Taxes

How to Get Tax Savings with an EV Credit

Personal Finance, Taxes / By

Electric vehicles (EVs) are increasing in popularity all the time — and more of them are qualifying for a federal tax credit. In fact, the IRS added several more eligible models over the summer.

The tax code provides a credit to buyers of qualifying plug-in electric drive motor vehicles, including passenger vehicles and light trucks. The credit is equal to $2,500 plus an additional amount, based on battery capacity, that can’t exceed $5,000. Therefore, the maximum credit allowed for a qualifying EV is $7,500.

EV Definition for Taxes

For purposes of the tax credit, a qualifying vehicle is defined as one with four wheels that’s propelled to a significant extent by an electric motor, which draws electricity from a battery. The battery must have a capacity of not less than four kilowatt hours and be capable of being recharged from an external source of electricity.

However, depending on the EV you purchase, the credit may not be available because of a per-manufacturer cumulative sales limitation. Specifically, it phases out over six quarters beginning when a manufacturer has sold at least 200,000 qualifying vehicles for use in the United States (determined on a cumulative basis for sales after December 31, 2009). For example, Tesla and General Motors vehicles are no longer eligible for the tax credit.

The IRS provides a list of qualifying vehicles on its website and, as mentioned, recently added more eligible models. You can access the list here.

Additional Points

There are some additional points about the plug-in EV tax credit to keep in mind. It’s allowed only in the year you place the vehicle in service, and the vehicle must be new. Also, an eligible vehicle must be used predominantly in the United States and have a gross weight of less than 14,000 pounds.

There’s a separate 10% federal income tax credit for the purchase of qualifying electric two-wheeled vehicles manufactured primarily for use on public thoroughfares and capable of at least 45 miles per hour (in other words, electric-powered motorcycles). It can be worth up to $2,500. This electric motorcycle credit was recently extended to cover qualifying 2021 purchases.

Only Basic Rules

These are only the basic rules. There may be additional incentives provided by your state. Contact Maggart if you’d like to receive more information about the federal plug-in EV tax break.

Which Business Website Costs Are Tax Deductible?

Business, Taxes / By

Every business needs a website, but it’s not always easy to determine which costs of running one are deductible. Fortunately, established rules that generally apply to the deductibility of more long-standing business costs provide business owners with a basic idea of how to anticipate and handle the tax impact of a website. And the IRS has issued guidance that applies to software costs.

Hardware Deductions

Hardware costs generally fall under the standard rules for depreciable equipment. Specifically, once website-related assets are up and running, you can deduct 100% of the cost in the first year they’re placed in service (before 2023). This favorable treatment is allowed under the 100% first-year bonus depreciation break.

In later years, you can probably deduct 100% of these costs in the year the assets are placed in service under the Section 179 first-year depreciation expensing privilege. However, Sec. 179 deductions are subject to several limitations.

For the 2021 tax year, the maximum Sec. 179 deduction is $1.05 million, subject to a phaseout rule. Under the rule, the deduction is phased out if more than a specified amount of qualified property is placed in service during the year. The threshold amount for 2021 is $2.62 million.

There’s also a taxable income limit. Under it, your Sec. 179 deduction can’t exceed your business taxable income. In other words, Sec. 179 deductions can’t create or increase an overall tax loss. However, any Sec. 179 deduction amount that you can’t immediately deduct is carried forward and can be deducted in later years (to the extent permitted by the applicable limits).

Software Deductions

Similar rules apply to off-the-shelf software that you buy for your business. However, software license fees are treated differently from purchased software costs for tax purposes. Payments for leased or licensed software used for your website are currently deductible as ordinary and necessary business expenses.

An alternative position is that your software development costs are currently deductible research and development costs under the tax code. To qualify for this treatment, the costs must be paid or incurred by December 31, 2022. A more conservative approach would be to capitalize the costs of internally developed software. Then you would depreciate them over 36 months.

If your website is primarily for advertising, you can also currently deduct internal website software development costs as ordinary and necessary business expenses.

Are you paying a third party for software to run your website? This is commonly referred to as “software as a service.” In general, payments to third parties are currently deductible as ordinary and necessary business expenses.

Other Considerations?

So much of business today seems to happen in virtual places other than your website — such as social media, apps and teleconferencing calls. Nonetheless, a central website where you can provide a solid overview of your company is still important. We can help you determine the appropriate tax treatment of website costs.

5 Key Points About Bonus Depreciation

Business, Employment, Taxes / By

Like most business owners, you’ve probably heard about 100% bonus depreciation — and hopefully you’ve been claiming it when appropriate. It’s available for a wide range of qualifying asset purchases and allows you to deduct the entire expense of an eligible asset in the year it’s placed in service.

But there are many important details to keep in mind as you plan your asset purchases for 2021 and beyond. Here are five key points about this powerful tax-saving tool:

1. It’s scheduled to be reduced and eliminated. 

Under current law, 100% bonus depreciation will be gradually reduced and eliminated for property placed in service in 2023 through 2026. Thus, an 80% rate will apply to property placed in service in 2023, 60% in 2024, 40% in 2025, and 20% in 2026. Bonus depreciation will be eliminated for 2027 and later years.

For some aircraft (generally, company planes) and for costs of certain property with a long production period, the reduction is scheduled to take place beginning a year later, from 2024 through 2027. Then it will be eliminated beginning in 2028.

Of course, Congress could pass legislation to extend bonus depreciation.

2. It’s available for new and most used property. 

Before a Tax Cuts and Jobs Act (TCJA) provision went into effect in late 2017, used property didn’t qualify for bonus depreciation. It currently qualifies unless the taxpayer is the party that previously used the property or unless the property was acquired in ineligible transactions. (These are, generally, acquisitions that are tax-free or from a related person or entity.)

3. In some situations you should elect to turn it down. 

Taxpayers can elect out of bonus depreciation for one or more classes of property. The election out may be useful for certain businesses. These include sole proprietorships and pass-through entities, such as partnerships, S corporations and, typically, limited liability companies, that want to prevent the “wasting” of depreciation deductions from applying them against lower-bracket income in the year property was placed in service — instead of applying them against anticipated higher-bracket income in future years.

C corporations are currently taxed at a flat rate. But because an increase to the corporate rate has been proposed, it could also make sense for C corporations to elect out of bonus depreciation this year.

4. Certain building improvements are eligible. 

Before the TCJA, bonus depreciation was available for two types of real property:

  1. land improvements other than buildings, such as fencing and parking lots; and
  2. qualified improvement property (QIP), a broad category of internal improvements made to nonresidential buildings after the buildings have been placed in service.

The TCJA inadvertently eliminated bonus depreciation for QIP. However, 2020’s CARES Act made a retroactive technical correction to the TCJA that makes QIP placed in service after December 31, 2017, eligible for bonus depreciation.

5. 100% bonus depreciation has — temporarily — reduced the importance of Section 179 expensing. 

If you own a smaller business, you’ve likely benefited from Sec. 179 expensing. This is an elective benefit that, subject to dollar limits, allows an immediate deduction of the cost of equipment, machinery, off-the-shelf computer software and certain building improvements.

Sec. 179 has been enhanced by the TCJA, but the availability of 100% bonus depreciation is economically equivalent and has greatly reduced the cases in which Sec. 179 expensing is useful. If bonus depreciation is reduced and eliminated as scheduled, then the importance of Sec. 179 will return for many taxpayers.

Know the Nuances of the Nanny Tax

Employment, Personal Finance, Taxes / By

Many families hire household workers to care for their children, their home, or their outdoor spaces. If you’re among them, be sure you know the nuances of the “nanny tax.”

Withholding Household Worker Taxes

For federal tax purposes, a household worker is anyone who does household work for you and isn’t an independent contractor. Common examples include child care providers, housekeepers and gardeners.

If you employ such a person, you aren’t required to withhold federal income taxes from the individual’s pay unless the worker asks you to and you agree. In that case, the worker would need to complete a Form W-4. However, you may have other withholding and payment obligations.

You must withhold and pay Social Security and Medicare taxes, otherwise known as “FICA” taxes, if your worker earns cash wages of $2,300 or more (excluding food and lodging) during 2021. If you reach the threshold, all wages (not just the excess) are subject to FICA taxes.

Employers are responsible for withholding the worker’s share and must pay a matching employer amount. The Social Security tax portion of FICA taxes is 6.2% for both the employer and the worker (12.4% total). Medicare tax is 1.45% each for the employer and the worker (2.9% total). If you prefer, you can pay your worker’s share of Social Security and Medicare taxes, instead of withholding it from pay.

However, if your worker is under 18 and child care isn’t his or her principal occupation, you don’t have to withhold FICA taxes. Therefore, if your worker is really a student/part-time babysitter, there’s no FICA tax liability.

Reporting and Paying the Taxes

You pay nanny tax by increasing your quarterly estimated tax payments or increasing withholding from your wages rather than by making an annual lump-sum payment. You don’t have to file any employment tax returns — even if you’re required to withhold or pay tax — unless you own a business. Instead, your tax professional will report employment taxes on Schedule H of your individual Form 1040 tax return.

On your return, your employer identification number (EIN) will be included when reporting employment taxes. The EIN isn’t the same as your Social Security number. If you need an EIN, you must file Form SS-4.

A Keen Awareness

Retaining a household worker calls for careful record keeping and a keen awareness of the applicable rules. Keep in mind that you may also have federal unemployment tax (FUTA) liability, as well as state and local tax obligations. Contact Maggart for assistance complying.

A Tax Quirk of Being a Business Partner

Business, Taxes / By

If you’re a partner in a business, you may have encountered a situation that gave you pause: In any given year, you may have been taxed on more partnership income than was distributed to you. The cause of this quirk of taxation lies in the way partnerships and partners are taxed.

Pass-Through Taxation

Unlike regular corporations, partnerships aren’t subject to income tax. Instead, each partner is taxed on the partnership’s earnings — whether or not they’re distributed to the partners. Similarly, if a partnership has a loss, the loss is passed through to the partners. (Be aware that various rules may prevent partners from currently using their share of a partnership’s loss to offset other income.)

While a partnership isn’t subject to income tax, it’s treated as a separate entity for purposes of determining its income, gains, losses, deductions and credits. This makes it possible to pass through to partners their share of these items.

Partnership Items

A partnership must file an information return, which is IRS Form 1065, “U.S. Return of Partnership Income.” On this form, the partnership separately identifies income, deductions, credits and other items. This is so partners can properly treat items that are subject to limits or other rules that could affect their treatment at the partner level.

Examples of such items include capital gains and losses, interest expense on investment debts, and charitable contributions. Each partner gets a Schedule K-1 showing his or her share of partnership items.

Basis & Distribution Rules

Basis and distribution rules ensure that partners aren’t taxed twice. A partner’s initial basis in his or her partnership interest (which varies depending on how the interest was acquired) is increased by his or her share of partnership taxable income.

When that income is paid out to partners in cash, they aren’t taxed on the cash if they have sufficient basis. Instead, partners reduce their basis by the distribution amount. If a cash distribution exceeds a partner’s basis, then the excess is taxed to the partner as a gain (often, capital gain).

The Tax Ins & Outs

Partnership structure offers owners many benefits, but it’s important to understand the tax ins and outs. Contact Maggart to discuss further.

Curtailing Cryptocurrency Tax Surprises

Cryptocurrency, Personal Finance, Taxes / By

As investing in Bitcoin, Dogecoin and other cryptocurrencies becomes increasingly popular, investors need to understand the potential tax ramifications. Unlike traditional currency, the IRS views cryptocurrency as property for federal income tax purposes and even asks about it on Form 1040.

Many transactions involving cryptocurrency — such as purchases of goods or services — become taxable events where the purchase is also considered a sale. In addition, certain changes to the blockchain (the distributed digital “ledger” on which cryptocurrency transactions are typically recorded) can trigger taxable income.

Crypto Tax Gains & Losses

Because cryptocurrency is property, investors recognize a capital gain or loss when they sell it in exchange for traditional currency. As with other capital assets, the amount of gain or loss is the difference between the adjusted basis in the cryptocurrency (usually, the amount paid to acquire it) and the amount for which it’s sold. And, as with other capital assets, gain or loss may be short term or long term, depending on whether an investor held the cryptocurrency for more than one year. If cryptocurrency is sold at a loss, there may be limitations on the deductibility of the capital losses.

Cryptocurrency owners often are surprised to discover that using cryptocurrency to pay for goods or services can also trigger a capital gain or loss. Let’s say you purchased 10 units of cryptocurrency 10 years ago for $1,000 each, or a total of $10,000. This year, when the cryptocurrency’s price has climbed to $5,000 per unit, you use it to purchase a $50,000 car. Assuming your adjusted basis in the cryptocurrency is $10,000, you’ll recognize a $40,000 long-term capital gain. Generally, your gain or loss is the difference between your adjusted basis in the cryptocurrency and the fair market value of the goods or services you receive in exchange for it.

Crypto Forks & Drops

In some cases, a cryptocurrency owner may recognize taxable income because of certain blockchain events. Taxable income may be triggered even if you don’t conduct transactions or take any other actions with the cryptocurrency.

IRS guidance in 2019 addressed the tax implications of two types of blockchain events: “hard forks” and “airdrops.” A hard fork occurs “when a cryptocurrency on a distributed ledger undergoes a protocol change resulting in a permanent diversion from the legacy or existing distributed ledger.” Put much more simply, it’s when a single cryptocurrency is split in two.

A hard fork may or may not be followed by an airdrop, which the IRS describes as “a means of distributing units of a cryptocurrency to the distributed ledger addresses of multiple taxpayers.” According to the guidance, when an airdrop follows a hard fork, it “results in the distribution of units of the new cryptocurrency to addresses containing the legacy cryptocurrency.” In simpler terms, it’s when “free coins” representing the new cryptocurrency are dropped into the existing cryptocurrency wallets of the owners of the legacy cryptocurrency.

If the new cryptocurrency isn’t airdropped or otherwise transferred to an account of the legacy cryptocurrency’s owner, a hard fork doesn’t trigger taxable income. On the other hand, if a hard fork is followed by an airdrop (which enables owners to immediately dispose of the new cryptocurrency), the owner recognizes ordinary income in the year the new cryptocurrency is received.

Stay Current

Buying and selling cryptocurrency involves significant risk, including the possibility you could lose part or all of the money you’ve invested. Tax treatment of cryptocurrency is also subject to change. The IRS will likely continue to provide guidance on the distinctive tax issues presented by cryptocurrency. Maggart can help you stay current on these developments and work with you to avoid unpleasant tax surprises.

Revisiting Worker Classification Rules

Business, Employment, Taxes / By

Over the last year, many companies have experienced workforce fluctuations and have engaged independent contractors to address staffing needs. In May, the U.S. Department of Labor (DOL) announced that it had withdrawn the previous administration’s independent contractor rule that had been scheduled to go into effect earlier this year. That rule generally would have made it easier to classify certain workers as independent contractors for the purposes of the Fair Labor Standards Act (FLSA), and thus make them ineligible for minimum wage and other FLSA protections.

While worker classification for DOL purposes isn’t necessarily the same for IRS purposes, now is a good time to revisit the federal tax implications of worker classification.

Tax Obligations

The question of whether a worker is an independent contractor or an employee for federal income and employment tax purposes is a complex one. If a worker is an employee, the company must withhold federal income and payroll taxes, and pay the employer’s share of FICA taxes on the wages, plus FUTA tax. And there may be state tax obligations as well.

These obligations don’t apply if a worker is an independent contractor. In that case, the business simply sends the contractor a Form 1099-NEC for the year showing the amount paid (if the amount is $600 or more).

No Uniform Definition

The IRS and courts have generally ruled that individuals are employees if the organization they work for has the right to control and direct them in the jobs they’re performing. Otherwise, the individuals are generally independent contractors, though other factors are considered.

Some employers that have misclassified workers as independent contractors may get some relief from employment tax liabilities under Internal Revenue Code Section 530. In general, this protection applies only if an employer filed all federal returns consistent with its treatment of a worker as a contractor and treated all similarly situated workers as contractors.

The employer must also have a “reasonable basis” for not treating the worker as an employee. For example, a “reasonable basis” exists if a significant segment of the employer’s industry traditionally treats similar workers as contractors. (Note: Sec. 530 doesn’t apply to certain types of technical services workers. And some categories of individuals are subject to special rules because of their occupations or identities.)

Asking for a Determination

Under certain circumstances, you may want to ask the IRS (on Form SS-8) to rule on whether a worker is an independent contractor or employee. However, be aware that the IRS has a history of classifying workers as employees rather than independent contractors.

Consult a CPA before filing Form SS-8 because doing so may alert the IRS that your company has worker classification issues — and inadvertently trigger an employment tax audit. It may be better to ensure you are properly treating a worker as an independent contractor so that the relationship complies with the tax rules.

Latest Tax Developments

With growth in the “gig” economy and other changes to the ways Americans are working, the question of who is an independent contractor and who is an employee will likely continue to evolve. Stay tuned for the latest developments and contact us for any help you may need with worker classification.

2 More Ways Parents Are Benefitting from the American Rescue Plan Act

Medical Expenses, Personal Finance, Taxes / By

When you think back on this spring, you may fondly recall a substantial deposit made to your bank account by the federal government (if you were eligible). Economic Impact Payments were a focal point of the American Rescue Plan Act (ARPA), signed into law in March, and the payments were even larger for parents with dependent children. But ARPA contains two other provisions that benefit parents:

1. Child credit expansion and advance payments. 

For 2021, this refundable tax credit has been increased from $2,000 to $3,000 per child — $3,600 for children under six years of age. In addition, qualifying children now include 17-year-olds.

The child credit is subject to modified adjusted gross income (AGI) phaseout rules and begins to phase out when MAGI exceeds:

  • $400,000 for married couples who file a joint return, and
  • $200,000 for other taxpayers.

The increased credit amount ($1,000 or $1,600) is subject to lower income phaseouts than the ones that apply to the first $2,000 of the credit. The increased amount begins to phase out when MAGI exceeds:

  • $150,000 for joint filers,
  • $112,500 for heads of household, and
  • $75,000 for other taxpayers.

ARPA also calls for the IRS to make periodic advance payments of the child credit totaling 50% of the estimated 2021 credit amount. The IRS has announced the payments will begin on July 15, 2021. They’ll then be made on the 15th of each month (unless the 15th falls on a weekend or holiday).

Recipients will receive the monthly payments through direct deposit, paper check or debit cards. The IRS says that it is committed to maximizing the use of direct deposit.

2. Child and dependent care break increases. 

For 2021, the amount of qualifying expenses for the refundable child and dependent care credit has been increased to:

  1. $8,000 (from $3,000) if there’s one qualifying care individual; and
  2. $16,000 (from $6,000) if there are two or more such individuals.

The maximum percentage of qualifying expenses for which credit is allowed has been increased from 35% to 50%. So the credit ultimately is worth up to $4,000 or $8,000. But the credit is subject to an income-based phaseout beginning at household income levels exceeding $125,000.

The amount you can contribute to a child and dependent care Flexible Spending Account (FSA, also sometimes referred to as a “dependent care assistance program”) also has been increased. For 2021, it’s $10,500 (up from $5,000 for 2020). The FSA pays or reimburses you for these expenses. But you can’t claim a tax credit for expenses paid by or reimbursed through an FSA.

The Tax Treatment of Start-up Expenses

Business, Taxes / By

With the economy improving, many business owners and entrepreneurs may decide to launch new enterprises. If you’re among them, be aware that the way you handle some of your initial expenses can make a large difference in your tax liability.

General Rules

Start-up costs include those incurred or paid while creating an active trade or business — or investigating the creation or acquisition of one. Under the Internal Revenue Code, taxpayers can elect to deduct up to $5,000 of business start-up and $5,000 of organizational costs in the year the business begins.

As you know, $5,000 doesn’t get you very far today! And the $5,000 deduction is reduced dollar-for-dollar by the amount by which your total start-up or organizational costs exceed $50,000. Any remaining costs must be amortized over 180 months on a straight-line basis.

In addition, no start-up deductions are allowed until the year when “active conduct” of your new business begins. Generally, that means the year when the business has all the pieces in place to begin earning revenue. To determine whether a taxpayer meets this test, the IRS and courts generally ask questions such as: Did the taxpayer undertake the activity intending to earn a profit? Was the taxpayer regularly and actively involved? Did the activity actually begin?

Applicable Expenses

In general, start-up expenses include all amounts you spend to investigate creating or acquiring a business, launching the enterprise, or engaging in a for-profit activity while anticipating the activity will become an active business.

To be eligible for the election, an expense also must be one that would be deductible if it were incurred after a business began. One example is money you spend analyzing potential markets for a new product or service.

To qualify as an “organization expense,” the expenditure must be related to creating a corporation or partnership. Some examples of organization expenses are legal and accounting fees for services related to organizing a new business and filing fees paid to the state of incorporation.

Thinking Ahead

If you have start-up expenses that you’d like to deduct this year, record keeping is critical. Contact Maggart about your start-up plans. We can help with the tax and other aspects of your new business.

3 Things to Know After Filing Your Tax Return

Business, Personal Finance, Records, Taxes / By

Given that it’s after April 15, normally most people would have filed their income tax return by now. But with the deadline for filing 2020 individual returns pushed out to May 17, you might not have filed yours quite yet. Or you might be taking advantage of extending your return to Oct. 15. Whenever you file, here are three important things to keep in mind afterwards:

1. You can check on your refund. 

The IRS has an online tool that can tell you the status of your refund. Go to irs.gov and click on “Get Your Refund Status.” You’ll need your Social Security number, filing status and the exact refund amount.

2. You can file an amended return if you forgot to report something. 

In general, you can file an amended tax return and claim a refund within three years after the date you filed your original return or within two years of the date you paid the tax, whichever is later. But if you filed before the deadline (without regard to extensions), you typically have until three years from the deadline to file an amended return.

There are a few opportunities when you have longer to file an amended return. For example, the statute of limitations for bad debts is longer than the usual three-year time limit for most items on your tax return. In general, you can amend your tax return to claim a bad debt for seven years from the due date of the tax return for the year that the debt became worthless.

3. You can throw out some old tax records. 

You should keep tax records related to your return for as long as the IRS can audit your return or assess additional taxes. The statute of limitations is generally three years after you file your return.

That means you can probably dispose of most tax-related records for the 2017 tax year and earlier years. (If you filed an extension for your 2017 return, hold on to your records until at least three years from when you filed the extended return.) However, the statute of limitations extends to six years for taxpayers who understate their gross income by more than 25%.

You’ll need to hang on to certain tax-related records longer. For example, keep actual tax returns indefinitely so you can prove to the IRS that you filed legitimately. (There’s no statute of limitations for an audit if you didn’t file a return or you filed a fraudulent one.)

Keep records associated with retirement accounts until you’ve depleted the account and reported the last withdrawal on your tax return, plus three (or six) years. And retain records related to real estate or investments for as long as you own the asset, plus at least three years after you sell it and report the sale on your tax return. (Keep these records for six years if you want to be extra safe.)

Our CPAs are always available.

Contact the Maggart team if you have further questions about your refund, filing an amended return, or record retention. We’re here all year!