August 2022 Tax Updates

Employee Retention Tax Credit

The Employee Retention Tax Credit is a retroactive credit on 2020 and 2021 payroll taxes for employers who meet one of the classifications as a “recovery start up business,” a business that experienced a significant decline in revenue, or one that was impacted by a full or partial government shutdown in 2020 or 2021. Employers could be eligible for up to $33,000 per employee if eligibility applies to all quarters. Business income tax return amendments may be required.

Pennsylvania Accepts 1031 (Like-Kind) Exchanges

A 1031 exchange (also known as a like-kind change) is a process by which a seller can defer recognition of gain on the sale of real estate by replacing it with similar property within the prescribed period of time specified by law. This benefit was established by federal law, leaving states with the option to adopt the legislation. In prior years, Pennsylvania did not acknowledge 1031 exchanges, however as of  January 1, 2023, 1031 exchanges will be considered valid for purposes of Pennsylvania tax filings. 

Changes to Business Interest Expense Limitation

The Tax Cuts and Jobs Act of 2017 included legislation that limits a taxpayer's deduction for business interest to the sum of (i) business interest income, (ii) 30% of adjusted taxable income (ATI), and (iii) floor plan financing interest. Part of the calculation of ATI has historically included adding back depreciation, amortization and depletion. Those 3 items will no longer be added back to calculations for the 2022 tax year. This change may further limit the amount of deductible interest available to taxpayers with large amounts of fixed assets. 

Back to School Sales Tax Holidays

While Delawareans are fortunate enough to have tax-free shopping year-round, residents of other jurisdictions should stay tuned for back-to-school sales tax holidays hosted by their resident states. These holidays are established to help families save on necessities. Maryland’s sales tax holiday lasts from August 14– 20 and applies to certain clothing items and backpacks. New Jersey will offer a sales tax reprieve from August 27 to September 5. During this time, sales tax will not apply to computers, printers, personal digital assistants and school supplies. Pennsylvania does not currently have a sales tax holiday scheduled, but sales tax is already omitted in the Commonwealth on most clothing and textbooks for use in school. 

Tax Implications – NCAA Athlete Compensation

The National Collegiate Athletic Association now allows student athletes to be financially compensated for use of their name, image, and likeness (NIL) in promotional materials. While this is good news for athletes, there might be some unwelcome tax surprises lying in wait for some of those students. There may also be state and local income tax repercussions for athletes playing games in certain jurisdictions. Non-resident alien athletes on scholarship may encounter visa violations for NIL compensation, and thus may be excluded from compensation for their contributions and visibility. College athletes may also be unaware that free vehicle leases and non-cash compensation may result in taxable income. Students may also be unaccustomed to paying estimated taxes which could lead to high tax bills or liens down the road. 

Pennsylvania Child Care Tax Credit Program

In light of Pennsylvania’s current budget surplus, Governor Tom Wolf has earmarked $25 million for the Child and Dependent Care Enhancement Program. Starting with 2023 tax filings, Pennsylvania residents who pay for child care services will be able to take a credit between $180 and $630, depending on household income. Dependents who already qualify for the federal program would be eligible qualifying children for Pennsylvania’s program.

Estate Planning

With the current estate tax exemption set to be halved in 2026, taxpayers should take a look at their estate plans to determine the most advantageous next steps. While many Americans will have estates that will still be shielded under the smaller exemption amount of approximately 6 million per person, changes in tax law offer a timely opportunity to revisit estate planning strategies to ensure that they are still suitable in the current environment.