Author: dsauder

Preface: Time is more valuable than money. You can get more money, but you cannot get more time. -Jim Rohn

2022 Tax Planning: Retirement Savings for the Self-Employed

Many tax-favored options are available to self-employed individuals to provide for their retirement. Tax planning for retirement can include deductible contributions to a traditional or Roth IRA, SEP plan, SIMPLE plan or a one-person 401(k) plan. You may wish to consider implementing one of these plans for yourself and/or your employees to benefit from a current tax year deduction and accumulate tax-deferred retirement savings.

 Each of these plans has advantages and disadvantages, and some may not be applicable to your situation. For example, a sole-owner 401(k) retirement plan allows a contribution for you as both an employer and as an employee. Therefore, a sole-owner 401(k) plan may provide for the largest deductible contribution. However, a sole-owner 401(k) is not available to the self-employed with employees other than a spouse or relative. As an alternative, a SEP or SIMPLE plan may have less administrative costs. Ultimately, the choice of savings vehicle will depend on factors related to your business and your retirement needs. Regardless of which plan you qualify for or what your retirement needs are, it is important to begin planning now for your retirement.

 Solo 401(k)s

 A one-participant or solo 401(k) plan is similar to a traditional 401(k), except that it covers only the business owner or owner plus spouse. These plans have the same rules and requirements (for the most part) as any other 401(k) plan. They can include the owner’s spouse, or partners and their spouses.

 The business owner is both employee and employer in a 401(k) plan, and contributions can be made to the plan in both capacities. The owner can contribute both: 

• Elective deferrals up to 100 percent of compensation (earned income in the case of a self-employed individual) up to the annual contribution limit ($20,500 for 2022 and $19,500 for 2021, plus $6,500 if age 50 or older); and

• Employer nonelective contributions up to 25 percent of compensation as defined by the plan (for self-employed individuals the amount is determined by using an IRS worksheet and in effect limits the deduction to 20 percent of earned income).

For 2022, the Solo 401(k) total contribution limit is $61,000 or $67,500 if you are age 50 or older. 

Traditional or Roth IRA 

A traditional IRA allows a taxpayer to deduct contributions on their income tax return or elect to treat those contributions as nondeductible. Earnings in the IRA are allowed to grow tax-deferred and are only subject to income tax when they are distributed. There is no age limit for making contributions. Distributions are required to be taken annually when the IRA owner reaches age 72. For 2021 and 2022, total contributions to a taxpayer’s traditional and Roth IRAs cannot be more than, the lesser of $6,000 ($7,000 if they are age 50 or older), or their taxable compensation for the year. In addition, the taxpayer may not be able to deduct all contributions if the taxpayer or the taxpayer’s spouse participates in another retirement plan at work. 

A Roth IRA is generally subject to the rules that apply to a traditional IRA. Unlike a traditional IRA, however, a taxpayer cannot deduct contributions to a Roth IRA and qualified distributions from a Roth IRA are tax free. For 2021 and 2022, total contributions to a taxpayer’s traditional and Roth IRAs cannot be more than the lesser of $6,000 ($7,000 if they are age 50 or older) or their taxable compensation for the year. In addition, the taxpayer’s Roth IRA contribution can also be limited based on filing status and income. 

Simplified Employee Pensions (SEPs)

 A SEP (Simplified Employee Pension Plan) IRA is a type of IRA for small business owners or self-employed individuals. This type of IRA allows the employer to make contributions to the accounts set up for employees. Contributions are tax-deductible and earnings are not taxable until withdrawal. One advantage of this type of IRA is the higher contribution limit. For 2022, employers can contribute up to 25% of income or $61,000, whichever is less.

 SIMPLE IRA Plan

 A SIMPLE (Savings Incentive Match Plan for Employees) IRA Plan is a plan, set up by an employer, in which employees can make contributions of a portion of their pre-tax wages. Employers must also make contributions whether or not an employee elects to defer a portion of their income to the plan. Contributions are tax deductible and investments grow tax deferred until the owner is ready to make withdrawals in retirement. It follows the same investment, distribution and rollover rules as traditional IRAs. SIMPLE IRAs have higher contribution limits than traditional and Roth IRAs and, unlike a SEP IRA, employees can make contributions to their accounts. Any employer that had no more than 100 employees with $5,000 or more in compensation during the preceding calendar year can establish a SIMPLE IRA plan. An employee may defer up to $14,000 in 2022 ($17,000 for employees age 50 or over).

 Please contact us to discuss the various retirement plan options and how they might apply to your business.

Preface: “Farming looks mighty easy when your plow is a pencil and you’re a thousand miles from the cornfield.” – Dwight D. Eisenhower.

2022 Industry Planning: Income Averaging for Farmers and Fishermen

Expectations with many of the farmers and fishermen in the United States, is that income has fluctuated widely during the past several years. Due to the extremely uncertain variables that affect farming revenues, including weather, drought, and other uncontrollable factors, it is common to have very little income in a poor year, with a large amount of income the subsequent year. By electing income averaging and spreading your farming income from a profitable year over a three-year period, you may be able to lower your tax liability for the successful year by avoiding the higher tax brackets. For example, if you have a high profit year after low-income years you would benefit as your farm income which otherwise would be taxed at the 25 percent rate or higher would be shifted to the 15 percent bracket for the prior years, thus saving taxes.

There are a number of rules you should understand in order to decide whether to make this election. You may make the tax election if you are a sole proprietor in a farming or fishing business, a partner in a partnership engaged in farming or fishing, or a shareholder of an S corporation engaged in farming or fishing. An estate or a trust may also not be selective with this election.

Under the election, the tax imposed in any tax year will equal the sum of the tax computed on your taxable income, reduced by the amount of farm income elected for averaging, plus the increase in tax that would result if taxable income for each of the three prior tax years were increased by an amount equal to one-third of your elected farm income. Your elected farm income is the amount of taxable income attributable to any farming business and which you specify under the election. Elected farming income can include gains from the sale or disposition of property or equipment, other than land, which you were regularly operating for a substantial period in your farming business.

For purposes of the income averaging election, a farming business includes operating a nursery or sod farm, raising or harvesting of trees bearing fruit, nuts or other crops or ornamental trees, or raising animals. Note that a farming business does not include the harvesting of crops grown by another person or the buying and reselling of plants or animals that are grown or raised by another person.

Although income averaging allows you to range the latitude of your farm income from a high-income year over the three prior years, it does not always result in a lower tax for the election year. In some cases, when the tax for a base year is calculated on the taxable income for that year plus one-third of the elected farm income, a higher tax rate may apply. Additionally, once the election is made, it can only be revoked only with the permission of the IRS, therefore it is important that all the relevant tax factors be considered.

Please contact our office if you would like to further discuss how income averaging might work for you as a farmer or fisherman.

Preface: Control your expenses better than your competition. This is where you can always find the competitive advantage. -Sam Walton

Spending on Equipment and Saving on Taxes

Credit: Jacob M. Dietz, CPA

Do you like to save on taxes? Most taxpayers do. Do you enjoy having the right equipment for the job? In some cases, taxpayers get the double blessing of purchasing the right equipment to run their business and sending in less taxes to the government. Although “depreciation” might sound like a boring word, the tax savings are not boring. Working hard with the right equipment does not have to be boring either.

Business taxpayers depreciate, or expense, fixed assets on their tax return. Certain things that businesses buy, such as expensive equipment, buildings, and so on, cannot simply be written off as an ordinary expense. Instead, it must be capitalized as an asset, and then expensed as depreciation. This depreciation is normally over a period of years. In some cases, the IRS allows the business to deduct it all in one year using bonus depreciation or section 179 expense.

Normally a business has a depreciation schedule that lists their fixed assets, when they bought it, what it cost, how much is being depreciated this year, and so on. Often the tax preparer maintains this schedule.
The complexity of depreciation could put some to sleep and irritate others. This article will not dive into all the details but cover certain areas of depreciation. For further information, or for help falling asleep, consider reading all 112 pages of IRS Publication 946 “How to Depreciate Property.”

In Service

Taxpayers should place property in service before depreciating it. IRS Publication 946 explains that it is in service “when it is ready and available for a specific use.” The “Farmer’s Tax Guide”, which is Publication 225, gives the example of a planter purchased in December. Since the planter was “ready and available” depreciation starts in December even though it is not planting season and the planter will not be used until spring.
The “Farmer’s Tax Guide” goes on to explain that if the planter was not assembled when it arrived, and the farmer does not assemble it until the next year, then depreciates starts in the year it is assembled. If you are still awake after reading IRS Publication 946, consider reading the 94 pages of the “Farmer’s Tax Guide” to help with insomnia.

Determining which year to start depreciation can sometimes be difficult. Another problem that can arise is a taxpayer might order a piece of equipment in one year, but it does not arrive until a future year is already well underway. In that situation, the equipment most likely is not ready and available for service in the year ordered. If you are counting on the depreciation from a large purchase to reduce your taxes, considering confirming with your accountant before the year is over to see if your equipment will qualify. If you are a taxpayer in Pennsylvania, and your equipment is sailing across the Atlantic from Europe on December 31st, then it probably is not ready and available for service. If your business is either fishing or recovery of sunken treasure, however, the answer may be different.

Getting in a Pattern

If your business operates multiple pieces of equipment that periodically wear out, you may want to consider a purchasing pattern. For example, suppose your business operates 5 forklifts. You expect them to last about 5 years. One option would be to buy 5 new forklifts every five years. That could put a strain on the finances in that 5th year. It could also give you a large depreciation deduction in that year.

Alternatively, you may want to develop a pattern of replacing a forklift about once a year. That would spread out the cash needs. It would potentially allow you to optimize the depreciation deduction each year. If you happened to have a bad year, you could consider delaying, if possible, the purchase until the next year when the tax deduction might be more helpful, and when you might have more income. On the other hand, if you were having an exceptionally good year, you might choose to accelerate your pattern and buy 2 forklifts in the same year.

Bonus Depreciation and 179 Expense

Although depreciation can take years, and in some cases decades, for the taxpayer to expense their costs, the tax code provides some taxpayer-friendly ways to accelerate the deduction. One is section 179 expense. Another is bonus depreciation. I will not go into all the complexities and details and differences of these two options, but I will say they can be very beneficial for a taxpayer looking for a quick tax deduction. Not all purchases qualify, however. If you are hoping to take bonus depreciation or to expense under section 179, you may want to talk with your accountant before the year ends and confirm if your property qualifies.

Election to Capitalize Repair and Maintenance Costs

The IRS provides an option to capitalize repair and maintenance costs. If a taxpayer elects to do so, they may capitalize and depreciate repairs and maintenance instead of expensing them as a repairs and maintenance. Why would a taxpayer make such an election? There could be multiple reasons. One reason would be to increase their income for that year and reduce it in future years with depreciation expense when the expense would be more helpful.

For example, suppose a business had a rough year and income is down. The business expects profits will pick up in the future. The business owner may see limited benefits of getting his income too low this year, but the owner might benefit more from the deduction in a future year. This election allows the owner to do that. If in the future the taxpayer is in a higher tax bracket, then each dollar of deduction might save more in taxes in the future.

De Minimis Safe Harbor Election

Have you ever studied a depreciation schedule? If so, perhaps your eyes glazed over. Now, imagine if that depreciation schedule were twice as long. That could be a challenge to track.

Fortunately, the IRS has a de minimis rule for amounts too trivial to worry about. Taxpayers can elect on their tax return to deduct certain amounts without capitalizing and depreciating them. The amounts that are considered de minimis can vary. $2,500 is a common threshold used.
How does that work? Suppose a business taxpayer buys a generator for $2,000 that will last for 5 years. Under the general rules of depreciation, that generator should be capitalized and depreciated. If the taxpayer is using the $2,500 de minimis safe harbor, however, then the taxpayer deducts that generator without ever putting it on the fixed asset schedule. Over a period of years, this threshold can keep a lot of de minimis tools from cluttering the depreciation schedule.

Tax Planning

Depreciation can play a significant role in tax planning. If a taxpayer had a good year, then the tax bill might be enough to cause a significant dip in the checking account. Placing equipment in service by the end of the year can significantly decrease taxes if section 179 or bonus depreciation is taken.
Caution should be exercised, however, before simply buying equipment to save on taxes.

First, will the purchase qualify for bonus depreciation or section 179 in the year you wish it would qualify? Sometimes an asset will not qualify for reasons such as what type of asset it is, or when it was placed in service, or from whom it was purchased. For example, the code prohibits taking section 179 expense on purchases from certain related parties.
Secondly, you will spend more money on equipment than you save in taxes. The exact percentage you pay in taxes will vary depending on multiple factors, including your level of income and the state in which you reside.

Let’s suppose someone is in a 30% tax bracket for federal, state, and local income tax combined. Suppose their accountant estimates their taxes for them in December, and the projected tax causes concern. What can be done? The business taxpayer could rush out and buy equipment costing $10,000. In that case, they just saved $3,000 (30% of $10,000) and they spent $10,000. The net result is decreased cash of $7,000. If the taxpayer doesn’t have a use for that equipment, then that could be a waste of $7,000. On the other hand, if the taxpayer had a good use for that equipment, then they essentially received $10,000 worth of equipment for an effective price of $7,000.

If you run a business that purchases significant amounts of equipment, then you are probably already aware of the benefits of both having the right equipment and depreciation. Buy wisely and depreciate wisely. Enjoy working hard with your new equipment and enjoy the tax savings from depreciation.

Proverbs 21:5 “The thoughts of the diligent tend only to plenteousness; but of every one that is hasty only to want.”

This article is general in nature, and it does not contain legal advice. Contact your advisors to discuss your specific situation.

Preface: “And just remember, every dollar we spend on outsourcing is spent on US goods or invested back in the US market. That’s accounting. – Arthur Laffer

What Is A Strong Balance Sheet?

Credit: Donald J. Sauder, CPA | CVA

A sage banker recently advised his client to have a strong balance sheet to prepare for the numerous developing shifts in regional and global marketplaces. Why? Because a business with a strong balance sheet is more likely to weather any overcast recessionary effects and be positioned to gain market share once fair-weather reemerges.

Most accountants will agree that assets = liabilities + equity. So the basic assumption of a strong balance sheet is to have more equity and fewer liabilities. Yet, there is much more to a strong balance sheet than equity.
As long a business can obtain a net profit for the year or quarter during a recessionary climate, the equity should hold fairly steady, albeit the business doesn’t require substantial distributions to finance owner personal obligations and investments (e.g., rental properties, funding for other debt such personal mortgage, taxes, or standard of living cash flows). Guarding against excess non-deductibles (owner draws, debt payments. etc.) helps insulate a balance sheet from atrophy.

Therefore, one of the primary considerations for a strong balance sheet is to analyze ongoing and recurring cashflow requirements for both business and personal obligations, e.g., non-deductible cash uses. What percent of business operating cashflows are available for financing activities, what allocations are discretionary, and what amounts are non-discretionary?

For instance, I recently heard a CPA talking about some quick analysis calculations for several clients to answer questions on appraising strong balance sheets with some back-of-the-envelope projections of what cashflows could look like if top-line sales ebbed 20% to 40% depending on the challenges expected with shifting economic winds in the marketplace.

In contrast, the worse thing a company can do is run out of money. Interestingly, based on increased interest costs, cashflow requirements for debt payments, and a caveat of higher taxes rates, it appears that some banks are willing to extend 20% or more in debt financing than can be comfortably managed in such trough scenarios by some borrowers, i.e., the companies could still be marginally profitable, and yet be in special assets situations in such scenarios, because their balance sheets are too unwieldy.

Another feature in analyzing a solid balance sheet is looking at working capital. Working capital is current assets – current liabilities. How much of your working capital is tied up in inventory, how much is cash, and what $ | % is allocable? Astute financial managers monitor working capital levels constantly and regularly prioritize optimization.

Experienced managers are proactive in balance sheet management and divest excess cash-intensive assets with low ROIs before they become a business detractor or decrease in value, e.g., surplus equipment, trucks, and vehicles. Business is not speculation. However, many business owners approach to inventory and asset management as such. It is best to remember that such speculative rewards are often simply a matter of time and chance. It’s like the Monopoly Chance card to pay for houses and hotels. It’s not a problem in the game of Monopoly unless someone speculates without considering the odds.

Although the definition of a strong balance sheet varies, the banker advising such in the second half of 2022 is astute. Do you have a strong balance sheet in your business (say 80%+ equity to assets), Congratulations! If you don’t know, talk with an advisor who can help you analyze and suggest actions to develop a plan to implement any necessary improvements.

Q4 2022

Preface: A man doesn’t need brilliance or genius, all he needs is energy. – Albert M. Greenfield

2022 Inflation Act: Research Credit for Small Businesses

In tax years beginning after 2015, certain qualified small businesses are allowed to claim a limited amount of the research credit against payroll taxes. Under the Inflation Reduction Act of 2022, in tax years beginning after 2022, the maximum amount of the credit against payroll taxes is increased from $250,000 to $500,000.

Taxpayers may be able to claim a credit for qualified research expenses. The research credit comprises three separately calculated credits: (1) the incremental research credit, (2) the credit for basic research payments to universities and other qualified organizations, and (3) the credit for energy consortium payments. A qualified small business may elect to apply a portion of its research credit against the social security tax imposed on an employer’s wage payments to employees.

A qualified small business must satisfy the following tests:

1. for the year of the election, the business’s gross receipts must be less than $5 million;
2. the business cannot have had gross receipts in any tax year preceding the five-tax-year period that ends with the tax year of the election; and
3. the business cannot be a tax-exempt organization

New Energy Efficient Home Credit

The Inflation Reduction Act of 2022 (2022 Inflation Act) extends the New Energy Efficient Home Credit through 2032, in addition to increasing and modifying energy-saving requirements effective for dwelling units acquired after December 31, 2022.

Extension of credit. The credit is extended for 11 years, through December 31, 2032.

Energy-saving requirements. The 2022 Inflation Act modifies the energy-saving requirements that must be met to qualify for the credit, including requirements for:

• single-family new homes;
• manufactured homes; and
• multifamily dwelling units.

Credit amounts. Additionally, the 2022 Inflation Act replaces the existing credit amounts with a $2,500 credit for new single-family homes that meet certain energy efficiency standards and a $5,000 credit for new single-family homes that are certified as zero-energy ready homes.

The credit for multifamily dwelling units is set at $500, or $1,000 for eligible multifamily units certified as zero-energy ready. Additionally, an enhanced bonus credit is available with respect to multifamily housing units if taxpayers satisfy prevailing wage requirements for the duration of the construction of such units. The bonus credit is equal to $2,500, or $5,000 for units that are certified as zero-energy ready.

Basis adjustment. Further, the 2022 Inflation Act clarifies that taxpayers claiming the credit do not have to reduce basis for purposes of calculating the low-income housing tax credit.

Please call our office and we can discuss how these tax laws might affect your individual tax situation.

Preface: If you’re trying to create a company, it’s like baking a cake. You have to have all the ingredients in the right proportion. –Elon Musk

2022 Inflation Act: Energy Efficient Commercial Buildings Deduction

The Inflation Reduction Act of 2022 (2022 Inflation Act) modifies the energy efficient commercial buildings deduction for tax years beginning after December 31, 2022, by increasing the maximum deduction and updating the eligibility requirements for reduction of energy costs, in addition to other changes.

Energy efficient commercial buildings deduction. A deduction is allowed for all or part of the cost of energy efficient commercial building property placed in service as part of a building’s:

• • • • interior lighting systems;
      • heating, cooling, ventilation, and hot water systems; or
      • envelope.

The deduction was enacted to encourage commercial building owners or lessees to install energy efficient property. Installation of energy-efficient commercial building property occurs when constructing a new, or improving an existing, commercial building or government building. The tax deduction benefits both commercial building owners or lessees and designers of government-owned buildings.

Efficiency standard. The 2022 Inflation Act updates eligibility requirements for the deduction so that property must reduce associated energy costs by 25% or more (decreased from 50% or more) in comparison to a reference building that meets the latest efficiency standard.

Applicable amount. The applicable dollar value of the deduction is $0.50 per square foot, increased by $0.02 for each percentage point above 25% that a building’s total annual energy cost savings are increased. The amount cannot be greater than $1.00 per square foot. However, the maximum amount of the deduction in any tax year cannot exceed $1 per square foot minus the total deductions taken in the previous three tax years (or during a four-year period in cases where the deduction is allowable for someone other than the taxpayer). The applicable dollar value will be adjusted for inflation for tax years beginning after 2022.

An increased dollar value is available for projects that satisfy prevailing wage and apprenticeship requirements for the duration of the construction.

Alternative deduction for energy-efficient retrofit property. Under the 2022 Inflation Act, taxpayers may elect to take an alternative deduction for a qualified retrofit of any qualified property. However, instead of a reduction in total annual energy power costs, the deduction is based on the reduction of energy usage intensity.

Please contact us for information on how you may be able to take advantage of this deduction or any other tax relief under the 2022 Inflation Act.

Preface: The way we look at manufacturing is this: The US’s strategy should be to skate where the puck is going, not where it is – Tim Cook

2022 Inflation Act: Advanced Manufacturing Production Credit

The Inflation Reduction Act of 2022 (2022 Inflation Act) provides for investment in clean energy and promotes reductions in carbon emissions. A large share of those incentive provisions are in the form of tax credits for green energy. In some cases, the credits are extensions and expansions of current credits, such as those for electric vehicles or residential energy property. Additionally, the 2022 Inflation Act includes new credits, such as those for the production of clean electricity.

The 2022 Inflation Act also adds a new general business credit for various components of advanced energy production and storage devices produced and sold after December 31, 2022. The amount of the credit varies depending on the component and begins to phase out after 2029.

The amount of the advanced manufacturing production credit is the sum of all credit amounts determined for each type of eligible component (including any incorporated eligible components) produced and sold to an unrelated person during the tax year, even where the sale to an unrelated person is made by a person related to the taxpayer.

Eligible Components. The amount of the advanced manufacturing production credit is determined by the particular component produced, and is available for the production of the following items, subject to specified requirements applicable to each particular component:

• thin film photovoltaic cells or crystalline photovoltaic cells;
• photovoltaic wafers;
• solar grade polysilicon;
• solar modules;
• wind energy components;
• torque tubes;
• longitudinal purlins;
• structural fasteners; and
• inverters.

Credit. The amount of the credit is phased out for eligible components sold after 2028. The credit is 75% of the otherwise eligible amount for components sold during the 2029 tax year, 50% for components sold during the 2030 tax year, 25% for components sold during the 2031 tax year, and zero percent thereafter.

Taxpayers eligible for the advanced manufacturing production credit can elect to receive direct advance payment from the Treasury Department instead of a credit against taxes.

 

Preface: The Journey of a thousand miles begin with one step – Lao Tzu

Mileage and Meals

Credit: Jacob M. Dietz, CPA

Do you or your employees drive personal vehicles for business purposes? Do you eat at restaurants for business purposes? If yes, then there may be tax benefits waiting for you.

Business Mileage

Business travel is tax deductible. First, there are two general ways a business can deduct expenses for travel by vehicle. The first method is actual expenses. For example, suppose a construction company buys a new pickup truck used 100% for business. The cost of that pickup truck, as well as gas or diesel, repairs, maintenance, inspection etc. are all tax deductible either directly as expenses or as depreciation.

The second method is the mileage deduction. The IRS publishes a set rate at which miles can be deducted. For the second part of 2022, that rate is $.625. If a business owner decides not to take the actual expense deduction, they can deduct a mileage rate. The mileage rate can be an especially good option for a small business if the owner uses a vehicle primarily for personal use and only secondarily for business use.

The standard mileage deduction replaces certain actual expenses like car insurance, gasoline, repairs, registration fees, and depreciation. If you incur tolls (such as on the PA turnpike) or parking fees, those can still be deductible in addition to the standard mileage rate.

In IRS Publication 463, the IRS explains that in certain situations the mileage method is not allowed. For example, if you take bonus depreciation or 179 expense on a car, you are prohibited from then taking the mileage deduction. This helps prevent a business owner from getting a double benefit, both expenses and mileage.

Employee Mileage for Business?

What happens when an employee drives their personal vehicle for work? If the business has an accountable plan, then the employee can submit mileage logs for reimbursement to the business. The company can then reimburse the employee for their mileage at the IRS rate, which is currently $.625 per mile. The business can then deduct those mileage expenses for tax purposes, and the employee does not need to pick up that reimbursement as income.

If a business has employees driving their personal vehicle for work, then an accountable plan can be a tax-efficient way to reimburse the employee for that expense. Simply increasing the employees pay would not be as efficient, since the employee would then be subject to taxes on the increased pay and there could be increased payroll taxes. Note that the reimbursement should be for business miles, not commuting miles.

Meals

Taxpayers can often deduct 50% of the cost of a business meal, or 100% (for 2021 and 2022) of a business meal if it is from a restaurant. To deduct this meal, the taxpayer should be able to substantiate the expense.

Adequate Records
Whether reporting your own business mileage or reporting mileage to an employer under an accountable plan, make sure that you substantiate the information. Simply taking a wild guess in April as to how many miles you drove for business last year may not hold much weight in an audit. Also, when reporting business meals, make sure you have adequate substantiation. If the meals and mileage are not substantiated, expect to have them thrown out in an audit. Remember to establish the business purpose of the expense, not just that the expense was incurred.

Per Diem

If you have employees traveling for business, consider using the per diem rules. Under the per diem rules an employer may deduct expenses paid to an employee at the federal per diem rate with less paper shuffling. The details of the per diem rules are beyond the scope of this blog. If you want to implement a per diem plan, please contact your accountant for more details. The per diem rules may make some things easier, but they do not eliminate all the recordkeeping.

This article is general in nature, and it does not contain legal advice. Contact your advisors to discuss your specific situation.

Preface: Californians can keep driving and buying gas-powered vehicles after 2035, but no new models will be sold in the state thereafter.

2022 Inflation Act: Electric Vehicle Credits

SACRAMENTO, Calif. (AP) [August 26, 2022] — California set itself on a path Thursday to end the era of gas-powered cars, with air regulators adopting the world’s most stringent rules for transitioning to zero-emission vehicles.
The move by the California Air Resources Board to have all new cars, pickup trucks and SUVs be electric or hydrogen by 2035 is likely to reshape the U.S. auto market, which gets 10% of its sales from the nation’s most populous state.
But such a radical transformation in what people drive will also require at least 15 times more vehicle chargers statewide, a more robust energy grid and vehicles that people of all income levels can afford.

“It’s going to be very hard getting to 100%,” said Daniel Sperling, a board member and founding director of the Institute of Transportation Studies at the University of California, Davis. “You can’t just wave your wand, you can’t just adopt a regulation — people actually have to buy them and use them.”
Other states are expected to follow, further accelerating the production of zero-emissions vehicles.

Washington state and Massachusetts already have said they will follow California’s lead and many more are likely to — New York and Pennsylvania are among 17 states that have adopted some or all of California’s tailpipe emission standards that are stricter than federal rules.
https://apnews.com/article/technology-california-air-resources-board-climate-and-environment-dc75c11280f85a8ab134cf392497be68

The 2022 Inflation Act signed into legislation includes extension and modification to tax credits for electric vehicles.

The credit for the purchase of new electric vehicles (which includes both plug-in electric vehicles and fuel cell vehicles) is extended through 2032, and modified, under the 2022 Inflation Act. The 2022 Inflation Act eliminates the current credit’s limitation on the number of vehicles produced by a specific manufacturer.

A new credit of up to $4,000 is also available for the purchase of a previously owned clean vehicle, subject to income limitations, through 2032. The 2022 Inflation Act also includes a new credit for up to 30 percent of the basis of a qualified commercial clean vehicle acquired after 2022 and before 2033.

New Clean Vehicle Credit

The credit for new qualified plug-in electric drive motor vehicle credit is restructured as a maximum credit of $7,500 for a new clean vehicle. The new clean vehicle credit generally applies to vehicles placed in service after December 31, 2022. Only one credit is allowed once with respect to any vehicle, as determined based on its vehicle identification number (VIN), including any vehicle with respect to which the taxpayer elects to transfer the credit to an eligible entity.

The credit imposes sourcing requirements on the critical components of the vehicle and battery systems. The maximum amount of the credit remains at $7,500, but includes income limitations, as well as limitations on the manufacturer’s suggested retail price.

Taxpayer adjusted gross income price caps.
The threshold amounts are:

• • • •  $300,000 for a joint return filer or a surviving spouse;
      • $225,000 for a head of household; or
      • $150,000 for any other taxpayer (an unmarried taxpayer or a married taxpayer filing a separate return).

The credit also is not allowed if the manufacturer’s suggested retail price (MSRP) for the vehicle exceeds:

• • • •  $80,000 for a van,
      • $80,000 for a sports utility vehicle (SUV),
      • $80,000 for a pick-truck, or
      •  $55,000 for any other vehicle.

Credit Amount.

The new clean vehicle credit has two components:

• • • A $3,750 credit applies if the vehicle satisfies domestic content requirements for critical minerals in the battery
    • A $3,750 credit applies if the vehicle satisfies domestic content requirements for battery components

Previously Owned Clean Vehicle Credit

A tax credit of up to $4,000 is available for the purchase of certain used clean vehicles. A qualified buyer who places in service a previously owned clean vehicle during a tax is allowed as a credit the lesser of:

• • • • $4,000, or
      • 30 percent of the vehicle’s sale price.

The credit is not allowed if the lesser of the taxpayer’s modified adjusted gross income for the tax year or the preceding tax year exceeds $75,000 ($150,000 for married couples filing jointly and $112,500 for head of household filers).

A “previously owned clean vehicle” is a motor vehicle whose model year is at least two years earlier than the calendar year in which the taxpayer acquires the vehicle. It must have been used originally by a person other than the taxpayer. The taxpayer must have acquired the vehicle in a qualified sale. The vehicle must have a gross vehicle weight rating less than 14,000 pounds.

A qualified sale is a sale of a motor vehicle by a dealer for a sale price that does not exceed $25,000. The sale must be to a qualified buyer. The sale must be the first transfer since the date the enactment of this provision. The sale may not be to the original user of the vehicle.

Commercial Clean Vehicle Credit

The qualified commercial clean vehicle credit for any tax year is an amount equal to the sum of the credit amounts determined with respect to each qualified commercial clean vehicle placed in service by the taxpayer during the tax year.

Per vehicle amount- The credit amount is equal to the lesser of:

• • • 15 percent of the basis of the vehicle (30 percent in the case of a vehicle not powered by a gasoline or diesel internal combustion engine), or
    • the incremental cost of the vehicle.

The amount is limited to $7,500 for a vehicle having a gross vehicle weight rating of less than 14,000 pounds, and $40,000 for other vehicles. A qualified commercial clean vehicle’s incremental cost is the excess of the vehicle’s purchase price over the price of a comparable vehicle. A comparable vehicle is any vehicle powered solely by a gasoline or diesel internal combustion engine and comparable in size and use to the vehicle.

Please contact us if you would like to discuss tax reporting requirements and help to determine if you qualify for the clean vehicle credits.