Key takeaways from major tax provisions.
Key Highlights of Inflation Reduction Act 2022
1:- Energy Tax provisions
A significant portion of the Inflation Reduction Act is devoted to incentives for green energy, including tax credits.
In some cases, the tax credits are extensions or expansions of existing credits. However, the IRA also creates new tax credits for businesses and individuals.
Credit for Electric vehicles
Maximum credit up to $7500.
Business credit for commercial clean vehicles
The Inflation Reduction Act provides a new business credit for qualified commercial clean vehicles in an amount equal to the lesser of:
- 15% (or 30% for a vehicle not powered by a gas or diesel internal combustion engine) of basis, or
- the incremental cost of the vehicle (excess of the purchase price of such vehicle over the purchase price of a comparable vehicle).
The credit is worth a maximum of $7,500, or $40,000 for a vehicle with a gross vehicle weight rating of at least 14,000 pounds.
The credit is set to expire after 2032.
Research Credit Against Payroll for Small Businesses
The IRA increases from $250,000 to $500,000, the limit on the amount of research credit that qualified small businesses may elect to treat as a credit against their payroll tax liability.
2:- 15% Corporate alternative minimum tax.
The IRA imposes a 15% corporate alternative minimum tax based on the financial statement income of corporations or their predecessors with a three-year taxable year average annual adjusted financial statement income in excess of $1 billion. The corporate alternative minimum tax is effective for tax years beginning after December 31, 2022.
The 15% corporate alternative minimum tax is equal to the difference between a corporation’s “adjusted financial statement income” for the taxable year and the corporation’s “alternative minimum tax foreign tax credit” for the taxable year. A corporation’s tax liability is the greater of its regular tax liability and the 15% alternative minimum tax.
3:- Extension of excess business loss limitation rules
Under pre-IRA law, for taxable years that begin before January 1, 2027, non-corporate taxpayers may not deduct excess business loss (generally, net business deductions over business income) if the loss is in excess of $250,000 ($500,000 in the case of a joint return), indexed for inflation. The excess loss becomes a net operating loss in subsequent years and is available to offset 80% of taxable income each year.
The IRA extends the excess business loss limitation rules to taxable years that begin before January 1, 2029.
The IRA’s amendments apply to taxable years beginning after December 31, 2026.
Highlights of the Tax Cuts & Jobs Act for Individuals.
Individual tax
There are several deductions that will be eliminated or reduced, which may or may not be offset by a larger standard deduction:
- Individuals (as opposed to businesses) are only be able to claim an itemized deduction of up to $10,000 ($5,000 for a married taxpayer filing a separate return) for the total of (1) state and local property taxes; and (2) state and local income taxes.
- Under current rules, alimony payments generally are an above-the line deduction for the payer and included in the income of the payee. Under the new law, beginning in 2019, alimony payments aren’t deductible by the payer or included in the income of the payee, generally effective for any divorce decree or separation agreement executed after 2018. For any divorce decree or separation agreement executed prior to 2019, the new law will apply if such agreement is modified after 2018 and the modification expressly provides that the new law applies to the modification.
- The itemized deduction for charitable contributions is not eliminated, however, because most other itemized deductions will be eliminated in exchange for a larger standard deduction (e.g., $24,000 for joint filers), charitable contributions after 2017 may not yield a tax benefit for you because you won’t be able to itemize deductions.
- The new law temporarily boosts itemized deductions for medical expenses. For 2017 and 2018 these expenses can be claimed as itemized deductions to the extent they exceed a floor equal to 7.5% of your adjusted gross income (AGI). Before the new law, the floor was 10% of AGI, except for 2017 it was 7.5% of AGI for age-65-or-older taxpayers. It is important to be aware that that next year, many individuals will have to claim the standard deduction because many itemized deductions have been eliminated.
- The principal residence mortgage interest deduction will be limited to interest on $750,000 of indebtedness, for loans after 2017.
- The following personal exemptions will be eliminated: the deduction for home equity debt, miscellaneous itemized deductions subject to the 2% floor (e.g., investment advisory fees and tax preparation fees), the Pease rule (i.e., phase-out of itemized deductions), the deduction for casualty losses (except for federally declared disasters), and moving expenses (except for certain military personnel).
- Estate, Gift and GST tax exemptions will double to $10 million (expected to be $11.2 million for 2018 with inflation indexing). Thus, for a married couple the combined exemptions would be $22.4 million in 2018.
Notable items that are not changing for individuals include:
- The preferential top rate (i.e., 20%) on capital gains and qualified dividends.
- Annual exclusion gifts ($15,000 for 2018).
- The 3.8% net investment income tax is not changing, thus, net investment income (e.g., interest, dividends, capital gains, annuity income, rents, etc.) will be taxable to the extent it exceeds the applicable thresholds (e.g., single taxpayers $200,000, married filing jointly $250,000).
- A taxpayer’s ability to sell specific lots of securities. The original tax reform bills in the House and Senate would have forced FIFO treatment for the sale of securities (e.g., stocks).
- Stretch-out distributions for beneficiaries of IRAs and other qualified plans.
- Rules for excluding gain on the sale of a principal residence.
Taxpayers should understand that a majority of these tax reform provisions are applicable only through 2025. We will continue to provide you with updates on the new changes in tax laws throughout the year. Please do not hesitate to contact us in regard to any questions you may have about the Tax Cuts and Jobs Act.
Highlights of the Tax Cuts & Jobs Act for Businesses
The Tax Cuts and Jobs Act ushers in some significant tax changes for businesses which our CPA office has summarized below:
One of the key benefits of the TCJA for businesses is lower tax rates for C-corporations effective in the 2018 tax year. For businesses that are considered “pass-through” (such as partnerships, limited liability companies taxed as partnerships or S-corporations) may also see their tax bills cut.
- The graduated “C-corporation” tax rates will range from 15% to 35% will be reduced to a flat 21% rate under the new law.
- The corporate AMT is fully repealed beginning in 2018.
- A new like-kind exchange rule limits exchanges to real estate not held primarily for sale.
- The IRC section 179 deduction will double to $1 million, subject to phase-out thresholds.
- Bonus depreciation will double to 100% and expand to include used property. The effective date is for assets acquired and placed in service after September 27, 2017 and before January 1, 2023.
- Pass-through entities (e.g., partnerships, s corporations, and sole proprietorships) will be entitled to a 20% qualified business income deduction. The provision is applicable for business owners with income under $157,500 ($315,000 for married filing jointly). In addition, the benefit is subject to phase
New Net Operating Loss Rules for Corporations
What is a NOL and how do you know if you have one? A net operating loss, or NOL, is realized when a loss taken by a company in a certain period (usually a tax year) makes its allowable tax deductions greater than its taxable income. In this situation, the NOL has traditionally helped companies recover past tax payments with the carryforward rule in place. However, the treatment of NOL for corporations is changing starting this tax year, due to the effect of the following new provisions:
Tax Reform Update on Meal Deductions
Keep in mind, however, that expenses for entertainment, amusement, or recreation in the course of business are not deductible. For example, if you want to treat your client to dinner plus tickets to a show, only 50 percent of the meal expenses would be deductible.
You can deduct client meal expenses, but they have to be legitimate. As a refresher, here are the requirements for being able to take advantage of the meal expense deduction on your freelance business tax return:
- The meal expense must be reasonable and a necessary as part of your business operations.
- Either you, or an employee of your business, must be present when the meal is eaten.
- The food and beverages you are claiming must be provided to a current or potential business customer, client, consultant, or similar business contact.
- If food and beverages are provided during or at an entertainment activity (i.e. brats and beer at a baseball game) they must be purchased separately from the entertainment on one or more bills, invoices, or receipts.
Remember that you must have receipts to support your meal expense deductions (not just a credit card statement) so be sure to keep those filed with your other tax information. If you need assistance with 2018 tax planning and tax filing please us.
