Month: October 2024

Preface:  “One of the most exciting opportunities created by renewable energy technologies like solar is the ability to help the world’s poorest develop faster – but more sustainably too.” – Ed Davey

The Investment Energy Credit for Businesses

Section 48 of the Internal Revenue Code provides a tax credit for businesses that invest in properties that conserve or produce certain types of energy. The credit is generally worth 30% of the cost of the property if conditions are met. Bonus credits can increase the total value of the credit even more.

There is also a Production Tax Credit under Section 45 that can be claimed for the production of clean electricity on a per kilowatt-hour basis, but we will only address the Investment Tax Credit here. You cannot take the Investment Tax Credit and the Production Tax Credit on the same property.

Types of energy property that can be used to claim the credit include: geothermal, fuel cell, microturbine, small wind, biogas, microgrid controllers, energy storage, solar illumination, combined heat and power systems, waste energy recovery, and clean hydrogen production.

This credit is only available for depreciable property for which original use begins with the taxpayer.

The credit can be taken by individuals if they are sole proprietors or if they are partners or shareholders in pass-through entities that pass through part of the credit to them. Like all business credits, it is non-refundable, and any unused portion can be carried forward for up to 20 years.

The credit is claimed on Form 3468 parts I & VI. Part I reports the facility where the property has been installed, and Part VI claims the Energy Credit.

The 1MW Exception

A separate claim must be filed for each facility for which the credit is claimed. If the facility produces more than 1 megawatt of alternating current or equivalent, you must file an application with the Department of Energy confirming that you agree to meet prevailing wage and apprenticeship requirements. Once the facility is in service, you must notify the DOE and confirm that the requirements were met. Failure to make these notifications will result in the credit being only 6% instead of 30%. 

To put this limit in perspective, consider that 1 megawatt is enough electricity to power about 600 homes.

Domestic Content Bonus Credit and Energy Community Bonus Credit

The Domestic Content Bonus Credit adds an additional 10% to the credit if you attach a signed declaration that all steel, iron, or manufactured products that are a part of the facility were produced in the United States.

The Energy Community Bonus Credit adds an additional 10% to the credit if the facility is located in either:

• A brownfield site; or
• The site of a coal mine closed after 1999 or a coal-fired power plant closed after 2009; or
• A statistical area with at least the national average of unemployment and at least 0.17% direct employment in or at least 25% local tax revenue related to coal, oil, or natural gas

The Domestic Content Bonus Credit and Energy Community Bonus Credit are not mutually exclusive. However, these two types of bonus credit are each worth only 2% instead of 10% unless the energy project has either:

• Maximum net output of less than 1 megawatt; or
• Its construction began before January 29, 2023; or
• It meets the prevailing wage and apprenticeship requirements

Low-Income Communities Bonus Credit

For solar and wind facilities, the credit may also be increased:

• An additional 10% if installed on Indian land; or
• An additional 10% if installed in a low-income community; or
• An additional 20% if part of a qualified low-income residential building; or
• An  additional 20% if part of a qualified low-income economic benefit project

You must apply and be approved to receive any kind of Low-Income Communities Bonus Credit.

In principle, if you were eligible for both the Domestic Content and Energy Community Bonus Credits and qualified for either the low-income residential building or qualified low-income economic benefit project part of the Low-Income Communities Bonus Credit, you could recoup 70% of your costs as a tax credit.

Preface: “I have had many anxieties for our commonwealth, principally occasioned by the depreciation of our money.” – Patrick Henry

Accelerated Depreciation Rules for 2024: A Comprehensive Guide

Depreciation is an essential concept for businesses when it comes to managing assets and maximizing tax savings. In 2024, accelerated depreciation rules continue to play a critical role in providing tax relief by allowing businesses to write off the cost of capital assets more quickly than under traditional depreciation methods. This results in reduced taxable income in the earlier years of an asset’s life, improving cash flow for businesses.

This blog explores the accelerated depreciation rules for 2024, with a particular focus on key provisions such as Bonus Depreciation and Section 179 Expensing. By understanding how these rules work, businesses can make strategic decisions on purchasing equipment, property, and other capital assets.

1. What is Accelerated Depreciation?

Accelerated depreciation allows businesses to deduct a larger portion of an asset’s cost in the earlier years of its useful life. This is in contrast to straight-line depreciation, where the cost is spread evenly over the asset’s life. Accelerated depreciation can offer significant tax advantages by reducing taxable income in the short term.

The two main methods of accelerated depreciation used in the U.S. tax system are Bonus Depreciation and Section 179 Expensing, both of which allow businesses to deduct significant amounts of the cost of assets in the year they are placed in service.

2. Bonus Depreciation in 2024

One of the most impactful provisions of the Tax Cuts and Jobs Act (TCJA) was the expansion of Bonus Depreciation, which allows businesses to deduct a significant portion of the cost of qualified property in the first year of service.

Under current rules, Bonus Depreciation has been set at 60% for 2024, which represents a reduction from the 100% level available in 2022. This means that businesses can immediately deduct 60% of the cost of eligible assets in the year they are purchased and put into service, with the remaining 20% depreciated over the asset’s useful life.

What Qualifies for Bonus Depreciation?

To qualify for Bonus Depreciation, a property must meet specific criteria:

• • • The property must be new or used (as long as it’s the first time the asset is used by the taxpayer).
    • Eligible property includes tangible personal property such as machinery, equipment, computers, furniture, and certain building improvements.
    • The asset must have a useful life of 20 years or less. This includes equipment, vehicles, and office furniture, but excludes most buildings.

Key Changes for 2024

The phased reduction of Bonus Depreciation continues, with the rate set to decline to 40% in 2025. This gradual decrease emphasizes the importance of timing for businesses planning major purchases. Accelerating capital investments in 2024 could help businesses take advantage of the higher deduction rate before it drops further.

3. Section 179 Expensing

Another essential provision that works alongside Bonus Depreciation is Section 179 Expensing. Under Section 179, businesses can elect to deduct the full cost of qualifying equipment and software in the year the asset is purchased and placed in service, up to a certain limit.

Section 179 Limits for 2024

For 2024, the maximum deduction businesses can take under Section 179 is expected to be around $1.22 million, with a phase-out threshold of $3.050 million. This means that businesses can immediately expense up to $1.22 million of qualifying property, but if the total cost of qualifying property exceeds $3.050 million, the amount eligible for deduction begins to phase out dollar for dollar.

What Qualifies for Section 179?

To be eligible for Section 179 Expensing, the property must be tangible and used in business. Some examples include:

• • • Equipment and machinery used for business purposes
    • Computers and office furniture
    • Software (off-the-shelf)
    • Certain improvements to nonresidential property, such as HVAC systems, fire protection, and alarm systems

One major benefit of Section 179 is that it allows businesses to take the deduction for both new and used property. Additionally, businesses have more flexibility with Section 179 because it is an election they can choose to make, unlike Bonus Depreciation which is automatic.

4. The Interaction Between Bonus Depreciation and Section 179

While Bonus Depreciation and Section 179 can both provide substantial tax savings, businesses need to understand how they interact. Section 179 is generally applied first, allowing businesses to immediately expense up to the limit. After the Section 179 deduction, Bonus Depreciation can be applied to the remaining eligible basis of the property.

For example, if a business purchases $1.5 million worth of equipment in 2024, it can deduct $1.22 million using Section 179, and then apply Bonus Depreciation to the remaining $280,000. With 60% Bonus Depreciation, the business can deduct an additional $168,000, leaving only $112,000 to be depreciated over time.

5. Key Considerations for Businesses

Businesses looking to invest in capital assets in 2024 should carefully consider the timing of their purchases to maximize their tax benefits. With Bonus Depreciation set to phase down in future years, and Section 179 thresholds changing with inflation, 2024 represents an important year to take advantage of accelerated depreciation options.

It’s also important to note that while accelerated depreciation provides immediate tax relief, it reduces future depreciation deductions. Businesses need to weigh the benefits of short-term tax savings against long-term planning considerations.

Conclusion

Accelerated depreciation rules for 2024 offer businesses the opportunity to reduce their tax burden and increase cash flow by expensing a large portion of capital investments in the year they are purchased. By understanding the mechanics of Bonus Depreciation and Section 179, businesses can strategically plan their asset purchases to optimize tax savings. As always, consulting with a CPA or tax professional is recommended to ensure compliance with the latest regulations and to make the best use of these provisions.

Preface: “Taxes are not trivial – they’re a huge portion of this overall economy. And that’s why I focused on them.”  -Arthur Laffer

Arthur Laffer’s Taxes Have Consequences: A Dive into Economic History and Taxation

Arthur Laffer, widely known for the “Laffer Curve” concept in economics, has long been a thought leader on tax policy, growth, and the interplay between taxation and economic activity. His book Taxes Have Consequences provides a deep historical analysis of the impact taxes have had on American society and economic development over centuries. Co-authored with Brian Domitrovic and Jeanne Cairns Sinquefield, the book isn’t just a theoretical exploration of tax policy but an empirical one, backed by a wealth of historical data and economic insights. Through it, Laffer and his co-authors explore pivotal moments in U.S. history to illustrate the profound consequences taxes have had on the country’s economic trajectory.

Key Themes of the Book

1. The Laffer Curve in Historical Context

At the heart of Taxes Have Consequences lies the Laffer Curve, a concept that Laffer is famous for popularizing. It posits that there is an optimal tax rate that maximizes government revenue without stifling economic growth. Too high a tax rate discourages productivity and can reduce tax revenue, while too low a rate doesn’t capture enough revenue to fund essential government services. The authors use this model as a guiding principle to explore various historical tax policies and their outcomes. The curve isn’t presented as a static formula but as a dynamic principle, dependent on the time, economic environment, and political context.

One of the key points in the book is that U.S. economic growth has often been directly impacted by changes in tax rates. High tax rates, particularly on income, have consistently led to slower economic growth, reduced investment, and often less tax revenue than anticipated. Meanwhile, when taxes are reduced, the economy has generally experienced periods of growth, higher employment, and, in some cases, increased government revenues due to a larger tax base.

2. The Historical Impact of Taxation

The authors provide a chronological tour of American history, highlighting the profound impact that taxation has had on various eras. One of the most striking observations they make is that the modern era of high taxation (particularly the mid-20th century) is an anomaly when compared to the broader history of taxation in America. For much of the nation’s early history, federal taxes were minimal, and income taxes, in particular, were rare and low.

The book discusses key periods in U.S. history where tax policy played a defining role, such as the post-World War II era and the tax cuts of the 1980s under President Ronald Reagan. The 1920s are cited as a critical example where, following tax cuts by Treasury Secretary Andrew Mellon, the economy boomed. Conversely, the authors argue that the high tax rates imposed in the late 1960s and 1970s were responsible for the stagflation and economic stagnation of that period. The lesson is clear: taxes do have significant consequences, and history provides numerous examples of how tax policy can either boost or hinder economic performance.

3. Tax Cuts and Economic Growth

A key theme in the book is the positive impact that tax cuts can have on economic growth. Laffer and his co-authors repeatedly show how lower tax rates have historically led to increased investment, job creation, and overall prosperity. This point is driven home with detailed discussions on the tax cuts of the 1920s, 1960s, and 1980s. The book highlights the actions of policymakers like John F. Kennedy and Ronald Reagan, both of whom embraced lower tax rates as a means of stimulating economic activity.

The 1980s tax cuts under Reagan, which were influenced in part by Laffer’s own economic theories, serve as a centerpiece for this argument. The authors explain that not only did the cuts lead to robust economic growth, but they also increased federal revenue as the economy expanded and more people were employed. This period is contrasted with the high-tax, high-inflation years of the 1970s, showing the sharp differences in outcomes.

4. The Moral Argument Against High Taxes

Beyond the economic rationale, Taxes Have Consequences also makes a moral argument against high taxes. Laffer and his co-authors suggest that taxation should be viewed as a moral issue because it involves the government taking the earnings of individuals. They argue that excessively high taxes discourage individual initiative and entrepreneurship, which are the engines of innovation and economic progress. When the government overtaxes its citizens, it not only harms the economy but also limits personal freedom and autonomy.

Important Historical Quotations

Laffer and his co-authors use a range of historical quotations throughout the book to reinforce their points. One particularly notable quote is from John F. Kennedy, who famously said, “It is a paradoxical truth that tax rates are too high today and tax revenues are too low, and the soundest way to raise revenues in the long run, is to cut rates now.” This quotation encapsulates the central message of the book: lower tax rates can lead to higher government revenue, as they stimulate economic activity.

Another key quote comes from Treasury Secretary Andrew Mellon, a staunch advocate of low taxes in the 1920s, who stated, “An industrious people increases the wealth of a nation. The government should not unnecessarily impede that growth.” This perspective aligns with the authors’ argument that governments should focus on policies that encourage growth rather than burdening citizens with excessive taxes.

Conclusion

Taxes Have Consequences is a comprehensive and insightful exploration of tax policy in the United States. Arthur Laffer, along with Brian Domitrovic and Jeanne Cairns Sinquefield, uses historical evidence and economic theory to demonstrate the profound impact taxes have had on American economic development. The book highlights that while taxes are necessary for funding government functions, there is a delicate balance that must be struck. Too high a tax rate can stifle growth, while too low a rate can underfund essential services. Ultimately, the authors argue that history teaches us one crucial lesson: taxes do indeed have consequences, and wise policy must account for them.

Preface: “Taxes are what we pay for civilized society.” — Oliver Wendell Holmes, Jr., U.S. Supreme Court Justice

2024 Tax Planning – Ideas for Business Owners to Save on Taxes

As a business owner, you’re always looking for ways to reduce costs, and taxes can be one of the biggest expenses you face each year. While paying taxes is inevitable, there are numerous strategies to reduce your tax burden legally and efficiently. By understanding the tax code, planning, and leveraging available deductions, you can retain more of your profits. Here are several creative and effective ways business owners can save on taxes:

1. Take Advantage of Business Deductions

One of the most straightforward ways to save on taxes is by maximizing your business deductions. 

Any expense that is “ordinary and necessary” to running your business is typically tax-deductible. These can include:

• • • Office supplies, equipment, and software
    • Marketing and advertising costs
    • Utilities and rent for office space
    • Insurance premiums
    • Professional services like legal and accounting fees

The key here is diligent record-keeping. By tracking all of your expenses, you can ensure that you capture every deduction available.

2. Claim Home Office Deduction

If you operate your business from a home office, you can claim a portion of your home expenses as a deduction. The IRS allows you to deduct expenses related to your home office, such as a percentage of your mortgage or rent, utilities, and maintenance. The space must be exclusively used for business purposes to qualify. This deduction can be substantial, especially for business owners who work primarily from home.

The home office deduction can be calculated using either the simplified method (a flat rate of $5 per square foot of your home used for business, up to 300 square feet) or the regular method, which involves calculating actual expenses based on the percentage of your home devoted to business.

3. Set Up a Retirement Plan

Business owners can reduce their taxable income by contributing to retirement accounts. There are several retirement savings options available for small business owners:

SEP-IRA (Simplified Employee Pension): Allows you to contribute up to 25% of your net earnings from self-employment, up to $69,000 for 2024.

Solo 401(k): Ideal for sole proprietors or businesses without employees, allowing contributions up to $69,000 (or $76,500 if you’re over 50).

SIMPLE IRA: A good option for businesses with employees, where you can contribute up to $16,000 ($19,500 if over 50) as an employee and provide matching contributions.

By setting up a retirement plan, not only are you investing in your future, but you’re also reducing your taxable income in the present.

4. Take Advantage of Section 179 Deductions

Section 179 of the tax code allows businesses to deduct the full purchase price of qualifying equipment and software in the year it is placed in service. This immediate deduction can be a huge tax saver for business owners, especially those making significant equipment purchases. For 2023, the maximum deduction is $1,220,000, with a spending cap of $3,050,000. This deduction is designed to encourage businesses to invest in equipment and technology that will drive growth.

Whether you’re buying machinery, computers, or vehicles for business purposes, Section 179 is an excellent way to lower your tax liability quickly.

5. Hire Family Members

Hiring family members, such as your spouse or children, can be a savvy tax-saving strategy. If your spouse works in the business, you can contribute to retirement accounts on their behalf, thereby doubling your contributions.

For children, the IRS allows business owners to employ their children without being subject to payroll taxes, as long as they are under 18 and the business is a sole proprietorship or partnership. The wages you pay your children are tax-deductible, reducing your business’s taxable income.

The income paid to your children can also be taxed at their lower income tax rate, which could further reduce the overall family tax burden.

6. Utilize the Qualified Business Income (QBI) Deduction

The 199A tax deduction, also known as the Qualified Business Income (QBI) Deduction, is a tax provision that provides a potential tax break for business owners by allowing them to deduct up to 20% of their qualified business income (QBI) from certain pass-through entities. The deduction is available through 2025 unless extended by future legislation.

Here’s what you need to know about the 199A tax deduction for 2024:

1. Eligibility for the 199A Deduction

The 199A deduction is available to owners of pass-through businesses. These include:

• • • • • • Sole proprietorships
          • Partnerships
          • S Corporations
          • Limited Liability Companies (LLCs)
          • Certain trusts and estates

Pass-through businesses are those where the income “passes through” to the owner’s personal tax return, rather than being taxed at the corporate level.

2. Qualified Business Income (QBI)

The 199A deduction is based on Qualified Business Income (QBI), which is the net income earned from your business, excluding certain items like:

• • • • • • Capital gains and losses
          • Interest income
          • Dividends
          • Wages earned as an employee

In simple terms, QBI is the profit from your business after deducting ordinary expenses. The deduction allows you to potentially exclude up to 20% of this income from taxation.

7. Deduct Health Insurance Premiums

Self-employed business owners can deduct health insurance premiums for themselves, their spouses, and their dependents. This deduction is “above the line,” meaning you don’t need to itemize to claim it. For businesses with employees, providing health insurance can also result in additional deductions and tax credits, such as the Small Business Health Care Tax Credit, which can cover up to 50% of health insurance premiums paid for employees. To qualify in Pennsylvania, you must meet the following parameters:

• • • Have fewer than 25 full-time employees;
    • The average employee salary for your business is roughly $50,000 per year or less;
    • You offer health insurance coverage to full-time employees through the SHOP Marketplace;​
    • You pay at least 50 percent of your full-time employee’s premium costs.​

8. Leverage Depreciation Deductions

In addition to Section 179, businesses can also benefit from bonus depreciation. For 2024, businesses can write off 60% of the cost of qualifying assets in the first year. Depreciation deductions apply to assets with a useful life of more than one year, such as vehicles, machinery, and buildings. By accelerating depreciation, you can reduce taxable income now, rather than spreading the deduction over several years.

9. Charitable Contributions

If your business supports charitable causes, you can deduct charitable contributions made to qualifying organizations supporting your local community or overseas. Businesses structured as corporations can deduct up to 10% of their taxable income to these organizations and non-profits, while pass-through entities can deduct donations through the individual tax return of the business owner on Schedule A.

10. Keep an Eye on Tax Credits

Tax credits are often more valuable than deductions because they directly reduce the amount of tax owed, rather than just lowering taxable income. Some credits available to businesses include:

• • • Research and Development (R&D) Credit: For businesses investing in new technologies or improving products.
    • Work Opportunity Tax Credit: For hiring individuals from certain target groups, such as veterans or long-term unemployed.
    • Energy Efficiency Credits: For businesses that invest in energy-efficient buildings or renewable energy.

Conclusion

As a business owner, there are countless ways to save on taxes through careful planning and smart financial decisions. By understanding the deductions and credits available to you, leveraging tax-advantaged retirement plans, and being strategic about your purchases and staffing, you can significantly reduce your tax liability while ensuring the long-term success of your business. Always consult with a CPA or tax professional to ensure you are compliant with IRS regulations and are making the most of the tax-saving opportunities available to you.