Observe New Tax Rules of the Road
New law revamps electric vehicle credits
Are you thinking about purchasing an electric vehicle (EV) or plug-in hybrid? The new Inflation Reduction Act (the IRA) green lights tax credits for many taxpayers who buy EVs in 2023. However, other individuals may hit some unexpected roadblocks.
Background: Currently, a tax credit is available for EVs, including plug-in hybrid vehicles, that meet certain energy consumption standards. The maximum credit is $7,500, regardless of cost. The credit is claimed on the tax return for the year in which you purchase the vehicle.
In addition, you must meet other technical requirements, including a limit on the gross vehicle weight rating (GVWR). Also, the vehicle has to be used predominantly by its original purchaser. In other words, the credit cannot be claimed on a resale.
The IRS regularly updates the list of vehicles that qualify for the credit. Visit its website for more detailed information about the various models.
Caution: Under prior law, the credit begins to phase out for a manufacturer’s vehicles when it has sold at least 200,000 qualifying vehicles for domestic use. Tesla, GM and Toyota have already exceeded this limit.
Furthermore, the credit is nonrefundable. For example, if you show $5,000 in tax liability on your 2022 return and you qualify for a $7,500 credit, it is limited to $5,000. Finally, the credit is only available to the owner of the vehicle. Lessees do not qualify.
New rules: The IRA includes the following key provisions relating to tax credits for EVs.
• The credit cannot be claimed by single filers with a modified adjusted gross income (MAGI) above $150,000 or an MAGI or $300,000 for joint filers.
• The credit is not available for most passenger vehicles that cost more than $55,000. The limit is $80,000 for vans, sports utility vehicles (SUVs) and pickup trucks.
• The vehicle must be powered by batteries whose materials are sourced from the U.S. or its free trade partners and must be assembled in North America.
• The 200,000-vehicle threshold for manufacturers is eliminated. However, this restriction still applies for vehicles purchased in 2022.
• If you qualify for the credit, you may get instant gratification though a price reduction at the time of purchase. But it appears that this tax break will not be implemented until 2024. The IRS is expected to issue guidance shortly.
Tax break for used vehicles: Notably, the IRA also provides a credit of up to $4,000 for purchasers of used vehicles under a separate set of rules. For example:
• The credit is available to single filers with a MAGI of no more than $75,000 or $150,000 for joint filers.
• The vehicle cannot cost more than $25,000.
• The vehicle must be at least two years old.
• The purchase must be the first sale of the used vehicle by a licensed dealer.
• You can only claim the credit once every three years.
As you might imagine, the new IRA rules complicate matters for potential purchasers of EVs. Besides getting all the car facts, find out the tax facts for your situation. Your professional advisors can provide the “roadside assistance” you need.
Handing Over the Business Reins
Tips for anointing a succesor
If you have spent years building up a small family business, you may finally be preparing to step away from it or at least scale back your workload. After all, you deserve it. But who will you pick to run the operation when you are not around on a full-time basis?
Caution: Finding someone to “fill your shoes” may not be an easy task. You will probably want someone to carry on your legacy. Frequently, this will be another family member, but it might be a long-time employee who knows the business inside-and-out. Either way, you do not want to throw the business into a tailspin or damage any family relationships.
Here are several suggestions you might follow in choosing a business successor.
• Make your future intentions clear to the rest of the family. Do not suddenly spring it on them that you have decided to walk away. Give them some time to get used to the idea.
• Do not make any hasty decisions. Draw up a list of the qualities that each individual brings to the table. Also consider each candidate’s negatives. Try to avoid preconceived notions and focus on actual performance.
• Schedule a family gathering over a long weekend to discuss the need for a successor. Give other family members a chance to express their opinions about who should be leading the company. To avoid the usual distractions, try to hold the gathering in a remote location, or at least far away from the main office. Include all family members, including in-laws, in the invitation.
• If a clear successor does not emerge right away, or if multiple family members are interested in taking the helm, develop a job description to cut down the emotional aspect of the decision. Describe what the job requires in terms of talent, expertise and personality.
• When there are no family members up to the task or when they do not want the responsibility, consider a non-family leader. Typically, your business will already employ a manager who understands your values and can be groomed to lead the company. If not, you might use an executive search firm to identify candidates.
• Seek advice from an outsiders such as professionals or consultants familiar with your business as well as succession planning.
Keep in mind that choosing the next leader is only part of a succession plan. For instance, you should have a “buy-sell agreement” drafted that establishes the value of the business. This is vital not only when you retire, but also if you decide to sell your business interest or if you should suddenly die or become disabled.
Similarly, a power of attorney can give your successor some flexibility in the event of an unexpected incapacitation. Also, secure adequate life insurance for yourself and other key executives. The proceeds from a life insurance policy could be used to pay for estate taxes and to meet other potential liquidity needs.
Final words: Coordinate aspects of your business succession plan with your estate plan. Your professional advisors can help you address the key issues and investigate ways to minimize the tax burden.
Avoid These Seven Financial Sins
Do not fall into common traps
Although you probably try to live your life the best way you can, you still may be guilty of some common “financial sins.” This is not necessarily linked to wrath, greed, sloth, pride, lust, envy or gluttony. However, the actions you take regarding your financial affairs may lead you astray, especially as they relate to investments.
Practical advice: Do not give into these inclinations. By avoiding the following seven financial sins, you are more likely to end up in a state of bliss.
Sin #1: You invest based on your emotions.
Do not let your emotions dictate financial strategies. For instance, when the stock market is booming, your desires can lead you to make bad decisions. On the flip side, if you are faced with a declining market, you cannot let fear overtake your financial sensibilities. Try to maintain an even keel.
Sin #2: You are overly optimistic about returns.
When the stock market was roaring years ago, investors took it for granted that they could generate annual returns averaging 10% or even higher. But that is not a realistic outlook in the current environment. If you lower your expectations, you can better position yourself for what might happen.
Sin #3: You pay excessive fees.
Of course, you usually “get what you pay for,” but that does not mean you should pay exorbitant fees in connection with investments. Rely on trusted financial advisors to steer you in the right direction.
Sin #4: You are not adequately insured.
Insurance is a key component of most financial plans. This includes various forms such as life insurance, health insurance, disability income insurance, etc. Try to have your needs quantified based on your current and future objectives.
Sin #5: Your risk exposure is too high.
It has been said often that there is an inherent risk in the investment markets. Recognize that it is possible to make money, lose money or stay in the same basic position. Do not risk more than you can reasonably afford to lose. Consider your “risk tolerance” as part of your investment decisions.
Sin #6: You do not keep an emergency fund.
It is generally recommended that you keep enough financial “cushion” to sustain your family through six to twelve months if financial disaster should strike. Consider an emergency fund that will last even longer if you are contemplating retirement or have already retired.
Sin #7: You do not obtain professional assistance.
This is not to say that you are not qualified to manage your own financial affairs. But almost everyone needs a little help now and then. As mentioned above, you should not pay excessive fees, yet that does not mean you should not obtain guidance when the situation calls for it. Do not let your ego get in the way or you could be guilty of the “deadliest” financial sin of all.
Follow Tax Blueprint for This Credit
Cutting costs of business renovations
If you are intending to bring more workers for your small business back on site, you may decide to move to smaller digs than you had prior to the onset of the pandemic. Or maybe you are inclined to make some renovations to your existing business premises. In either event, if you include special accommodations for disabled individuals, you may qualify for a special tax credit equal to as much as half of the cost.
Furthermore, this “disabled access credit” may apply to more expenses than you might think. It is not limited to installations of ramps and guardrails—although those count, too.
Background: A qualified small business is eligible to claim the disabled access credit for making business premises more accessible to disabled individuals. The credit is claimed as part of the general business credit.
For this purpose, a “qualified small business” is one with gross receipts of $1 million or less or one that did not employ more than 30 full-time employees in the preceding tax year. The credit maybe carried back for one year and forward for up to 20 years.
Assuming your business qualifies, the disabled access credit is equal to 50% of the first $10,000 of qualified expenses. (Technically, the first $250 of expenses is excluded, but the credit then applies to the first $10,250 of expenses.) In other words, the maximum credit is $5,000. Remember that this amount comes right of the top of your tax bill.
What expenses are covered? To qualify, the expense must be incurred to meet requirements under the Americans with Disabilities Act (ADA). For instance, a small business can claim the credit for the following costs:
• Removal of architectural, communication, physical, or transportation barriers that prevent a business from being accessible to, or usable by, disabled individuals;
• Providing qualified interpreters or other effective methods of making orally delivered materials available to hearing-impaired individuals;
• Providing qualified readers, taped texts and other effective methods of making visually delivered materials available to visually impaired individuals;
• Acquiring or modifying equipment or devices for disabled individuals; and
• Providing other similar services, modifications, materials or equipment.
Key point: The modification does not have to exclusively benefit disabled individuals. Plus, there is no limit on the number of times you can claim the credit. Thus, you may be eligible even if your business already benefitted from the credit in a prior tax year.
Make sure you fully understand the tax rules before you commence renovations. Consult with your professional tax advisors if you have any questions.
Last Call for 2021 Returns
Did you obtain a six-month filing extension for your 2021return? Time is running out—fast!
The extension only lasts until October 17, 2022. (October 15 is a Saturday, so the usual deadline is moved to the next business day.) Do not wait any longer to provide your tax return preparer with the documentation needed to complete the return,
Remember that a filing extension is not an extension for paying tax. Find out if you have any remaining tax liability.
Facts and Figures
Timely points of particular interest
IRS Upgrades—The IRS is getting a fresh influx of cash. Under the new Inflation Reduction Act (the IRA), its coffers will be boosted by an extra $79 billion over a ten-year period. The Treasury Department expects that taxpayers will notice dramatic improvements in wait times on phone calls and faster processing. Also, taxpayers may be able to respond to the IRS online by next tax filing season.
Things To Do—Do you want to become a more successful manager? Try meeting these three goals each day. (1) Get two to three important things done before noon. That will create a positive attitude for the rest of the day. (2) Break down projects into parts. Do the hardest parts first. (3) Tackle similar tasks at the same time. You are likely to produce more if you remain in the same mode.