the date of the sale.

    Taxpayers who itemize their deductions could compound their tax benefits by donating the proceeds from the sale of a depreciated investment to a charity. They can both offset realized gains and claim a charitable contribution deduction for the donation.

    Satisfy your charitable inclinations

    For 2021, charitable contributions can reduce taxes for both itemizers and non-itemizers. Taxpayers who take the standard deduction can claim an above-the-line deduction of $300 ($600 for married couples filing jointly) for cash contributions to qualified charitable organizations.

    The adjusted gross income limit for cash donations is 100% for 2021; it’s scheduled to return to 60% for 2022. That means you could offset all of your taxable income with charitable contributions this year. (Donations to donor advised funds and private foundations don’t qualify, though.)

    Taxpayers who don’t generally itemize can benefit by “bunching” their charitable contributions. In other words, delaying or accelerating contributions into a tax year to exceed the standard deduction and claim itemized deductions. For example, if you usually make your donations at the end of the year, you could bunch donations in alternative years — say, donate in January and December of 2022 and January and December of 2024.

    Retired taxpayers who are age 70½ and older can reduce their taxable income by making qualified charitable contributions of up to $100,000 from their non-Roth IRAs. Retired or not, individuals age 72 and older can use such contributions to satisfy their annual required minimum distributions (RMDs). Note that RMDs were suspended for 2020 but are effective for 2021.

    So long as the assets would be considered long-term if they were sold, donations of appreciated assets offer a double-barreled tax benefit. You avoid the capital gains tax on the appreciation and can deduct the asset’s fair market value as of the date of the gift.

    Convert traditional IRAs to Roth IRAs

    As in 2020, when many taxpayers saw lower than typical income, 2021 could be a smart time to convert funds in traditional pre-tax IRAs to an after-tax Roth IRA. Roth IRAs have no RMDs, and distributions are tax-free.

    You’ll have to pay income tax on the converted funds, but it’s better to do so while subject to lower tax rates. Similarly, if you convert securities that have dropped in value, your tax may well be lower now than down the road — and any subsequent appreciation while in the Roth IRA will be tax-free.

    It’s worth noting that President Biden had proposed including a provision in the BBBA that would limit the ability of wealthy individuals to engage in Roth conversions. There was a lot of back-and-forth with respect to these provisions, and the latest version of the House bill includes certain restrictions. Whether these provisions will make it past any Senate amendments remains to be seen, but the proposal could be a harbinger of future proposed restrictions.

    Proceed with caution

    The strategies outlined above always come with pros and cons, but perhaps never more so than now, when potentially significant tax legislation that would take effect next year is under negotiation. We can help you chart the best course in light of any developments.