Category: Tax

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Tax

Sen. John Thune and Sen. Ben Cardin Recently Introduced the Athlete Opportunity and Taxpayer Integrity Act

More than a year ago, the U.S. Supreme Court ruled that student-athletes can be compensated for the use of their names, images, or likenesses (NIL). Now, a new bipartisan bill would eliminate a tax incentive for contributions to tax-exempt affiliates of colleges and universities. Since the ruling, groups of college boosters (third-party entities that promote a program’s interests) have formed what are known as NIL collectives. Sen. John Thune (R-SD) and Sen. Ben Cardin (D-MD) recently introduced the Athlete Opportunity and Taxpayer Integrity Act, which would bar individuals and organizations from claiming tax deductions for donations used by collectives for NIL payouts to student-athletes.

Contact one of our experts with all your tax-related questions.

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Tax

Deducting Eligible Medical Expenses

Taxpayers that itemize may be able to deduct eligible medical expenses they incurred for themselves, their spouses, and dependents, subject to limits. Taxpayers bear the burden to prove the expenses, to show they were paid during the tax year and weren’t reimbursed by insurance. 

 

One corporate executive and her husband deducted medical expenses of $41,648 on behalf of her father. They claimed the medical bills were paid by intrafamily loans but provided no proof that the loans had been repaid or that insurance hadn’t reimbursed them. Their records, they stated, were lost due to a hurricane and other setbacks. The U.S. Tax Court partially disallowed the deduction. (TC Memo 2022-99)

 

Contact one of our experts to discuss what expenses are eligible for deduction.

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Tax

Hurricane Ian Victims in Florida Qualify for Tax Relief

-UPDATE-

Hurricane Ian is likely to rank as one of the most destructive storms in U.S. history. The federal government has announced tax relief for all of Florida’s residents and businesses. If you’ve been affected by Hurricane Ian, visit the IRS’s dedicated webpage for details, updates, and resources: https://bit.ly/3rqYnyI

–

The IRS has provided return filing and payment extensions to taxpayers who are located in FEMA-designated areas of Florida affected by Hurricane Ian. The relief postpones various deadlines that occurred starting Sept. 23, 2022, until Feb. 15, 2023. This means individuals who have a valid extension to file their 2021 tax returns due to run out on Oct. 17, 2022, now have until Feb. 15, 2023, to file. The IRS noted, however, that because tax payments related to these 2021 returns were due on April 18, 2022, those payments aren’t eligible for this relief. For more information: https://bit.ly/3BWZyL0

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Tax

Year-End Tax Planning Ideas for Individuals

Now that fall is officially here, it’s a good time to start taking steps that may lower your tax bill for this year and next. One of the first planning steps is to ascertain whether you’ll take the standard deduction or itemize deductions for 2022. Many taxpayers won’t itemize because of the high 2022 standard deduction amounts ($25,900 for joint filers, $12,950 for singles and married couples filing separately, and $19,400 for heads of household). Also, many itemized deductions have been reduced or abolished under current law. If you do itemize, you can deduct medical expenses that exceed 7.5% of adjusted gross income (AGI), state and local taxes up to $10,000, charitable contributions, and mortgage interest on a restricted amount of debt, but these deductions won’t save taxes unless they’re more than your standard deduction.

Bunching, pushing, pulling

Some taxpayers may be able to work around these deduction restrictions by applying a “bunching” strategy to pull or push discretionary medical expenses and charitable contributions into the year where they’ll do some tax good. For example, if you’ll be able to itemize deductions this year but not next, you may want to make two years’ worth of charitable contributions this year.

Here are some other ideas to consider: Postpone income until 2023 and accelerate deductions into 2022 if doing so enables you to claim larger tax breaks for 2022 that are phased out over various levels of AGI. These include deductible IRA contributions, child tax credits, education tax credits and student loan interest deductions. Postponing income also is desirable for taxpayers who anticipate being in a lower tax bracket next year due to changed financial circumstances. However, in some cases, it may pay to accelerate income into 2022. For example, that may be the case if you expect to be in a higher tax bracket next year. If you’re eligible, consider converting a traditional IRA into a Roth IRA by year-end. This is beneficial if your IRA invested in stocks (or mutual funds) that have lost value. Keep in mind that the conversion will increase your income for 2022, possibly reducing tax breaks subject to phaseout at higher AGI levels. High-income individuals must be careful of the 3.8% net investment income tax (NIIT) on certain unearned income. The surtax is 3.8% of the lesser of: 1) net investment income (NII), or 2) the excess of modified AGI (MAGI) over a threshold amount. That amount is $250,000 for joint filers or surviving spouses, $125,000 for married individuals filing separately and $200,000 for others. As year-end nears, the approach taken to minimize or eliminate the 3.8% surtax depends on your estimated MAGI and NII for the year. Keep in mind that NII doesn’t include distributions from IRAs or most retirement plans.

It may be advantageous to arrange with your employer to defer, until early 2023, a bonus that may be coming your way. If you’re age 70½ or older by the end of 2022, consider making 2022 charitable donations via qualified charitable distributions from a traditional IRA — especially if you don’t itemize deductions. These distributions are made directly to charities from your IRA and the contribution amount isn’t included in your gross income or deductible on your return. Make gifts sheltered by the annual gift tax exclusion before year-end. In 2022, the exclusion applies to gifts of up to $16,000 made to each recipient. These transfers may save your family taxes if income-earning property is given to relatives in lower income tax brackets who aren’t subject to the kiddie tax. These are just some of the year-end steps that may save taxes.

Contact one of our experts to work on a plan that is best for you.

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Tax

Time is Running Out for the October 17th Deadline

If you requested an extension from the IRS to file your 2021 tax return, the Oct. 17 deadline is coming up soon. Taxpayers who asked for an extension should file on or before the deadline to avoid a late-filing penalty. Although Oct. 17 is the last day for most people to file, certain taxpayers may have more time; including military members and others serving in a combat zone. They typically have 180 days after they leave the combat zone to file returns and pay any taxes due. Also, taxpayers in federally declared disaster areas who already had valid extensions are given more time. Contact us right away to prepare your return to avoid penalties and claim any refund due.

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Tax

Are you aware of the Residential Clean Energy Credit?

The Clean Vehicle Credit is getting some of the attention, but the Inflation Reduction Act (IRA) also includes many new or revised home energy improvement-related tax credits. For example, the credit previously known as the Residential Energy Efficient Property (REEP) Credit is now the Residential Clean Energy Credit. Individuals are allowed a personal tax credit for solar electric, solar hot water, fuel cell, small wind energy, geothermal heat pump, and biomass fuel property installed in homes before 2024. Under the IRA, the credit has been extended for property installed before 2035. The credit is also available for qualified battery storage technology expenditures.

Contact one of our experts for more information.

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Inflation Reduction Act Of 2022 Includes Numerous Clean Energy Tax Incentives

On July 27, 2022, Sens. Joe Manchin (D-WV) and Chuck Schumer (D-NY) released legislative text for budget reconciliation legislation, also known as the Inflation Reduction Act of 2022. Twelve days later, the U.S. Senate on August 7 approved the bill on a party-line vote, with all 50 Democratic Senators voting for the legislation and all Republicans voting against it. Vice President Kamala Harris cast the decisive 51st vote in favor of the legislation. The House of Representatives then approved the bill on August 12, with all 220 Democrats voting for, and 207 Republicans voting against (with four Republicans not voting) the bill. The House made no changes to the Senate-passed bill, which President Biden signed into law on August 16.

The act includes the largest-ever U.S. investment committed to combat climate change, allocating $369 billion to energy security and clean energy programs over the next 10 years, including provisions incentivizing manufacturing of clean energy equipment and electric vehicles domestically.

Overall, the act modifies many of the current energy-related tax credits and introduces significant new credits and structures intended to facilitate long-term investment in the renewables industry.

 

Base and Bonus Credit Rate Structure

The act introduces a new credit structure whereby the tax incentives are subject to a base rate and a “bonus rate.” To qualify for the bonus rate, projects must satisfy certain wage and apprenticeship requirements implemented to ensure both the payment of prevailing wages and that a certain percentage of total labor hours are performed by qualified apprentices.

Projects under 1MW or that begin construction within 60 days of the date when Treasury publishes guidance regarding the wage and apprenticeship requirements are automatically eligible for the bonus credit.

Additional bonus credits may also be available for certain projects that are placed in service after December 31, 2022, and that meet domestic content requirements. For a project to qualify for this 10% bonus credit, taxpayers must ensure that a certain percentage of any steel, iron, or manufactured product that is part of the project at the time of completion was produced in the United States.

Facilities located in energy communities are also eligible for up to a 10% additional credit. Energy communities are defined as a brownfield site, an area with significant fossil fuel employment, or a census tract or any immediately adjacent census tract in which, after December 31, 1999, a coal mine has closed, or, after December 31, 2009, a coal-fired electric generating unit has been retired.

 

Credit Monetization Changes

The act includes two new options for the monetization of the tax credits in the form of direct pay and transferability.  Direct pay allows certain tax-exempt entities including state or local governments and Indian tribal governments to receive tax refunds in the amount of the credits as an overpayment of tax.   Taxpayers not eligible for direct pay can elect a one-time transfer of all or a portion of certain tax credits for cash to unrelated taxpayers. The cash received for the transfer of the credits is not included in the income, nor is the cash paid for the transferred credits deducted from income. The IRS may release registration requirements or other procedures to govern these tax credit transfers.

The act also increases the carryback period for certain credits to three years for credits eligible to be transferred from the current one-year carryback and extends the carryforward period two additional years, from 20 to 22 years.

 

Clean Energy Provisions

A number of additional changes to the energy related tax credits are summarized below:

 

Production Tax Credit (PTC) and Investment Tax Credit (ITC)

The PTC and ITC are extended and enhanced with the restoration to full rates for projects that begin construction prior to January 1, 2025, subject to prevailing wage and apprenticeship requirements. Wind and solar projects are also eligible for bonus credits for projects placed in service in low-income communities. Solar projects have the option to claim the PTC and the ITC is expanded to include energy storage as well as biogas and microgrid property.

 

Clean energy PTC and ITC

New technology-neutral credits will be available for qualified zero-emission facilities that begin construction after December 31, 2024. The credits begin to phase out the earlier of the calendar year when the annual greenhouse gas emissions from the production of electricity are equal to or less than 25% of the annual greenhouse gas emissions from the production of electricity in the U.S. for calendar year 2022 or 2032.

 

Carbon Capture Sequestration Credit

The act extends the “begin construction” date to December 31, 2032, and changes the credit rate and carbon capture requirements for both direct air capture and electricity-generating facilities. Qualification for the bonus rate requires satisfaction of prevailing wage and apprenticeship requirements and there is an option for all taxpayers to elect a direct payment of the credit for the first five years of operation.

 

Clean Hydrogen

A new tax credit is established for facilities that produce clean hydrogen at a qualified facility after December 31, 2022, and that begin construction prior to January 1, 2033. Taxpayers can claim the PTC or ITC with bonus rates subject to their fulfilling prevailing wage and apprenticeship requirements. All taxpayers can elect a direct payment of the credit for the first five years of operation.

 

Advanced Manufacturing Production Credit

A new production tax credit is available beginning in 2023 for each eligible renewable energy component produced by the taxpayer in the U.S. and sold to an unrelated person. Eligible components include any solar or wind component, qualifying inverters and qualifying battery components, and any applicable critical mineral. The credit is fully transferable and there is also an option for direct payment during the first five years of production.

 

Sustainable Aviation Fuel and Clean Fuel

The act includes new credits for sustainable aviation fuel used or sold as part of a qualified mixture between January 1, 2023, and December 31, 2024, and clean transportation fuel produced and sold after December 31, 2024, and before January 1, 2028.

 

Electric Vehicles

The existing $7,500 credit is modified by removing the current provision that begins phasing out the credit once a manufacturer sells 200,000 qualifying vehicles per manufacturer. The act also introduces limitations regarding domestic assembly requirements and for taxpayers with income over certain thresholds. Beginning in 2024, the act provides an option to transfer the credit to qualifying dealers and there is no credit available for purchases after December 31, 2032.

The act also establishes a new credit for previously owned clean vehicles on the initial transfer. The credit is allowed for vehicles with a sales price of $25,000 or less that have a model year at least two years old.  Similar to the credit for a new EV, this credit is limited for taxpayers with income over certain thresholds.

Immediately following President Biden’s signing of the bill,  the U.S. Department of the Treasury and the Internal Revenue Service published initial information – guidance and FAQs –  on changes to the tax credit for electric vehicles strengthened by the new legislation.

 

Alternative Refueling Property

The credit that expired on December 31, 2021, is extended and modified for property placed in service through December 31, 2032. The eligible expenses are increased and the per location limit is removed. However, beginning in 2023, only property placed in service in low-income or rural census tracts will be eligible for the credit. Prevailing wage and apprenticeship requirements must be satisfied to qualify for the full credit.

 

Commercial Clean Vehicles

Qualified commercial vehicles acquired after December 31, 2022, and before January 1, 2033, are eligible for a credit equal to the lesser of 30% of the cost of the vehicle not powered by a gasoline or diesel internal combustion engine or the incremental cost of the vehicle. The credit cannot exceed $7,500 for vehicles weighing less than 14,000 pounds or $40,000 for all other vehicles and is available only for depreciable property acquired from qualified manufacturers.

Additional clean energy and efficiency incentives for individuals included in the act include:

  • Extension, increase, and modification of nonbusiness energy property credit.
  • Residential clean energy credit.
  • Energy efficient commercial buildings deduction.
  • Extension, increase, and modifications of new energy efficient home credit.

 

Insights

  • Projects placed in service in 2022, including before the act’s date of enactment, may be eligible for the PTC and the ITC at full rates. Additional guidance around the prevailing wage and apprenticeship requirements is forthcoming and is expected to include required administrative procedures and documentation to meet the certification requirement to qualify for the bonus rates.
  • Direct pay, albeit limited in scope, in addition to the ability to transfer credits for cash, provides new flexibility in how certain tax credits may be monetized. Combined with the continuation of traditional tax equity structures, this option will impact capital and financing structures going forward.

Contact one of our experts for more information about the Inflation Reduction Act.

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Tax

IRS Provides Broad Penalty Relief for some 2019, 2020 Returns

The IRS on August 23, 2022, announced it will grant automatic penalty relief for late-file penalties imposed with respect to certain returns required to be filed for the 2019 and 2020 tax years.

Notice 2022-36 provides systemic penalty relief to taxpayers for certain civil penalties related to 2019 and 2020 returns. Penalty relief is automatic so that eligible taxpayers need not apply for it. If penalties have already been paid, the taxpayer will receive a credit or refund. However, the IRS has not yet announced if or when it will notify eligible taxpayers that it has waived their preexisting penalties pursuant to this announcement.

However, it is critical to note that some of these automatic penalty waivers are available only if a taxpayer files their delinquent returns on or before September 30, 2022. As such, there is a very short window for taxpayers with outstanding reporting obligations to file their delinquent 2019 and 2020 returns and receive this automatic penalty relief. Any penalty relief under these procedures will be credited or refunded as appropriate.

This automatic relief does not apply to penalties for fraudulent failure to file or when a taxpayer has already settled its late-file penalties via an offer in compromise, a closing agreement, or a judicial proceeding.

This chart summarizes the list of returns for which automatic penalty relief is now available.

If you have any questions about tax penalties or penalty relief, contact one of our experts.

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Tax

Tax Credit for Higher Education

It’s that time of year when students are starting or returning to college or trade school. Higher education is expensive, but taxpayers who take post-high school coursework in 2022 (or who have dependents taking such coursework) may qualify for one of two tax credits that can reduce their tax bills. The American Opportunity Tax Credit is worth up to $2,500 per eligible student for the first four years at an eligible school. The Lifetime Learning Credit tops out at $2,000 per tax return for any number of years. Income-based limits and additional rules apply.

To find out if you qualify for either credit, use this tool: http://bit.ly/36Vk6Ev , or contact one of our experts. 

 

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Tax

Home sweet home: Do you qualify for office deductions?

If you’re a business owner working from home or an entrepreneur with a home-based side gig, you may qualify for valuable home office deductions. But not everyone who works from home gets the tax break. Employees who work remotely can’t deduct home office expenses under current federal tax law. To qualify for a deduction, you must use at least part of your home regularly and exclusively as either: Your principal place of business, or A place to meet with customers, clients, or patients in the normal course of business. In addition, you may be able to claim deductions for maintaining a separate structure — such as a garage — where you store products or tools used solely for business purposes. Notably, “regular and exclusive” use means you must consistently use a specific identifiable area in your home for business. However, incidental or occasional personal use won’t necessarily disqualify you.

Rules for employees: What if you work remotely from home as an employee for an organization? Previously, people who itemized deductions could claim home office deductions as a miscellaneous expense, if the arrangement was for their employer’s convenience. But the Tax Cuts and Jobs Act suspended miscellaneous expense deductions for 2018 through 2025. So, employees currently get no tax benefit if they work from home. On the other hand, self-employed individuals still may qualify if they meet the tax law requirements. Direct and indirect expenses If you qualify, you can write off the full amount of your direct expenses and a proportionate amount of your indirect expenses based on the percentage of business use of your home. Indirect expenses include Mortgage interest, Property taxes, Utilities (electric, gas, and water), Insurance, Exterior repairs, maintenance, and Depreciation or rent under IRS tables. Important: If you itemize deductions, mortgage interest and property taxes may already be deductible. If you claim a portion of these expenses as home office expenses, the remainder is deductible on your personal return. But you can’t deduct the same amount twice as a personal deduction and again as a home office expense.

Calculating your deduction: Typically, the percentage of business use is determined by the square footage of your home office. For instance, if you have a 3,000 square-foot home and use a room with 300 square feet as your office, the applicable percentage is 10%. Alternatively, you may use any other reasonable method for determining this percentage, such as a percentage based on the number of comparably sized rooms in the home. The simplified method of keeping track of indirect expenses is time-consuming. Some taxpayers prefer to take advantage of a simplified method of deducting home office expenses. Instead of deducting actual expenses, you can claim a deduction equal to $5 per square foot for the area used as an office, up to a maximum of $1,500 for the year. Although this method takes less time than tracking actual expenses, it generally results in a significantly lower deduction. When you sell keep in mind that if you claim home office deductions, you may be in for a tax surprise when you sell your home. If you eventually sell your principal residence, you may qualify for a tax exclusion of up to $250,000 of gain for single filers ($500,000 for married couples who file jointly). But you must recapture the depreciation attributable to a home office for the period after May 6, 1997.

Contact one of our experts if you have any questions related to writing off home office expenses, the best way to compute deductions, and the tax implications when you sell your home. © 2022