By: Gene Barinholtz, CPA & Paul Wilkin, CPA, MST
Key Takeaways:
- Newly instituted Illinois state laws mandate transit benefits, paid leave entitlement, employee reimbursement regulations, and mandatory enrollment in the Illinois Secure Choice retirement program.
- Reporting requirements including a new obligation for smaller entities to report BOI to FinCEN and the importance of conducting a nexus study for state tax compliance are underscored.
- Anticipated legislative updates could potentially affect R&E deductions, bonus depreciation, business interest limitations, and enhance the Child Tax Credit.
Understanding New Requirements Essential for Illinois Manufacturers
The start of a new year is a time for manufacturers to plan for compliance with new laws and regulations that govern the workplace or impact tax strategies. For Illinois manufacturers, several new state laws governing employment issues took effect this year and in recent years, and uncertainty still fills the air around several federal tax issues such as bonus depreciation and tax credits for research and experimentation.
Following is a roundup of workplace regulations and tax issues that manufacturers should be aware of for 2024:
Illinois Employee Mandates
Several workplace regulation laws have been enacted in the past few years that employers should ensure they are complying with, including:
The Illinois Transportation Benefits Program Act, effective January 1, 2024, requires employers with 50 or more employees and an address located within one mile of a fixed-route transit service to give employees the opportunity to purchase transit passes on a pre-tax basis. The benefit must be offered to all covered employees – those who work at least 35 hours a week – after 120 days of employment. This program does not impose extra costs on employers, but if you are covered by the law you must participate in one of the transit programs offered by either the CTA or the RTA.
The Illinois Paid Leave for All Workers Act, effective January 1, 2024, required employers to allow workers to earn up to 40 hours of paid leave in a 12-month period. Employers may not inquire about the reasons for the leave. Leave may be used for either illness or personal reasons. Employers may offer more than 40 hours, but 40 hours is the mandated minimum. Employers should develop policies stating how the leave is earned and used, and inform employees of its availability. This is a state law applying to all employers in Illinois, but it does not apply to employees who are subject to collective bargaining agreements. In the city of Chicago, by municipal ordnance, employees are allowed to take at least 80 hours of leave per year, of which 40 hours can be used only for medical reasons.
The Illinois Wage Payment and Collection Act (amendment, Sec. 9.5), effective January 1, 2029 mandates employers to reimburse workers for expenses or losses incurred in the performance of their jobs. This amendment was written with an eye toward compensating employees who use personal devices for work – primarily cell phones and laptops – but is not limited to those expenses. Mileage incurred while driving a personal vehicle for business, use of personal tools, use of home internet and other costs are covered, as well. Employers must write reimbursement policies and inform employees that they exist. Reimbursement cannot be de minimis. Typical reimbursement for cell phone use ranges from $50 to $75 per month.
The Illinois Secure Choice retirement program, is a mandated retirement plan that requires U.S.-based employers with five or more employees in Illinois to offer a Roth retirement plan for their employees if the employer does not already sponsor a retirement plan. The program dates back to 2015, but became required of covered employers in 2022. Enrollment is accomplished through the Illinois Secure Choice website. Employees are automatically enrolled at a 5% salary deferral contribution rate, but employees may opt out. Employer contributions are not required, nor are they allowed. Accounts are owned by the individual employees and are portable from job to job. Employers are not considered plan fiduciaries and do not pay fees. Any employers who already sponsor retirement plans are not subject to the requirement to participate in Illinois Secure Choice.
Federal Tax Issues
Bonus Depreciation As provided by the Tax Cuts and Jobs Act (TCJA) of 2017, 100% bonus depreciation is currently in a phaseout period, having dropped to 80% for 2023 and 60% for 2024. It is scheduled to decline 20 percentage points annually until it expires altogether after 2027. Bonus depreciation enables business owners to enjoy immediate depreciation for purchases such as vehicles, computers, manufacturing equipment and even certain leasehold improvements. Any business planning capital expenditures should keep the phaseout timetable in mind and try to budget for purchases as soon as possible to benefit from the amount of bonus depreciation that still exists. Sec.179 expensing still exists as a way to get an immediate first-year deduction on certain expenditures, but the business community is anxiously awaiting Congressional action that may restore 100% bonus depreciation in the near future.
Research and Experimentation Tax Credit and Sec. 174 Formerly known by the familiar “R&D” (research and development) name, this tax credit was another victim of the TCJA. The credit didn’t go away, but its benefits were drastically reduced when a provision of the TCJA required, starting in 2022, that expenses related to research and experimentation be capitalized and amortized over five (domestic) or 15 (international) years. Of particular concern is that the new rules for capitalization under Sec. 174 apply so broadly that even companies that never took the R&E tax credit – and therefore didn’t have to report detailed R&E expenses to the IRS – now must do so. Such expenses include those related to development of new products, improvement of existing products, development of software, improvement of manufacturing processes, design and testing of prototypes and improvements made to increase performance and reliability. As with bonus depreciation, all eyes are on Congress to see if it will act to restore the old rules around R&E expenses.
The Tax Relief for American Families and Workers Act This $79 billion legislation has passed the House and is awaiting action by the U.S. Senate. Its most significant provisions are:
- Increase in the Child Tax Credit from $1,600 per child to $1,800 in 2023, $1,900 in 2024, and $2,000 in 2025.
- Retroactive restoration of the tax deduction for R&D domestic research and experimental expenditures under Section 174.
- Increase in the deductibility of business interest expense.
- Restoration and extension of 100% bonus depreciation retroactive to 1/1/2023 and extending through 12/31/2025.
- The tax provisions will be paid for, in part, by the termination of Employee Retention Credit claims as of 1/31/2024.
Termination of the Employee Retention Tax Credit (ERC) The IRS last fall placed a moratorium on accepting new claims for the pandemic-era ERC due to rampant fraudulent claims. A provision in the Tax Relief for American Families and Workers Act would permanently terminate the program.
Reporting of Beneficial Owner Information (BOI) to FinCen Starting January 1, 2025, corporations, limited liability companies and similar entities will be required to report certain “beneficial owner information” (BOI) to FinCEN – the Financial Crimes Enforcement Network arm of the U.S. Treasury Department – under the provisions of the Corporate Transparency Act. “Beneficial ownership” is defined as any person who exercises substantial control over a company, or who owns or controls at least 25% of the ownership interests of the company. The BOI reporting requirement will fall primarily on small businesses, as companies with more than 20 employees and more than $5 million in consolidated gross receipts, as well as a physical place of business in the U.S. – are among several types of entities that are exempt from the reporting requirement. Businesses founded before January 1, 2024, have until January 1, 2025 to file their first BOI report. Businesses founded after January 1, 2024 must file within 90 days of registration. Learn more about how to file a BOI report at the FinCEN BOI website, and contact your company’s attorney with any questions you may have.
State nexus issues There are three types of nexus for companies doing business in multiple states: sales tax, income tax and business registration. Rules vary from state to state and it’s important to know what triggers nexus in each state. Just because you have nexus in one state does not mean you’ll have it in another. Some of the activities that can trigger nexus include having a physical presence in a state such as employees, a warehouse or computer servers. To confuse matters further, certain internet-based activities are protected from nexus and others are not. If you haven’t had a comprehensive nexus study done to determine your company’s exposure, 2024 would be a good time to get one.
If you have questions about new state and federal laws and regulations that may impact your company this year, contact your KRD advisor.
