Around the Tax World- September 27, 2022 - Think Outside the Tax Box

Check out what’s happening all around the world of tax!

Twice per month, we post our “Around the Tax World” feature. This highly curated, concisely written feature acts as your own personal aggregator of all the news happening in and around the world of tax. Your days of endless scrolling and combing the internet for the tax stories of the day ends now because we’re doing that work for you!

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World News

Tesla aims for U.S. tax breaks by looking into battery cell production stateside… instead of its factories in Germany. This shift comes in response to the Inflation Reduction Act recently signed by President Biden. The bill provides tax benefits for electric vehicles if their batteries are made from materials sourced within the U.S. and assembled within the U.S. Tesla is considering relocating its manufacturing equipment as consumer demand for vehicles reaches all-time highs.

The UK’s new Prime Minister plans to cut taxes on energy bills and soft drinks… as her first initiative. In an effort to address concerns about the cost of living, Prime Minister Liz Truss plans to eliminate “sugar” taxes and obesity control measures that increase the prices of certain food and drink products. As Britain also struggles with rising energy prices, the government is expected to suspend “green” levies for household energy bills and introduce a measure to reduce energy costs for businesses.

U.S. NEWS

The Inflation Reduction Act’s biggest tax changes impact homeowners and business owners

Despite its moniker, analysts have observed that the Inflation Reduction Act will not likely have much impact on national inflation—or on personal income taxes. The most significant changes this bill makes to current tax law include three notable tax credits and a tax limitation that may impact business owners.

First, the Inflation Reduction Act places a heavy emphasis on climate change initiatives. The bill revives a tax benefit previously known as the “non-business energy property credit,” renaming it the “energy-efficient home improvement credit.” This benefit allows homeowners to claim up to 30% of the cost of qualifying home improvements. The legislation also introduces rebates for specific high-efficiency appliance upgrades.

Second, the bill extended the $7500 electric vehicle tax credit currently available to buyers of a qualifying new vehicle. Used vehicles may also be eligible for a credit of up to 30% of the cost of the vehicle or $4,000, whichever is less.

Third, the new legislation seeks to reduce the cost of healthcare by expanding and extending the premium tax credit. Introduced as part of the Affordable Care Act, the credit subsidizes the cost of health insurance for lower-income Americans. The Inflation Reduction Act also extends a temporary provision for taxpayers above the income threshold (currently set at 400% of the federal poverty level) to receive the credit.

On the business side, the bill extended a tax limitation on pass-through entities (such as sole proprietorships, S corporations, partnerships, and some LLCs) for two more years. This measure limits the amount of business losses that can be deducted by owners of pass-through businesses. The 2022 cap is set at $270,000 for single filers and $540,000 for married couples filing jointly.

While the Inflation Reduction Act seeks to benefit households making less than $400,000, it aims to increase taxes on larger corporations. The bill introduces a minimum corporate tax of 15% and a 1% excise tax on corporate stock buybacks. Additionally, $80 billion in additional funding was allocated to the IRS with the aim of improving tax enforcement on higher-income individuals and businesses.

STATE NEWS

The Illinois Family Relief Plan features income and property tax rebates… for qualifying state residents who have filed an IL-1040 form. The deadline to file—and determine eligibility for these rebates—is October 17th. Payments have already started to go out this month to those who meet the income criteria

The state income tax rebate begins at $50 for a single taxpayer, rises to $100 for couples filing jointly, and can total up to $300 for taxpayers with dependents. A maximum of three dependents can be claimed for a $100 credit each. To qualify for this rebate, the taxpayer must have been an Illinois resident in 2021 and earn no more than $200,000 per year (or $400,000 for joint filers).

Illinois is also offering a property tax rebate equal to the amount claimed on the homeowner’s 1040 form. This rebate is capped at $300. To qualify, the taxpayer must have paid property taxes in 2021 on a primary residence located in Illinois. The taxpayer must also fall within the income limits—$250,000 in adjusted gross income for single filers and $500,000 for couples filing jointly.

Both rebates will be issued automatically to those who filed an individual income tax return. The money will be distributed in the same method that the taxpayer received their original tax refund.

Massachusetts officials have been rushing to finalize a total tax revenue number… which is expected to be as high as $3 billion, based on recent estimates from the state’s Department of Revenue. Depending on the final sum, residents will likely see a tax refund to be distributed before the holiday season. Refund or not, Governor Charlie Baker has spoken in favor of providing residents with immediate financial assistance given rising inflation and costs of living.

State lawmakers hit a wall on plans for a $1 billion tax relief package that included one-time rebates of $250 for middle-income taxpayers, enhanced child care and dependent tax credits, and an increased rental deduction cap. The package also allotted hundreds of millions of dollars to health and human services, affordable housing, and climate change initiatives.

The relief package was stalled when a forgotten tax cap law (known as Chapter 62F) was brought to light, which mandates that the state auditor evaluate whether tax revenue exceeds a threshold that would trigger an automatic tax credit to residents. The final revenue number is expected to exceed that threshold given the continual growth of Massachusetts’ tax revenue throughout the past fiscal year.

TAX PLANNING

Which home upgrades could qualify for the new Inflation Reduction Act tax rebates?

President Biden’s climate change initiatives offer homeowners up to $14,000 in rebates for qualifying purchases focused on energy-efficiency. The rebates come through two separate programs: the HOMES Rebate Program and the High-Efficiency Electric Home Rebate Act (HEEHRA).

The HOMES Rebate Program subsidizes changes that reduce a home’s energy usage by at least 35%. This could include installing solar panels, new windows, heat pumps, or new electric appliances like stoves and dryers. These retrofits must occur after the Inflation Reduction Act became law on August 16, 2022, and they must be completed before September 30, 2031. Taxpayers can receive up to $4,000 in rebates or up to $8,000 if their household is considered low- or middle-income.

The High-Efficiency Electric Home Rebate Act provides rebates to low- and middle-income families for energy-friendly purchases. This could include a heat pump water heater; heat pump for space heating and cooling; electric stoves, cooktops, ranges, ovens, and clothes dryers; an electric load service center upgrade; insulation, air sealing, and ventilation; and electric wiring. To qualify for HEEHRA, taxpayers must make 150% or less of the median income in their region (as determined by the Department of Housing and Urban Development). Low-income homeowners can get up to 100% of their purchases covered while middle-income consumers can get up to 50% covered.

Taxpayers should note that they cannot receive two rebates for the same upgrade—they will have to select either the HOMES Rebate or the HEEHRA rebate if a purchase qualifies for both.

What happens if you missed the September 15th deadline for quarterly tax payments?

Taxpayers who earn income from self-employment, small businesses, investments, and gig work must make payments to the IRS four times per year. On a federal level, the deadlines for these quarterly payments are March 15th, June 15th, September 15th, and December 15th. Some taxpayers will also have state-level payments due.

Those who miss the deadline will incur a penalty of 0.5% of their balance due for each month after the deadline. Though the penalty is capped at no more than 25% of that balance, this can still result in a hefty sum that would otherwise be sitting in the taxpayer’s bank account. To stay on top of these payments, set aside either 90% of this year’s taxes or 100% of last year’s bill, whichever is less. If your adjusted gross income exceeds $150,000, set aside 110% of last year’s bill.

Quarterly tax payments can be made through IRS Direct Pay. For other payment options, visit the IRS payments website.

Recent Highlights

Wondering what you missed in our last newsletter? Check out our latest exclusive articles here:

CURRENT EDITION

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Dominique Molina, CPA MST CTS

Gather ’round, pardners! The Employee Retention Credit (ERC) has been the latest gold rush in the tax frontier, drawing business owners, tax deputies, and even a few sly outlaws. But as the dust settles, the IRS—our law keeping sheriff—is on the hunt for any who might’ve bent the rules. In this frontier of finance, knowing who’s who can keep you out of trouble as the IRS rounds up dubious claims.

Selected Techniques to Monetize Tax Attributes

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In the prior article “Tax Trends in M&A and What It Means for Your Clients,” we had discussed certain techniques to, e.g., maximize net operating loss (“NOL”) and interest expense deduction utilization in the context of M&A transactions. This article examines certain additional strategies to monetize expiring, latent, or otherwise disallowed tax attributes.

Do Those Tricks Really Work?

Peter J Reilly CPA

On the website for Axium Wealth, Charles Dombek tells us that: “Most CPAs are historians that tell their clients how much they make, how much they owe, when and where to file their taxes, and oftentimes how to write large checks at the last minute when you least expect.” When it comes to Axium, though: “We help clients recover dollars they unnecessarily pay in State and Federal income taxes.” Axium also helps clients diversify capital into off-market passive real estate and alternative investments. Before Axium, there was The Optimal-Financial Group LLC. Of course many of the readers of Think Outside The Tax Box are CPAs, or EAs or others who both help their clients be compliant and advise on ways to minimize their liability. When I was practicing I would call the things I might suggest my “bag of tricks.”