When you filed your federal tax return this year, were you surprised to find you owed money? You might want to change your withholding so that this doesn’t happen again next year. You might even want to adjust your withholding if you got a big refund. Receiving a tax refund essentially means you’re giving the government an interest-free loan.

Adjust if necessary

Taxpayers should periodically review their tax situations and adjust withholding, if appropriate.

The IRS has a withholding calculator to assist you in conducting a paycheck checkup. The calculator reflects tax law changes in areas such as available itemized deductions, the child credit, the dependent credit and the repeal of dependent exemptions. You can access the IRS calculator here: https://bit.ly/33iBcZV

Life changes

There are some situations when you should check your withholding. In addition to tax law changes, the IRS recommends that you perform a checkup if you:

• Adjusted your withholding last year, especially in the middle or later part of the year,
• Owed additional tax when you filed your 2021 return,
• Received a refund that was smaller or larger than expected,
• Got married or divorced,
• Had a child or adopted one,
• Purchased a home, or
• Had changes in income.

You can modify your withholding at any time during the year, or even multiple times within a year. To do so, you simply submit a new Form W-4 to your employer. Changes typically go into effect several weeks after a new Form W-4 is submitted. (For estimated tax payments, you can make adjustments each time quarterly estimated payments are due. The next payments for 2022 are due on September 15, 2022, and January 16, 2023.)

Plan ahead now

There’s still time to remedy any shortfalls to minimize taxes due for 2022, as well as any penalties and interest. Contact us if you have any questions or need assistance. We can help you determine if you need to adjust your withholding.

© 2022

These days, most businesses have websites. But surprisingly, the IRS hasn’t issued formal guidance on when website costs can be deducted.

Fortunately, established rules that generally apply to the deductibility of business costs provide business taxpayers launching a website with some guidance as to the proper treatment of the costs. Plus, businesses can turn to IRS guidance that applies to software costs.

Hardware versus software

Let’s start with the hardware you may need to operate a website. The costs fall under the standard rules for depreciable equipment. Specifically, once these assets are operating, you can deduct 100% of the cost in the first year they’re placed in service (before 2023). This favorable treatment is allowed under the 100% first-year bonus depreciation break. Note: The bonus depreciation rate will begin to be phased down for property placed in service after calendar year 2022.

In later years, you can probably deduct 100% of these costs in the year the assets are placed in service under the Section 179 first-year depreciation deduction privilege. However, Sec. 179 deductions are subject to several limitations.

For tax years beginning in 2022, the maximum Sec. 179 deduction is $1.08 million, subject to a phaseout rule. Under the rule, the deduction is phased out if more than a specified amount ($2.7 million for 2022) of qualified property is placed in service during the year.

There’s also a taxable income limit. Under it, your Sec. 179 deduction can’t exceed your business taxable income. In other words, Sec. 179 deductions can’t create or increase an overall tax loss. However, any Sec. 179 deduction amount that you can’t immediately deduct is carried forward and can be deducted in later years (to the extent permitted by the applicable limits).

Similar rules apply to purchased off-the-shelf software. However, software license fees are treated differently from purchased software costs for tax purposes. Payments for leased or licensed software used for your website are currently deductible as ordinary and necessary business expenses.

Software developed internally

If, instead of being purchased, the website is designed in-house by the taxpayer launching the website (or designed by a contractor who isn’t at risk if the software doesn’t perform), for tax years beginning before calendar year 2022, bonus depreciation applies to the extent described above. If bonus depreciation doesn’t apply, the taxpayer can either:

1. Deduct the development costs in the year paid or incurred, or
2. Choose one of several alternative amortization periods over which to deduct the costs.

For tax years beginning after calendar year 2021, generally the only allowable treatment will be to amortize the costs over the five-year period beginning with the midpoint of the tax year in which the expenditures are paid or incurred.

If your website is primarily for advertising, you can currently deduct internal website software development costs as ordinary and necessary business expenses.

Paying a third party

Some companies hire third parties to set up and run their websites. In general, payments to third parties are currently deductible as ordinary and necessary business expenses.

Before business begins

Start-up expenses can include website development costs. Up to $5,000 of otherwise deductible expenses that are incurred before your business commences can generally be deducted in the year business commences. However, if your start-up expenses exceed $50,000, the $5,000 current deduction limit starts to be chipped away. Above this amount, you must capitalize some, or all, of your start-up expenses and amortize them over 60 months, starting with the month that business commences.

We can help

We can determine the appropriate treatment of website costs. Contact us if you want more information.

© 2022

These days, most businesses have websites. But surprisingly, the IRS hasn’t issued formal guidance on when website costs can be deducted.

Fortunately, established rules that generally apply to the deductibility of business costs provide business taxpayers launching a website with some guidance as to the proper treatment of the costs. Plus, businesses can turn to IRS guidance that applies to software costs.

Hardware versus software

Let’s start with the hardware you may need to operate a website. The costs fall under the standard rules for depreciable equipment. Specifically, once these assets are operating, you can deduct 100% of the cost in the first year they’re placed in service (before 2023). This favorable treatment is allowed under the 100% first-year bonus depreciation break. Note: The bonus depreciation rate will begin to be phased down for property placed in service after calendar year 2022.

In later years, you can probably deduct 100% of these costs in the year the assets are placed in service under the Section 179 first-year depreciation deduction privilege. However, Sec. 179 deductions are subject to several limitations.

For tax years beginning in 2022, the maximum Sec. 179 deduction is $1.08 million, subject to a phaseout rule. Under the rule, the deduction is phased out if more than a specified amount ($2.7 million for 2022) of qualified property is placed in service during the year.

There’s also a taxable income limit. Under it, your Sec. 179 deduction can’t exceed your business taxable income. In other words, Sec. 179 deductions can’t create or increase an overall tax loss. However, any Sec. 179 deduction amount that you can’t immediately deduct is carried forward and can be deducted in later years (to the extent permitted by the applicable limits).

Similar rules apply to purchased off-the-shelf software. However, software license fees are treated differently from purchased software costs for tax purposes. Payments for leased or licensed software used for your website are currently deductible as ordinary and necessary business expenses.

Software developed internally

If, instead of being purchased, the website is designed in-house by the taxpayer launching the website (or designed by a contractor who isn’t at risk if the software doesn’t perform), for tax years beginning before calendar year 2022, bonus depreciation applies to the extent described above. If bonus depreciation doesn’t apply, the taxpayer can either:

1. Deduct the development costs in the year paid or incurred, or
2. Choose one of several alternative amortization periods over which to deduct the costs.

For tax years beginning after calendar year 2021, generally the only allowable treatment will be to amortize the costs over the five-year period beginning with the midpoint of the tax year in which the expenditures are paid or incurred.

If your website is primarily for advertising, you can currently deduct internal website software development costs as ordinary and necessary business expenses.

Paying a third party

Some companies hire third parties to set up and run their websites. In general, payments to third parties are currently deductible as ordinary and necessary business expenses.

Before business begins

Start-up expenses can include website development costs. Up to $5,000 of otherwise deductible expenses that are incurred before your business commences can generally be deducted in the year business commences. However, if your start-up expenses exceed $50,000, the $5,000 current deduction limit starts to be chipped away. Above this amount, you must capitalize some, or all, of your start-up expenses and amortize them over 60 months, starting with the month that business commences.

We can help

We can determine the appropriate treatment of website costs. Contact us if you want more information.

© 2022

The U.S. Senate and House of Representatives have passed the Inflation Reduction Act (IRA). President Biden is expected to sign the bill into law shortly. The IRA includes significant provisions related to climate change, health care, and, of course, taxes. The IRA also addresses the federal budget deficit. According to the Congressional Budget Office (CBO), the IRA is projected to reduce the deficit by around $90 billion over the next 10 years.

Although the IRA falls far short of Biden’s originally proposed $2 trillion Build Back Better Act, the $430 billion package nonetheless is a sprawling piece of legislation bound to affect most Americans over time. Here’s an overview of some of what the bill includes.

Significant tax provisions

For starters, how is the federal government going to pay for all of it? Not surprisingly, new taxes are part of the equation (along with savings from, for example, lower drug prices). But the bill is designed to not raise taxes on small businesses or taxpayers earning less than $400,000 per year. Rather, wealthier targets are in the crosshairs.

The first target is U.S. corporations (other than S corporations) that have more than $1 billion in annual earnings over the previous three years. While the current corporate tax rate is 21%, it’s been well documented that many such companies pay little to no federal income tax, due in part to deductions and credits. The IRA imposes a corporate alternative minimum tax of 15% of financial statement income (also known as book income, as opposed to tax income) reduced by, among other things, depreciation and net operating losses. The new minimum tax is effective for tax years beginning after December 31, 2022.

As a result of last-minute negotiations, private equity firms and hedge funds are exempt from the minimum tax. They could have been covered by a provision that generally includes subsidiaries when determining annual earnings. The tradeoff is that the IRA now will extend the excess business loss limitation for certain businesses for two years.

Although the initial bill language also closed the so-called “carried interest” loophole that permits these interests to be taxed as long-term capital gains rather than ordinary income, the loophole ultimately survived. Democrats agreed to remove the provision closing it to secure the vote of Sen. Kyrsten Sinema (D-AZ) — but they added another tax to make up for the lost revenue. The IRA will now impose a 1% excise tax on the fair market value when corporations buy back their stock.

In a statement, Sinema said she would work with Sen. Mark Warner (D-VA) on separate legislation to enact carried interest tax reform. To do so outside of the budget reconciliation process, however, would require 60 votes in the Senate in addition to a majority of the House. With midterm elections in the fall, and control of both houses of Congress hanging in the balance, imminent action on that front seems unlikely.

The IRA also provides about $80 billion over 10 years to fund the IRS and improve its “tax enforcement activities” and technology. Notably, the IRS budget has been dramatically slashed in recent years, dropping by 20% in 2020, compared to 2010. The CBO estimates that the infusion of funds will allow the IRS to collect $203 billion over the next decade from corporations and wealthy individuals.

Climate and energy provisions

The IRA dedicates about $370 billion to combating climate change and boosting domestic energy production. It aims to reduce the country’s carbon emissions by 40% by 2030.

The legislation includes new, extended and increased tax credits intended to incentivize both businesses and individuals to boost their use of renewable energy. For example, the bill provides tax credits to private companies and public utilities to produce renewable energy or manufacture parts used in renewable projects, such as wind turbines and solar panels. Clean energy producers that pay a prevailing wage also may qualify for tax credits.

Clean vehicle credit

The current tax credit for qualified plug-in electric vehicles has been significantly revised in the IRA. Currently, a taxpayer can claim a credit for each new qualified plug-in electric drive motor vehicle placed in service during the tax year. The maximum credit amount is $7,500. Certain vehicle requirements must be met.

The credit phases out beginning in the second calendar quarter after a manufacturer sells more than 200,000 plug-in electric drive motor vehicles for use in the U.S. after 2009. Under the IRA, the plug-in vehicle credit has been renamed the clean vehicle credit and the manufacturer limitation on the number of vehicles eligible for the credit has been eliminated after December 31, 2022.

The bill changes how the clean vehicle credit is calculated. Specifically, a vehicle must meet critical mineral and battery component requirements. There are also price and income limitations. The clean vehicle credit isn’t allowed for a vehicle with a manufacturer’s suggested retail price above $80,000 for vans, sport utility vehicles and pickups, and above $55,000 for other vehicles.

The clean vehicle credit isn’t allowed if a taxpayer’s modified adjusted gross income (MAGI) for the current or preceding tax year exceeds $150,000 for single filers, $300,000 for married couples filing jointly and $225,000 for heads of household.

The IRA also contains a tax credit for a used plug-in electric drive vehicle purchased after 2022. The tax credit is $4,000 or 30% of the vehicle’s sale price, whichever is less. There are also price and income limitations.

Home energy improvements

Individual taxpayers can also receive tax breaks for home energy efficiency improvements, such as installing solar panels, energy-efficient water heaters, heat pumps and HVAC systems. And a “Clean Energy and Sustainability Accelerator” will use public and private funds to invest in clean energy technologies and infrastructure.

Health care provisions

The IRA allows Medicare to negotiate the price of prescription drugs and prohibits future administrations from refusing to negotiate. It also caps Medicare enrollees’ annual out-of-pocket drug costs at $2,000 and monthly insulin costs at $35 and provides them free vaccines. Additional provisions to rein in drug costs include a requirement that pharmaceutical companies that raise the prices on drugs purchased by Medicare faster than the rate of inflation rebate the difference back to the program.

The IRA also should reduce health care costs for Americans of all ages who obtain health insurance coverage from the federal Health Insurance Marketplace. It extends the expansion of subsidies — in the form of refundable premium tax credits — under the America Rescue Plan Act through 2025. These subsidies had been scheduled to expire at the end of 2022.

Much more to come

The IRA is a sweeping piece of legislation that affects many sectors of U.S. business, as well as most citizens. Additional information, guidance and regulations related to its numerous, far-reaching provisions are inevitable. We’ll keep you up to date on the developments that could affect your finances and federal tax liability.

© 2022

While the recently announced student loan debt relief has captured numerous headlines, it’s estimated that another federal relief program announced on the same day will provide more than $1.2 billion in tax refunds or credits. Specifically, IRS Notice 2022-36 extends penalty relief to both individuals and businesses who missed the filing deadlines for certain 2019 and/or 2020 tax and information returns. The relief covers many of the most commonly filed forms.

Broad relief for late taxpayers

The intent behind the penalty relief is two-fold: 1) to help taxpayers negatively affected by the COVID-19 pandemic, and 2) to allow the IRS to focus on processing backlogged tax returns and taxpayer correspondence. As recently as late May 2022, the IRS had a backlog of more than 21 million unprocessed paper returns. The goal is for the IRS to return to normal operations for the 2023 filing season.

To that end, the notice provides relief from the failure-to-file penalty. The penalty is typically assessed at a rate of 5% per month and up to 25% of the unpaid tax when a federal income tax return is filed late. To qualify for the relief, an income tax return must be filed on or before Sept. 30, 2022.

Banks, employers and other businesses that are required to file various information returns (for example, the Form 1099 series) also may qualify for relief. Eligible 2019 returns must have been filed by Aug. 3, 2020, and eligible 2020 returns must have been filed by Aug. 2, 2021.

Potentially eligible forms include:

• Form 1040, “U.S. Individual Income Tax Return,” and other forms in the Form 1040 series
• Form 1041, “U.S. Income Tax Return for Estates and Trusts,” and other forms in the Form 1041 series
• Form 1065, “U.S. Return of Partnership Income”
• Returns filed in the Form 1120 series including:
  • Form 1120, “U.S. Corporation Income Tax Return”
  • Form 1120-C, “U.S. Income Tax Return for Cooperative Associations”
  • Form 1120-F, “U.S. Income Tax Return of a Foreign Corporation”
  • Form 1120-FSC, “U.S. Income Tax Return of a Foreign Sales Corporation”
  • Form 1120-H, “U.S. Income Tax Return for Homeowners Associations”
  • Form 1120-L, “U.S. Life Insurance Company Income Tax Return”
  • Form 1120-ND, “Return for Nuclear Decommissioning Funds and Certain Related Persons”
  • Form 1120-PC, “U.S. Property and Casualty Insurance Company Income Tax Return”
  • Form 1120-POL, “U.S. Income Tax Return for Certain Political Organizations”
  • Form 1120-REIT, “U.S. Income Tax Return for Real Estate Investment Trusts”
  • Form 1120-RIC, “U.S. Income Tax Return for Regulated Investment Companies”
  • Form 1120-SF, “U.S. Income Tax Return for Settlement Funds (Under Section 468B)”
  • Form 1120-S, “U.S. Income Tax Return for an S Corporation”
• Form 1066, “U.S. Real Estate Mortgage Investment Conduit (REMIC) Income Tax Return”
• Forms concerning exempt organizations
• Certain international information returns

Notably, the relief doesn’t extend to failure-to-file penalties for Form 8938, “Statement of Specified Foreign Financial Assets,” or FinCEN Report 114, “Report of Foreign Bank and Financial Accounts.”

Exceptions to the rule

Some other exceptions apply. Penalty relief isn’t available if:

• A fraudulent return was filed,
• The penalty was part of an accepted offer-in-compromise or a closing agreement with the IRS, or
• The penalty was finally determined by a court.

In addition, the IRS isn’t providing relief for the failure-to- pay penalty or other penalties. Such ineligible penalties may, however, qualify for previously existing penalty relief procedures, including the reasonable cause defense or the IRS’s First Time Abatement Program.

No action required

The penalty relief is automatic. If you qualify, you need not apply for it or reach out to the IRS in any way. Penalties that have already been assessed will be abated. If you’ve already paid a covered penalty, the IRS says, you should receive a refund or credit by Sept. 30, 2022.

© 2022

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

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 us. We can address questions related to writing off home office expenses, the best way to compute deductions and the tax implications when you sell your home.

© 2022

The Inflation Reduction Act (IRA) includes a wide range of tax incentives aimed at combating the dire effects of climate change. One of the provisions receiving considerable attention from consumers is the expansion of the Qualified Plug-in Electric Drive Motor Vehicle Credit (IRC Section 30D), now known as the Clean Vehicle Credit.

While the expanded credit seems promising, questions have arisen about just how immediate its impact will be. Here’s what you need to know about the credit if you’re thinking about purchasing an electric vehicle (EV).

The credit in a nutshell

The Qualified Plug-in Electric Drive Motor Vehicle Credit has been around since 2008. For passenger vehicles and light trucks acquired after December 31, 2009, the credit starts at $2,500. Vehicles with battery capacities rated at five kilowatt hours qualify for an additional $417, plus an additional $417 for each kilowatt hour of capacity exceeding five kilowatt hours. The credit’s maximum amount is $7,500.

The credit amount begins to phase out for a manufacturer’s vehicle when at least 200,000 qualifying vehicles have been sold for use in the United States (for sales after December 31, 2009). As a result of this limitation, vehicles, including those manufactured by Tesla and General Motors, no longer qualify for the credit.

The IRA extends the newly named Clean Vehicle Credit through December 31, 2032. It also makes several significant changes to the credit, most of which will phase in over time. For example, the credit now applies to any “clean” vehicle, so a hydrogen fuel cell car or a plug-in hybrid could qualify. It also eliminates the manufacturer production cap after 2022.

The IRA leaves intact the $7,500 max credit amount but bifurcates it. You can earn a $3,750 credit if the qualifying vehicle meets a critical minerals requirement and another $3,750 credit if the vehicle meets a new battery component requirement (see “Potential hurdles” below).

The credit now includes income limitations, too. It’s not available to:

• Single filers with modified adjusted gross income (MAGI) over $150,000,
• Married couples filing jointly with MAGI over $300,000, or
• Heads of household with MAGI over $225,000.

The credit is also limited by the price of the vehicle. Vans, pickup trucks and SUVs with manufacturer’s suggested retail prices (MSRPs) of more than $80,000 don’t qualify. Other cars must have MSRPs no higher than $55,000.

One critical change took effect immediately after President Biden signed the bill into law: the so-called “final assembly” requirement. It limits the credit to vehicles for which final assembly occurred in North America. Final assembly generally refers to the production of an EV at the location from which it’s delivered to a seller with all of the necessary component parts included. The requirement is designed to encourage domestic production.

The IRS has established a two-step process to check whether a specific vehicle satisfies the final assembly requirement. First, check the Department of Energy’s Alternative Fuels Data Center’s list of 2022 and 2023 EVs that likely meet the requirement (https://bit.ly/3An4yYz). Be aware that because some models are assembled in multiple locations, some of the listed vehicles might not meet the requirement.

Then, to confirm that a specific vehicle’s final assembly occurred in North America, enter its Vehicle Identification Number (VIN) into the National Highway Traffic Safety Administration’s VIN decoder tool (https://bit.ly/3dOLUkF). By scrolling to the bottom of the result page, you’ll see the vehicle’s “Plant Information,” which includes the country where the plant is located.

For now, taxpayers who purchase qualifying EVs will continue to claim a credit on their annual tax returns. The IRA, however, provides an alternative — and much more taxpayer-friendly — option beginning in 2024. At that point, EV purchasers can transfer their credit to dealers at the point of sale, rather than waiting to claim it on their annual tax returns. The credit will directly and immediately reduce the purchase price.

Potential hurdles

The IRA imposes “applicable percentage” requirements for critical minerals and battery components. At least 40% of critical minerals must be 1) processed or extracted from the United States or a country with which the United States has a free trade agreement, or 2) recycled in North America. At least 50% of battery components must be manufactured or assembled in North America.

The initial percentages will take effect after the IRS issues proposed guidance, which the IRA mandates occur before December 31, 2022. The percentages then ramp up over time, peaking at 80% of critical minerals after 2026 and 100% of battery components after 2028.

And the credit isn’t available for vehicles with critical minerals or battery components from a “foreign entity of concern,” including China and Russia. The critical mineral exclusion takes effect for vehicles placed in service after 2024. The battery component exclusion is effective for vehicles placed in service after 2023.

These rules have raised concerns among the automotive industry, particularly as a substantial amount of the supply chain for minerals and battery components is located in China.

Transitional relief for purchasers

What if you signed a contract on an EV before August 16, 2022, when the IRA was enacted, but haven’t yet received the vehicle? The IRS has stated that the changes in the law won’t affect your tax credit. You can claim it under the rules in effect when you signed the purchase contract.

Unfortunately, that means the manufacturer cap will still apply. If you purchase a vehicle from a manufacturer that hit the 200,000 vehicle threshold more than a year prior, you don’t qualify for the EV credit. On the other hand, the final assembly requirement won’t apply.

If you purchase and take possession of a qualifying EV after the law was signed (August 16, 2022) but before January 1, 2023, the only difference to the prior rules is the applicability of the final assembly requirement. That means the manufacturer cap also would apply to your purchase. So, if you’re interested in a model that’s disqualified under the cap, it might pay off to wait until 2023 if the vehicle meets the requirements then.

New credits for used and commercial vehicles

The IRA also creates tax credits for used EVs (Sec. 25E) and commercial EVs (Sec. 45W), both starting in 2023. The IRS has indicated it will release more information on these credits in the coming months.

According to the IRA, the Sec. 25E credit is worth the lesser of $4,000 or 30% of a qualified vehicle’s sale price. The sale price can’t exceed $25,000. The credit is available only for EVs with model years at least two years earlier than the year of purchase. No credit is available if the lesser of the taxpayer’s MAGI for the year of purchase or the preceding year exceeds:

• $75,000 for single filers,
• $150,000 for married couples filing jointly, or
• $112,500 for heads of household.

The credit for commercial EVs is the lesser of 1) 15% of the vehicle’s basis (30% for vehicles not powered by a gas or diesel engine) or 2) the incremental cost of the vehicle over the cost of a comparable gas- or diesel-powered vehicle. The maximum credit per vehicle is $7,500 for vehicles with a gross vehicle weight under 14,000 pounds and $40,000 for heavier vehicles.

Only the beginning

The IRS and Treasury Department have promised to issue additional guidance about the various new and existing EV-related tax credits in the coming weeks and months. We’ll keep you up to date on new developments.

© 2022

The Creating Helpful Incentives to Produce Semiconductors for America Act (CHIPS Act) was recently passed by Congress as part of the CHIPS and Science Act of 2022. President Biden is expected to sign it into law shortly. Among other things, the $52 billion package provides generous tax incentives to increase domestic production of semiconductors, also known as chips. While the incentives themselves are narrowly targeted, the expansion of semiconductor production should benefit a wide range of industries.

In particular, it could reduce the risks of future supply chain issues for the many goods and devices that rely on semiconductor chips, from cell phones and vehicles to children’s toys. The law also is intended to address national security concerns related to the reliance on foreign production of semiconductors.

The impetus

Although the United States developed and pioneered chip technology, many legislators have determined that the country has become too reliant on foreign producers. According to the government, American companies still account for almost half of all revenues in the global semiconductor industry, but the U.S. share of global chip production has fallen from 37% in 1990 to only 12% today. Seventy-five percent of semiconductor production occurs in East Asia. This situation poses a national and economic security threat, according to Congress.

Government subsidies are responsible for up to 70% of the cost difference in producing semiconductors overseas, giving foreign producers a 25% to 40% cost advantage over U.S. producers. The grants in the CHIPS Act, combined with a new tax credit, are intended to fully make up for this cost differential and thereby incentivize the “re-shoring” of semiconductor production.

The new tax credit

The CHIPS Act creates a temporary “advanced manufacturing investment credit” for investments in semiconductor manufacturing property, to be codified in Section 48D of the Internal Revenue Code. The Sec. 48D credit amounts to 25% of qualified investment related to an advanced manufacturing facility — that is, a facility with the primary purpose of manufacturing semiconductors or semiconductor manufacturing equipment.

Qualified property is tangible property that:

• Qualifies for depreciation or amortization,
• Is constructed, reconstructed or erected by the taxpayer or acquired by the taxpayer if the original use of the property begins with the taxpayer, and
• Is integral to the operation of the advanced manufacturing facility.

It also can include a building, a portion of a building (other than a portion used for functions unrelated to manufacturing, such as administrative services) and certain structural components of a building.

The credit is available for qualified property placed in service after December 31, 2022, if construction begins before January 1, 2027. If construction began before the CHIPS Act was enacted, though, only the portion of the basis attributable to construction begun after enactment is eligible.

Taxpayers generally are eligible for the credit if they aren’t designated as a “foreign entity of concern.” That term generally refers to certain entities that have been deemed foreign security threats under previous defense authorization legislation or those with conduct that has been ruled detrimental to U.S. national security or foreign policy.

The CHIPS Act additionally excludes taxpayers that have made an “applicable transaction” (for example, the early disposition of investment credit property under Sec. 50(a)). Applicable transactions also include any “material expansion” of the taxpayer’s semiconductor manufacturing capacity in China or other designated “foreign countries of concern.” The law provides for recapture of the credit if a taxpayer enters such a transaction within 10 years of claiming the credit.

Notably, eligible taxpayers can claim the credit as a payment against tax — what’s known as “direct pay.” In other words, taxpayers can receive a tax refund if they don’t have sufficient tax liability to use the credit. Without this option, eligible taxpayers could struggle to monetize their credits.

Additional provisions

The CHIPS Act also provides:

• $39 billion in subsidies to build, expand or modernize domestic facilities and equipment for semiconductor fabrication, assembly, testing, advanced packaging or research, and development,
• $200 million for workforce development and training, and
• $1.5 billion to spur wireless supply chain innovation.

It includes almost $170 billion for governmental research and development, as well.

Stay tuned

If your business might qualify for the new tax credit, keep an eye out for additional IRS guidance on just how it will work, including the direct pay provision. We can help you make the most of this and other tax credits.

© 2022

Here are some of the key tax-related deadlines affecting businesses and other employers during the fourth quarter of 2022. Keep in mind that this list isn’t all-inclusive, so there may be additional deadlines that apply to you. Contact us to ensure you’re meeting all applicable deadlines and to learn more about the filing requirements.

Note: Certain tax-filing and tax-payment deadlines may be postponed for taxpayers who reside in or have businesses in federally declared disaster areas.

Monday, October 3

The last day you can initially set up a SIMPLE IRA plan, provided you (or any predecessor employer) didn’t previously maintain a SIMPLE IRA plan. If you’re a new employer that comes into existence after October 1 of the year, you can establish a SIMPLE IRA plan as soon as administratively feasible after your business comes into existence.

Monday, October 17

• If a calendar-year C corporation that filed an automatic six-month extension:
  • File a 2021 income tax return (Form 1120) and pay any tax, interest and penalties due.
  • Make contributions for 2021 to certain employer-sponsored retirement plans.

Monday, October 31

• Report income tax withholding and FICA taxes for third quarter 2022 (Form 941) and pay any tax due. (See exception below under “November 10.”)

Thursday, November 10

• Report income tax withholding and FICA taxes for third quarter 2022 (Form 941), if you deposited on time (and in full) all of the associated taxes due.

Thursday, December 15

• If a calendar-year C corporation, pay the fourth installment of 2022 estimated income taxes.

Contact us if you’d like more information about the filing requirements and to ensure you’re meeting all applicable deadlines.

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Here are some of the key tax-related deadlines affecting businesses and other employers during the fourth quarter of 2022. Keep in mind that this list isn’t all-inclusive, so there may be additional deadlines that apply to you. Contact us to ensure you’re meeting all applicable deadlines and to learn more about the filing requirements.

Note: Certain tax-filing and tax-payment deadlines may be postponed for taxpayers who reside in or have businesses in federally declared disaster areas.

Monday, October 3

The last day you can initially set up a SIMPLE IRA plan, provided you (or any predecessor employer) didn’t previously maintain a SIMPLE IRA plan. If you’re a new employer that comes into existence after October 1 of the year, you can establish a SIMPLE IRA plan as soon as administratively feasible after your business comes into existence.

Monday, October 17

• If a calendar-year C corporation that filed an automatic six-month extension:
  • File a 2021 income tax return (Form 1120) and pay any tax, interest and penalties due.
  • Make contributions for 2021 to certain employer-sponsored retirement plans.

Monday, October 31

• Report income tax withholding and FICA taxes for third quarter 2022 (Form 941) and pay any tax due. (See exception below under “November 10.”)

Thursday, November 10

• Report income tax withholding and FICA taxes for third quarter 2022 (Form 941), if you deposited on time (and in full) all of the associated taxes due.

Thursday, December 15

• If a calendar-year C corporation, pay the fourth installment of 2022 estimated income taxes.

Contact us if you’d like more information about the filing requirements and to ensure you’re meeting all applicable deadlines.

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If you’re charitably inclined, it may be desirable to donate assets held in a trust. Why? Perhaps you’re not ready to let go of assets you hold individually. Or maybe the tax benefits of donating trust property would be more attractive than making an individual donation.

Before moving forward, it’s important to understand the differences, for tax purposes, between individual and trust donations and the circumstances under which donations by a trust are deductible.

Tax treatment of individual donations

Generally, you’re permitted to deduct charitable donations for income tax purposes only if you itemize. Itemized charitable deductions for cash gifts to public charities generally are limited to 50% of adjusted gross income (AGI), while cash gifts to private foundations are limited to 30% of AGI. Note that through 2025, the Tax Cuts and Jobs Act increased the limit for certain cash gifts to public charities to 60% of AGI.

Noncash donations to public charities generally are limited to 30% of AGI and 20% for donations to private foundations. If you donate appreciated long-term capital gain property to a public charity, you’re generally entitled to deduct its full fair market value. But with the exception of publicly traded stock, deductions for similar donations to private foundations are limited to your cost basis in the property.

Deductions for ordinary income property (including short-term capital gain property) are limited to your cost basis, regardless of the recipient.

Tax treatment of trust donations

The discussion that follows focuses on nongrantor trusts. Because grantor trusts are essentially ignored for income tax purposes, charitable donations by such trusts are treated as if they were made directly by the grantor, subject to the rules applicable to individual donations. Also, this article doesn’t discuss trusts that are specifically designed for charitable purposes, such as charitable remainder trusts or charitable lead trusts.

Making charitable donations from a nongrantor trust may have several advantages over individual donations, including the ability to claim a charitable deduction even if you don’t itemize deductions on your individual income tax return. And a trust can deduct up to 100% of its gross taxable income, free of the AGI-based percentage limitations previously discussed.

In addition, trust deductions can be more valuable than individual deductions because the highest tax rates for trust income kick in at much lower income levels. If you’re contemplating a charitable donation from a trust, there are a few caveats to keep in mind:

• The trust instrument must authorize charitable donations.
• The donation must be made from (that is, traceable to) the trust’s gross taxable income. This includes donations of property acquired with such income, but not property that was contributed to the trust.
• Unlike certain individual charitable donations, deductions for noncash donations by a trust generally are limited to the asset’s cost basis.

Special rules apply to trusts that own interests in partnerships or S corporations, as well as to certain older trusts (generally, those created on or before Oct. 9, 1969).

Make the most of charitable deductions

If income limits or restrictions on itemized deductions have hampered your ability to deduct charitable donations, consider making donations from a trust. We can help you determine if this is a tax-wise option for your situation.

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Many offices, plants and other business facilities are once again filled with real, live people. And those hard-working employees need somewhere to park. If your company provides parking as a fringe benefit — either on or near your premises or at a location from which employees commute — the IRS may take an interest in the arrangement.

A recently revised IRS webpage intended for charities and nonprofits highlights the tax rules applicable to employer-provided parking and what the tax agency will want to know in the event of an audit. The content is informative for businesses as well.

Parking as a benefit

Employers are allowed to provide tax-free parking to employees as a qualified transportation fringe benefit under Internal Revenue Code Section 132(f). The dollar amount of qualified parking expenses that may be excluded from an employee’s gross income cannot exceed a statutory maximum, which is subject to annual cost-of-living adjustments. For 2022, the maximum is $280 per month.

The IRS webpage explains that the value of employer-provided parking must be determined following the same general rules as those used for valuing other fringe benefits under Treasury regulations. These rules provide that an employer must include in an employee’s gross income the amount by which the fair market value of the benefit exceeds the sum of the amount, if any, paid for the benefit by or on behalf of the recipient. Any amount specifically excluded under other applicable rules must also be documented.

The fair market value, which is determined based on all the facts and circumstances, is generally the amount that an individual would have to pay for parking at the same or a comparable site in an arm’s length transaction.

Tips for auditors

The IRS webpage also provides tips for its auditors, who could encounter qualified parking benefits as part of their examinations. Auditors are advised to:

• Determine whether the employer provides parking for any employees,
• Request a list of employees entitled to receive employer-provided parking,
• Determine whether the employer includes any portion of the benefit in employees’ wages,
• Request the method used to determine the value of the parking benefit, and
• Conduct a survey, if necessary, of nearby parking facilities to determine the fair market value of the benefit.

Valuation issues generally arise with respect to qualified parking only where it’s provided “in-kind” by the employer — in other words, where the employer provides parking at its own lot.

Thorough documentation

If your company provides a qualified parking benefit, be sure to thoroughly document how you determine the value of that benefit. You’ll need to produce the documentation if you get audited. We can help you prepare for and fulfill your obligations during an IRS audit, as well as assist you in choosing fringe benefits and keeping accurate records of those you provide.

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