Deputy Secretary of the Treasury Wally Adeyemo was out promoting the positives of the Inflation Reduction Act in an apparent effort to counteract the messaging from Republicans who are working to abolish the law as well as to replace the IRS with a national sales tax.

Deputy Secretary of the Treasury Wally Adeyemo was out promoting the positives of the Inflation Reduction Act in an apparent effort to counteract the messaging from Republicans who are working to abolish the law as well as to replace the IRS with a national sales tax.

Speaking January 17, 2023, at a White House event, Deputy Secretary Adeyemo described the law as "the most significant piece of legislation in our country’s history when it comes to building a clean energy future," and highlighted the law’s tax incentives aimed at getting more Americans to invest in clean energy.

For example, he noted the $1,200 available to people for making homes more energy efficient with new insulation, doors, windows, and other upgrades. He also highlighted the up to $2,000 available to upgrade existing furnaces and air conditioners with energy efficient heat pumps, as well as tax credits to help defray the cost of installing solar panels on their home rooftops.

Adeyemo also highlighted the tax incentives related to the purchase of clean vehicles, including up to a $7,500 tax credit for a new vehicle and up to $4,000 for a pre-owned vehicle.

"Treasury is working expeditiously to provide clarity and certainty to taxpayers, so the climate and economic benefits of this historic legislation can be felt as quickly as possible," he said.

Adeyemo also referenced the additional funding the Internal Revenue Service is receiving due to the Inflation Reduction Act. He noted that a "well-resourced IRS … is essential for effective implementation of the IRA’s clean energy credits and other tax benefits, and for ensuring fairness of our tax system overall."

Countering Republican Messaging

Adeyemo’s comments come as Republicans in their new majority in the House of Representatives begin to work on abolishing the IRA and dismantling the IRS.

Already passed in the GOP-led House is the Family and Small Business Taxpayer Protection Act (H.R. 23), which would eliminate the additional IRS funding in the IRA and in particular targets the 87,000 new hires by the agency. GOP messaging continues to misrepresent those new hires as all being IRS agents who will target low- and middle-income taxpayers with audits, despite the stated purposed of those new hires to be primarily for customer service, with the new agents that do get hired to be used to target the wealthiest taxpayers in an effort to ensure they are paying their fair share and to close the tax gap.

Indeed a one-sheet on the H.R. 23 posted to the House Ways and Means website highlights that the bill is targeting the 87,000 new hires which it claims will all be agents. The bill passed the House on January 9, 2023, by a 221-210 vote along party lines. The Senate is likely not going to take up the bill and President Biden already threatened a veto if the bill made it to his desk.

The Congressional Budget Office estimates that enacting this bill would actually reduce revenue by nearly $186 billion and increase the deficit by more than $114 billion.

House Republicans also introduce a bill (H.R. 25) that would abolish the IRS and replace its revenue generating taxation authority with a national sales tax of 23 percent, with a means-tested monthly sales tax rebate available to taxpayers who qualify. No further action on this bill has been taken.

The IRS has issued the luxury car depreciation limits for business vehicles placed in service in 2023 and the lease inclusion amounts for business vehicles first leased in 2023.

The IRS has issued the luxury car depreciation limits for business vehicles placed in service in 2023 and the lease inclusion amounts for business vehicles first leased in 2023.

Luxury Passenger Car Depreciation Caps

The luxury car depreciation caps for a passenger car placed in service in 2023 limit annual depreciation deductions to:

• $12,200 for the first year without bonus depreciation
• $20,200 for the first year with bonus depreciation
• $19,500 for the second year
• $11,700 for the third year
• $6,960 for the fourth through sixth year

Depreciation Caps for SUVs, Trucks and Vans

The luxury car depreciation caps for a sport utility vehicle, truck, or van placed in service in 2023 are:

• $12,200 for the first year without bonus depreciation
• $20,200 for the first year with bonus depreciation
• $19,500 for the second year
• $11,700 for the third year
• $6,960 for the fourth through sixth year

Excess Depreciation on Luxury Vehicles

If depreciation exceeds the annual cap, the excess depreciation is deducted beginning in the year after the vehicle’s regular depreciation period ends.

The annual cap for this excess depreciation is:

• $6,960 for passenger cars and
• $6,960 for SUVS, trucks, and vans.

Lease Inclusion Amounts for Cars, SUVs, Trucks and Vans

If a vehicle is first leased in 2023, a taxpayer must add a lease inclusion amount to gross income in each year of the lease if its fair market value at the time of the lease is more than:

• $60,000 for a passenger car, or
• $60,000 for an SUV, truck or van.

The 2023 lease inclusion tables provide the lease inclusion amounts for each year of the lease.

The lease inclusion amount results in a permanent reduction in the taxpayer’s deduction for the lease payments.

Vehicles Exempt from Depreciation Caps and Lease Inclusion Amounts

The depreciation caps and lease inclusion amounts do not apply to:

• cars with an unloaded gross vehicle weight of more than 6,000 pounds; or
• SUVs, trucks and vans with a gross vehicle weight rating (GVWR) of more than 6,000 pounds.

So taxpayers who want to avoid these limits should "think big."

IRS has reminded eligible workers from low and moderate income groups to make qualifying retirement contributions and get the Saver’s Credit on their 2022 tax return. Taxpayers have until the due date for filing their 2022 return, that is April 18, 2023, to set up a new IRA or add money to an existing IRA for 2022. 

IRS has reminded eligible workers from low and moderate income groups to make qualifying retirement contributions and get the Saver’s Credit on their 2022 tax return. Taxpayers have until the due date for filing their 2022 return, that is April 18, 2023, to set up a new IRA or add money to an existing IRA for 2022. The Retirement Savings Contributions Credit, also known as the Saver’s Credit, helps offset part of the first $2,000 workers voluntarily contribute to Individual Retirement Arrangements, 401(k) plans and similar workplace retirement programs. The credit also helps any eligible person with a disability who is the designated beneficiary of an Achieving a Better Life Experience (ABLE) account, contribute to that account. The Saver’s Credit is available in addition to any other tax savings that apply, and contributions to both, Roth and traditional IRAs qualify for the credit.

Taxpayers participating in workplace retirement plans must make their contributions by December 31, 2022. The Saver’s Credit supplements other tax benefits available to people who set money aside for retirement. The Service also urges employees who are unable to set aside money in 2022, to schedule their 2023 contributions soon, so their employers can begin withholding them in January, 2023.

The IRS also informs taxpayers about the eligibility and restrictions to Saver's Credit:

• Saver's Credit can be claimed by married couples filing jointly with incomes up to $68,000 in 2022 or $73,000 in 2023, heads of household with incomes up to $51,000 in 2022 or $54,750 in 2023, married individuals filing separately and singles with incomes up to $34,000 in 2022 or $36,500 in 2023.
• Eligible taxpayers must be at least 18 years of age.
• Anyone claimed as a dependent on someone else’s return cannot take the credit, and any person enrolled as a full-time student during any part of 5 calendar months during the year, cannot claim the credit.

A taxpayer’s credit amount is based on their filing status, adjusted gross income, tax liability and amount contributed to qualifying retirement programs or ABLE accounts. The Service has cautioned that, though the maximum Saver’s Credit is $1,000 ($2,000 for married couples), it was often much less.

The IRS has also announced that, any distributions from a retirement plan or ABLE account, reduces the contribution amount used to figure the credit. For 2022, this rule applies to distributions received after 2019 and before the due date, including extensions, of the 2022 return.

The IRS and Treasury have announced have released a list of clean vehicles that meet the requirements to claim the new clean vehicle tax credit, along with FAQs to help consumers better understand how to access the various tax incentives for the purchase of new and used electric vehicles available beginning January 1, 2023.

The IRS and Treasury have announced have released a list of clean vehicles that meet the requirements to claim the new clean vehicle tax credit, along with FAQs to help consumers better understand how to access the various tax incentives for the purchase of new and used electric vehicles available beginning January 1, 2023. The Service has clarified the incremental cost of commercial clean vehicles in 2023 and stated that, for vehicles under 14,000 pounds, the tax credit was 15-percent of a qualifying vehicle’s cost and 30-percent if, the vehicle is not gas or diesel powered.

The Service has also given a notice of intent to propose regulations on the tax credit for new clean vehicles, to provide clarity to manufacturers and buyers, on changes that take effect automatically on January 1, such as Manufacturer’s Suggested Retail Price limits. The notice has further clarified, that a vehicle would be considered as placed in service, for the purposes of the tax credit, on the date the taxpayer takes possession of the vehicle, which may or may not be the same date as the purchase date.

In order to help manufacturers identify vehicles eligible for tax credit, when the new requirements go into effect after a Notice of Proposed Rulemaking is issued in March, the Treasury also released a white paper on the anticipated direction of their upcoming proposed guidance on the critical minerals and battery components requirements and the process for determining whether vehicles qualify under these requirements.

The Treasury Department and the Internal Revenue Service have issued guidance pertaining to the new credit for qualified commercial clean vehicles, established by the Inflation Reduction Act of 2022 ( P.L. 117-169). Notice 2023-9 establishes a safe harbor regarding the incremental cost of certain qualified commercial clean vehicles placed in service in calendar year 2023.

The Treasury Department and the Internal Revenue Service have issued guidance pertaining to the new credit for qualified commercial clean vehicles, established by the Inflation Reduction Act of 2022 ( P.L. 117-169). Notice 2023-9 establishes a safe harbor regarding the incremental cost of certain qualified commercial clean vehicles placed in service in calendar year 2023.

Credit for Qualified Commercial Clean Vehicles

The amount of the credit is equal to the lesser of (1) 15% of the basis of the vehicle (30% if the vehicle is not powered by a gasoline or diesel internal combustion engine), or (2) the incremental cost of the vehicle. The credit is limited to $7,500 for a vehicle with a gross vehicle weight rating (GVWR) 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 that is powered solely by a gasoline or diesel internal combustion engine and is comparable in size and use to the qualified vehicle.

Under Code 45W(c), a qualified commercial clean vehicle includes a vehicle treated as a motor vehicle for purposes of title II of the Clean Air Act and manufactured primarily for use on public streets, roads, and highways (not including street vehicles); and mobile machinery (as defined by Code 4053(8)).

Safe Harbor

The Treasury Department reviewed a Department of Energy incremental cost analysis (DOE analysis) of current costs for all street vehicles in calendar year 2023. The DOE analysis determined and/or provided the following:

• the incremental cost of all street vehicles (other than compact car PHEVs) that have a gross vehicle weight rating of less than 14,000 pounds will be greater than $7,500;
• the incremental cost for compact car PHEVs, including mini-compact and sub-compact cars, will be less than $7,500;
• an incremental cost analysis of current costs for several representative classes of street vehicles with a gross vehicle weight rating of 14,000 pounds or more in calendar year 2023; and
• the incremental cost will not limit the available credit amount for vehicles placed in service in calendar year 2023.

Accordingly, the Treasury Department and IRS will accept a taxpayer’s use of the incremental cost published in the DOE Analysis to calculate the credit amount for compact car PHEVs placed in service during calendar year 2023, and for the appropriate class of street vehicle to calculate the credit amount for vehicles placed in service during calendar year 2023.

A taxpayer's use of $7,500 as the incremental cost for all street vehicles (other than compact car PHEVs) with a gross vehicle weight rating of less than 14,000 pounds to calculate the credit for vehicles placed in service during calendar year 2023.

The IRS announced a delay in reporting thresholds for third-party settlement organizations (TSPOs). As a result of this delay, third-party settlement organizations will not be required to report tax year 2022 transactions on a Form 1099-K to the IRS or the payee for the lower, $600 threshold amount enacted as part of the American Rescue Plan Act of 2021 ( P.L. 117-2).

The IRS announced a delay in reporting thresholds for third-party settlement organizations (TSPOs). As a result of this delay, third-party settlement organizations will not be required to report tax year 2022 transactions on a Form 1099-K to the IRS or the payee for the lower, $600 threshold amount enacted as part of the American Rescue Plan Act of 2021 ( P.L. 117-2).

Background

Code Sec. 6050W requires payment settlement entities to file an information return for each calendar year for payments made in settlement of certain reportable payment transactions. The annual information return must set forth the (1) name, address, and taxpayer identification number (TIN) of the participating payee to whom payments were made; and (2) gross amount of the reportable payment transactions with respect to that payee. The returns must be furnished to the participating payees on or before January 31 of the year following the calendar year for which the return was made. Further, the returns must be filed with the IRS on or before February 28 (March 31 if filing electronically) of the year following the calendar year for which the return was made.

Transition Period

A TPSO will not be required to report payments in settlement of third party network transactions with respect to a participating payee unless the gross amount of aggregate payments to be reported exceeds $20,000 and the number of such transactions with that participating payee exceeds 200. This condition applies to calendar years beginning before January 1, 2023. The Service will not assert penalties under Code Sec. 6721 or 6722 for TPSOs failing to file or failing to furnish Forms 1099-K unless the gross amount of aggregate payments to be reported exceeds $20,000 and the number of transactions exceeds 200.

For returns for calendar years beginning after December 31, 2022, a TPSO would be required to report payments in settlement of third party network transactions with any participating payee that exceed a minimum threshold of $600 in aggregate payments, regardless of the number of such transactions. The delay does not affect requirements of Code Sec. 6050W that were not modified by the American Rescue Plan Act. Taxpayers that have performed backup withholding under Code Sec. 3406(a) during calendar year 2022 must file a Form 1099-K, Payment Card and Third-Party Network Transactions, with the IRS and furnish a copy to the payee if total payments to and withholding from the payee exceeded $600 for the calendar year.

The IRS has notified taxpayers of the applicable reference standard required to be used to determine the amount of the energy efficient commercial building (EECB) property deduction allowed under Code Sec. 179D as amended by the Inflation Reduction Act of 2022 (IRA) ( P.L. 117-169). 

The IRS has notified taxpayers of the applicable reference standard required to be used to determine the amount of the energy efficient commercial building (EECB) property deduction allowed under Code Sec. 179D as amended by the Inflation Reduction Act of 2022 (IRA) ( P.L. 117-169). Further, the IRS has announced the existing reference standard, affirmed a new reference standard and clarified when each of the two reference standards will apply to taxpayers. The effective date of this announcement is January 1, 2023.

The American Society of Heating, Refrigerating, and Air Conditioning Engineers (ASHRAE) and the Illuminating Engineering Society of North America Reference Standard 90.1-2019 has been affirmed as the applicable Reference Standard 90.1 for purposes of calculating the annual energy and power consumption and costs with respect to the interior lighting systems, heating, cooling, ventilation, and hot water systems of the reference building as follows:

• For property for which construction begins after December 31, 2022, ASHRAE 90.1-2019 will be the applicable standard for property that is placed in service after December 31, 2026.
• Taxpayers who already began or will begin construction by December 31, 2022, or who already placed property in service or will place property in service by December 31, 2026, are not subject to the updated Reference Standard 90.1-2019. For such property, the applicable Reference Standard 90.1 is Reference Standard 90.1-2007.
• Taxpayers who begin construction before January 1, 2023 may apply Reference Standard 90.1-2007 regardless of when the building is placed in service.

The Treasury Department and the IRS have provided guidance announcing that they intend to issue proposed regulations to address the application of the new one-percent corporate stock repurchase excise tax under Code Sec. 4501, which was added by the Inflation Reduction Act of 2022 ( P.L. 117-169).

The Treasury Department and the IRS have provided guidance announcing that they intend to issue proposed regulations to address the application of the new one-percent corporate stock repurchase excise tax under Code Sec. 4501, which was added by the Inflation Reduction Act of 2022 ( P.L. 117-169).

Excise Tax on Stock Repurchases

Beginning in 2023, a publicly traded U.S. corporation is subject to a one-percent excise tax on the value of its stock that the corporation repurchases during the tax year, effective for stock repurchases made after December 31, 2022. Repurchases include stock redemptions, as well as economically similar transactions as determined by the Treasury Secretary.

The excise tax does not apply if:

• the total value of the stock repurchased during the tax year does not exceed $1 million;
• the repurchased stock (or its value) is contributed to an employee pension plan, employee stock ownership plan (ESOP), or similar plan;
• the repurchase is by a regulated investment company (RIC) or a real estate investment trust (REIT);
• the repurchase is part of a reorganization in which no gain or loss is recognized;
• the repurchase is treated as a dividend; or
• the repurchase is by a dealer in securities in the ordinary course of business.

Interim Guidance

The interim guidance is intended to clarify excise tax calculation, and the application of Code Sec. 4501 to certain transactions and other events occurring before the proposed regulations are issued.

Among other things, the interim guidance addresses the $1 million de minimis exception; the stock repurchase excise tax base; redemptions and economically similar transactions; acquisitions by specified affiliates, applicable specified affiliates, or covered surrogate foreign corporations; timing and fair market value of repurchased stock; statutory exceptions; and a netting rule. The guidance also includes illustrative examples.

Reporting

The proposed regulations are anticipated to provide that the stock repurchase excise tax must be reported on IRS Form 720, Quarterly Federal Excise Tax Return. To facilitate the tax computation, the IRS also intends to issue an additional form that taxpayers will be required to attach to Form 720.

Although Form 720 is filed quarterly, the Treasury and IRS expect the proposed regulations to provide that the stock repurchase tax will be reported once per tax year, on the Form 720 that is due for the first full quarter after the close of the taxpayer’s tax year.

Applicability Dates

The proposed regulations are anticipated to provide that rules consistent with those in the guidance will generally apply to repurchases of stock of a covered corporation made after December 31, 2022, and to issuances of stock made during a tax year ending after December 31, 2022. Rules consistent with those in the guidance on purchases funded by applicable specified affiliates will apply to repurchases and acquisitions of stock made after December 31, 2022, that are funded on or after the date the guidance is released to the public.

Until the proposed regulations are issued, taxpayers can rely on the rules in the guidance.

Request for Comments

Interested parties can submit written comments on the rules by or before 60 days after the date the guidance is published in the Internal Revenue Bulletin. Comments may be submitted by the Federal E-rulemaking Portal ( https://www.regulations.gov), or by mail to Internal Revenue Service, CC:PA:LPD:PR ( Notice 2023-2), Room 5203, P.O. Box 7604, Ben Franklin Station, Washington, D.C., 20044. Refer to Notice 2023-2.

With the transition of leadership from Democrats to Republicans in the House of Representatives comes new rules that legislators must adhere to, and they could have implications on tax policy.

With the transition of leadership from Democrats to Republicans in the House of Representatives comes new rules that legislators must adhere to, and they could have implications on tax policy.

The rules, which were adopted January 9, 2023, almost exclusively along party lines (only one Republican voted against and no Democrats voted in favor), contain two key provisions that could impact tax policy in at least the next two years. First is the need for a supermajority of lawmakers to vote in favor of a tax rate increase and the second is a replacement of the "pay as you go" rule {any increase in spending needs a mechanism to fund the increase) to a "cut as you go" rule, which means any increase in spending in one area must be offset by a cut of funding in another area.

A summary of the rules states that it "restores a requirement for a three-fifths supermajority vote on tax rate increases." This is likely to have little impact as there likely will not be many, if any, proposals to increase taxes coming out of the GOP-led House, especially considering many Republicans signed a pledge to oppose increase taxes.

"While it is unsurprising that Republicans approved this rule, it undermines the stated goal of lowering the debt," Joe Hughes, federal policy analyst at the Institute on Taxation and Economic Policy, stated in a blog on the rules. He added that "there is a clear contradiction in stating that government should take on less debt while putting tight restraints on the government’s ability to pay for things."

The second provision, cut as you go, requires that increases in mandatory spending programs, including programs such as Social Security, Medicare, veterans’ benefits and unemployment compensation, be offset by cuts to other mandatory spending programs.

"This means that the House cannot even pass increases to these programs that are fully paid for with new revenue, unless they also cut some other program in this category," Hughes notes.

This could make passage of enhancements to popular tax provisions more problematic. For example, the cut as you go rule "makes it harder to enhance proven and effective policies like the Child Tax Credit (CTC) or Earned Income Tax Credit (EITC) because the refundable portions of the credits—the amount that can exceed the income tax a family would otherwise owe—are counted as mandatory spending under the budget scoring rules used by Congress," Hughes writes, noting that any improvements would require cuts to another essential program like Social Security or Medicare.

"Advocates and lawmakers hoping to restore the 2021 expansion, or otherwise improve the CTC or EITC, will now face an even tougher road ahead" due to the cut as you go rule, he states.

Despite a significant number of challenges faced by taxpayers in 2022, National Taxpayer Advocate Erin Collins has reason to be more optimistic for 2023.

"We have begun to see the light at the end of the tunnel," Collins wrote in the 2022 annual NTA report to Congress, released on January 11, 2023. "I’m just not sure how much further we have to travel before we see sunlight."

Despite a significant number of challenges faced by taxpayers in 2022, National Taxpayer Advocate Erin Collins has reason to be more optimistic for 2023.

"We have begun to see the light at the end of the tunnel," Collins wrote in the 2022 annual NTA report to Congress, released on January 11, 2023. "I’m just not sure how much further we have to travel before we see sunlight."

She highlighted three key areas that are providing a foundation for the optimistic outlook for this year:

• The IRS has largely worked through its backlog of unprocessed returns, though there still remains a high volume of suspended returns and correspondence;
• Congress has provided funding to increase customer service staffing; and
• The agency has already added 4,000 new customer service and is seeking to add 700 additional employees to provide in-person help at its Taxpayer Assistance Centers.

Collins did caution that while she is optimistic for the future, the near term will still be faced with challenges. In particular, she noted that while new staff are being trained, some of the issues that have been plaguing the IRS will continue.

"As new employees are added, they must be trained." Collins noted. "For most jobs, IRS does not maintain a separate cadre of instructors. Instead, experienced employees must be pulled off their regular caseloads to provide the initial training and act as on-the-job instructors. In the short run, that may mean that fewer employees are assisting taxpayers, particularly experienced employees who are likely to be the most effective trainers."

2022 Challenges

Taking into consideration the time needed to train new employees, some of the challenges from 2022 that were highlighted in the report could still be an issue early into 2023.

That could mean ongoing processing and refund delays. The COVID-19 pandemic created a significant backlog of unprocessed returns and while the IRS has made strides to reducing that backlog, as of December 23, 2022, the agency reported it still has a backlogged inventory of about 400,000 individual tax returns and about 1 million business tax returns. It could also mean ongoing delays in processing taxpayer correspondence and other cases in the Accounts Management function.

Another issue that could linger as more employees are being trained is getting a live person on the telephone. NTA reported that about one in eight calls from taxpayers to the agency made it through to a live person, with hold times for taxpayers averaged 29 minutes.

Tax professionals were able to get through to a live person about ever one in six calls to the Practitioner Priority Service, with about 25 minutes of hold time on average.

"Tax professionals are key to a successful tax administration," Collins wrote. "The challenges of the past three filing seasons have pushed tax professionals to their limits, raising client doubts in their abilities and created a loss of trust in the system."

Recommendations

The report makes a number of recommendations both to the IRS and legislative recommendations to strengthen taxpayer rights and improve tax administration.

To the IRS, Collins recommends a couple of employee-related items – hiring and training more human resource employees to manage the hiring of all agency employees and ensuring all IRS employees are well-trained to do their jobs.

On the IT front, she also recommended improvements to online account accessibility and functionality to make them comparable to private financial institutions’ online accounts, as well as temporarily expand the uses of the documentation upload tool or similar technology. Also, there was a call to enable all taxpayers to e-file their tax returns.

Among the legislative recommendations are amending the “lookback period” to allow tax refunds for certain taxpayers who took advantage of the postponed filing deadlines due to COVID-19; establish minimum standards for paid tax preparers; expand the U.S. Tax Court’s jurisdiction to adjudicate refund cases and assessable penalties; modify the requirement that written receipts acknowledge charitable contributions must predate the filing of a tax return; and make the Earned Income Tax Credit structure simpler.

If you use your car for business purposes, you may have learned that keeping track and properly logging the variety of expenses you incur for tax purposes is not always easy. Practically speaking, how often and how you choose to track expenses associated with the business use of your car depends on your personality; whether you are a meticulous note-taker or you simply abhor recordkeeping. However, by taking a few minutes each day in your car to log your expenses, you may be able to write-off a larger percentage of your business-related automobile costs.

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If you use your car for business purposes, you may have learned that keeping track and properly logging the variety of expenses you incur for tax purposes is not always easy. Practically speaking, how often and how you choose to track expenses associated with the business use of your car depends on your personality; whether you are a meticulous note-taker or you simply abhor recordkeeping. However, by taking a few minutes each day in your car to log your expenses, you may be able to write-off a larger percentage of your business-related automobile costs.

Regardless of the type of record keeper you consider yourself to be, there are numerous ways to simplify the burden of logging your automobile expenses for tax purposes. This article explains the types of expenses you need to track and the methods you can use to properly and accurately track your car expenses, thereby maximizing your deduction and saving taxes.

Expense methods

The two general methods allowed by the IRS to calculate expenses associated with the business use of a car include the standard mileage rate method or the actual expense method. The standard mileage rate for 2017 is 53.5 cents per mile. In addition, you can deduct parking expenses and tolls paid for business. Personal property taxes are also deductible, either as a personal or a business expense. While you are not required to substantiate expense amounts under the standard mileage rate method, you must still substantiate the amount, time, place and business purpose of the travel.

The actual expense method requires the tracking of all your vehicle-related expenses. Actual car expenses that may be deducted under this method include: oil, gas, depreciation, principal lease payments (but not interest), tolls, parking fees, garage rent, registration fees, licenses, insurance, maintenance and repairs, supplies and equipment, and tires. These are the operating costs that the IRS permits you to write-off. For newly-purchased vehicles in years in which bonus depreciation is available, opting for the actual expense method may make particularly good sense since the standard mileage rate only builds in a modest amount of depreciation each year. For example, for 2017, when 50 percent bonus depreciation is allowed, maximum first year depreciation is capped at $11,160 (as compared to $3,160 for vehicles that do not qualify). In general, the actual expense method usually results in a greater deduction amount than the standard mileage rate. However, this must be balanced against the increased substantiation burden associated with tracking actual expenses. If you qualify for both methods, estimate your deductions under each to determine which method provides you with a larger deduction.

Substantiation requirements

Taxpayers who deduct automobile expenses associated with the business use of their car should keep an account book, diary, statement of expenses, or similar record. This is not only recommended by the IRS, but essential to accurate expense tracking. Moreover, if you use your car for both business and personal errands, allocations must be made between the personal and business use of the automobile. In general, adequate substantiation for deduction purposes requires that you record the following:

• The amount of the expense;
• The amount of use (i.e. the number of miles driven for business purposes);
• The date of the expenditure or use; and
• The business purpose of the expenditure or use.

Suggested recordkeeping: Actual expense method

An expense log is a necessity for taxpayers who choose to use the actual expense method for deducting their car expenses. First and foremost, always keep your receipts, copies of cancelled checks and bills paid. Maintaining receipts, bills paid and copies of cancelled checks is imperative (even receipts from toll booths). These receipts and documents show the date and amount of the purchase and can support your expenditures if the IRS comes knocking. Moreover, if you fail to log these expenses on the day you incurred them, you can look back at the receipt for all the essentials (i.e. time, date, and amount of the expense).

Types of Logs. Where you decide to record your expenses depends in large part on your personal preferences. While an expense log is a necessity, there are a variety of options available to track your car expenditures - from a simple notebook, expense log or diary for those less technologically inclined (and which can be easily stored in your glove compartment) - to the use of a smartphone or computer. Apps specifically designed to help track your car expenses can be easily downloaded onto your iPhone or Android device.

Timeliness. Although maintaining a daily log of your expenses is ideal - since it cuts down on the time you may later have to spend sorting through your receipts and organizing your expenses - this may not always be the case for many taxpayers. According to the IRS, however, you do not need to record your expenses on the very day they are incurred. If you maintain a log on a weekly basis and it accounts for your use of the automobile and expenses during the week, the log is considered a timely-kept record. Moreover, the IRS also allows taxpayers to maintain records of expenses for only a portion of the tax year, and then use those records to substantiate expenses for the entire year if he or she can show that the records are representative of the entire year. This is referred to as the sampling method of substantiation. For example, if you keep a record of your expenses over a 90-day period, this is considered an adequate representation of the entire year.

Suggested Recordkeeping: Standard mileage rate method

If you loathe recordkeeping and cannot see yourself adequately maintaining records and tracking your expenses (even on a weekly basis), strongly consider using the standard mileage rate method. However, taking the standard mileage rate does not mean that you are given a pass by the IRS to maintaining any sort of records. To claim the standard mileage rate, appropriate records would include a daily log showing miles traveled, destination and business purpose. If you incur mileage on one day that includes both personal and business, allocate the miles between the two uses. A mileage record log, whether recorded in a notebook, log or handheld device, is a necessity if you choose to use the standard mileage rate.

If you have any questions about how to properly track your automobile expenses for tax purposes, please call our office. We would be happy to explain your responsibilities and the tax consequences and benefits of adequately logging your car expenses.

A taxpayer's expenses incurred due to travel outside of the United States for business activities are deductible, but under a stricter set of rules than domestic travel. Foreign travel expenses may be subject to special allocation rules if a taxpayer engages in personal activities while traveling on business. Expenses subject to allocation include travel fares, meals, lodging, and other expenses incident to travel.  

Allocation expenses

Frequently, international business trips have a personal aspect. A taxpayer who travels outside of the United States for both business and pleasure may deduct no part of his or her travel expenses (airfare, cabs, hotel, meals, etc.) if the trip is not primarily related to business. However, business expenses incurred while at the destination are deductible even though the travel expenses are not.

If the trip is primarily related to business, then that portion of travel properly allocated to the business portion may be deducted. Proper allocation is based on the amount of time spent on each activity. "Primary purpose" is a purpose of more than 50 percent. Foreign travel for purposes of allocation is travel outside the 50 states and the District of Columbia.

The general "primary purpose" rule on foreign business travel, fortunately, has two huge exceptions, one for anyone who travels a week or less and the other for most employees on business trips under an expenses allowance arrangement.

The allocation rules do not apply to taxpayers:

• who do not have substantial control over the business trip;
• whose travel outside the United States is a week or less in duration; 
• who establish that a personal vacation was not a major factor in deciding to take the trip; and
• whose personal activities conducted during the trip are less than 25 percent of the total travel time.

Taxpayers who travel under reimbursement or other expense allowance arrangements are not considered to have substantial control over the business trip unless they are the managing executive of the employer or a party related to, or more than 10 percent owner of the employer.

Conventions

Business conventions come under a separate rule. A taxpayer cannot deduct travel expenses for attending a convention, seminar or similar business meeting held outside the "North American area" unless specific criteria are satisfied. The "North American area" includes not only the US, Canada, and Mexico but also Costa Rica, Honduras and many islands in the Atlantic, Caribbean, and the Pacific.

If you are unsure of how to allocate your business travel expenses and need additional information, please give our office a call. We would be glad to help.

With the subprime mortgage mess wreaking havoc across the country, many homeowners who over-extended themselves with creative financing arrangements and exotic loan terms are now faced with some grim tax realities. Not only are they confronted with the overwhelming possibility of losing their homes either voluntarily through selling at a loss or involuntarily through foreclosure, but they must accept certain tax consequences for which they are totally unprepared.

Many homeowners - whether in connection with their principal residence or a vacation property - may not anticipate that foreclosure and a home sale that produces a loss can trigger significant and unexpected income tax liabilities, especially when the sale does not produce enough gain to pay off outstanding mortgage debt.

Selling at a loss

Homeowners may be unpleasantly surprised to learn that they can not write-off losses incurred from the sale of their home. When a homeowner is forced to sell their personal residence for less than the price they paid, the loss incurred on the sale is considered to be a non-deductible personal expense for federal income tax purposes. What's more, if the homeowner eventually buys another home that is sold down the road at a taxable profit, previous losses cannot be used to offset that gain.

Faced with such a situation, the technique of renting out the home, rather than selling it, might help some homeowner buy time until better times. If renting eventually stops making financial sense, the homeowner who sells at a loss might then succeed in establishing a deductible business loss from the business of renting property. However, only losses incurred after the property is converted may be deducted.

Debt forgiveness

Homeowners who sell their property when their mortgage debt exceeds the net sale price of the home (a so-called "short sale") may find that they owe taxes to the IRS. For example, assume you paid $500,000 for a home that you sell for a net sale price of $400,000, but you have a mortgage of $550,000 on the property. For tax purposes, you have incurred a $100,000 loss on the sale because the sale price is lower than your tax basis in the property ($400,000 sale price - $500,000 basis = $100,000 loss). Moreover, you still owe $150,000 to your mortgage lender since a mortgage note is a personal liability in addition to being an encumbrance on the house itself. If the lender refuses to discharge the remaining debt, you'll have to pay off the loan and there is no tax break or write-off for doing so.

On the other hand, if the mortgage lender forgives part or all of the remaining $150,000 debt, the amount discharged is considered taxable income. With few exceptions, discharged debt of all types is treated as income, taxable at ordinary rates just like a salary. It is irrelevant to the IRS that no tangible income was actually received on the sale of the home or forgiveness of debt by the lender. You will owe taxes on the amount of mortgage debt that the lender discharges. What's more, there is no offset from your $100,000 loss on the sale of the property; nor is this income covered by the $250,000 exclusion on taxable gain on the sale of a principal residence ($500,000 for joint filers).

A lender who discharges any part or all of a homeowner's debt must report the forgiven debt on Form 1099-C (Cancellation of Debt) to you and to the IRS. You must report the amount of discharged debt as income on your tax return in the year the mortgage debt is forgiven.

Foreclosure

Foreclosure also produces tax consequences that may be wholly unanticipated by the homeowner. Taxable gains and income from mortgage debt forgiveness also occur in foreclosure. Tax liability upon foreclosure depends on whether you have a nonrecourse or recourse loan. A recourse loan permits the lender to sue the borrower for any outstanding debt. When a foreclosure occurs on the property of a homeowner with a nonrecourse loan, however, the lender is only entitled to collect the amount that the home is sold for, and the borrower has no further liability.

Example. Your tax basis in your home is $400,000. You have a recourse loan and your mortgage debt totals $350,000. But at the time of foreclosure the fair market value of your home has decreased to $325,000. However, the lender forgives the remaining unpaid mortgage debt of $25,000 (usually because the lender sees that the former homeowner has little assets left, the remaining debt would be hard to collect, and an immediate write off gives the lender an immediate tax deduction). Tax law treats you as having received ordinary income from the cancellation of the debt in the amount of $25,000.

Alternatively, if you had a nonrecourse loan in the amount of $350,000 and your home sold at auction for $325,000, you would have no further liability to the lender since it cannot pursue you for the lost $25,000. Therefore, since your mortgage lender cannot legally pursue you for the remaining $25,000, there will be no debt for them to discharge. Such nonrecourse loans, however, are very rare in personal, non-business settings.

Moreover, if property is foreclosed and sold at auction for more than the home's tax basis, the sale produces taxable gain. In this case, however, the gain from a foreclosure sale of an individual's principal residence may be excluded to the extent of up to $250,000 ($500,000 for married homeowners filing jointly), depending on the length of homeownership. No exclusion, however, is given on vacation property that is not a principal residence.

Future relief for homeowners?

In mid-April, Reps. Robert E. Andrews (D-New Jersey) and Ron Lewis (R-Kentucky), introduced the Mortgage Cancellation Relief Act of 2007 (H.R. 1876), a bill that would assist many homeowners affected by the loss of their home through foreclosure or short sale. The legislation would exempt discharged debt on primary home mortgages from treatment as income subject to income taxation. Currently, the bill is before the House Ways and Means Committee.

If you would like more information on the tax consequences of foreclosure or the potential implications of taking a loss on the sale of your home or vacation property, please call our office and we can discuss your options for minimizing your tax liabilities.

These days, both individuals and businesses buy goods, services, even food on-line. Credit card payments and other bills are paid over the internet, from the comfort of one's home or office and without any trip to the mailbox or post office.

Now, what is probably your biggest "bill" can be paid on-line: your federal income taxes.

There are three online federal tax payment options available for both businesses and individuals: electronic funds withdrawal, credit card payments and the Electronic Federal Tax Payment System. If you are not doing so already, you should certainly consider the convenience -and safety-- of paying your tax bill online.  While all the options are now "mainstream" and have been used for at least several years, safe and convenient, each has its own benefits as well as possible drawbacks. The pros and cons of each payment option should be weighed in light of your needs and preferences.

Electronic Funds Withdrawal

Electronic funds withdrawal (or EFW) is available only to taxpayers who e-file their returns. EFW is available whether you e-file on your own, or with the help of a tax professional or software such as TurboTax. E-filing and e-paying through EFW eliminates the need to send in associated paper forms.

Through EFW, you schedule when a tax payment is to be directly withdrawn from your bank account. The EFW option allows you to e-file early and, at the same time, schedule a tax payment in the future. The ability to schedule payment for a specific day is an important feature since you decide when the payment is taken out of your account. You can even schedule a payment right up to your particular filing deadline.

The following are some of the tax liabilities you can pay with EFW:

• Individual income tax returns (Form 1040)
• Trust and estate income tax returns (Form 1041)
• Partnership income tax returns (Forms 1065 and 1065-B)
• Corporation income tax returns for Schedule K-1 (Forms 1120, 1120S, and 1120POL)
• Estimated tax for individuals (Form 1040)
• Unemployment taxes (Form 940)
• Quarterly employment taxes (Form 941)
• Employers annual federal tax return (Form 944)
• Private foundation returns (Form 990-PF)
• Heavy highway vehicle use returns (Form 2290)
• Quarterly federal excise tax returns (Form 720)

For a return filed after the filing deadline, the payment is effective on the filing date. However, electronic funds withdrawals can not be initiated after the tax return or Form 1040 is filed with the IRS. Moreover, a scheduled payment can be canceled up until two days before the payment.

EFW does not allow you to make payments greater than the balance you owe on your return. Therefore, you can't pay any penalty or interest due through EFW and would need to choose another option for these types of payments. While a payment can be cancelled up to two business days before the scheduled payment date, once your e-filed return is accepted by the IRS, your scheduled payment date cannot be changed. Thus, if you need to change the date of the payment, you have to cancel the original payment transaction and chose another payment method. Importantly, if your financial institution can't process your payment, such as if there are insufficient funds, you are responsible for making the payment, including potential penalties and interest. Finally, while EFW is a free service provided by the Treasury, your financial institution most likely charges a "convenience fee."

Credit Card Payments

Do you have your card ready? The Treasury Department is now accepting American Express, Discover, MasterCard, and VISA.

Both businesses and individual taxpayers can make tax payments with a credit card, whether they file a paper return or e-file. A credit card payment can be made by phone, when e-filing with tax software or a professional tax preparer, or with an on-line service provider authorized by the IRS. Some tax software developers offer integrated e-file and e-pay options for taxpayers who e-file their return and want to use a credit card to pay a balance due.

However, there is a convenience fee charged by service providers. While fees vary by service provider, they are typically based on the amount of your tax payment or a flat fee per transaction. For example, you owe $2,500 in taxes and your service provider charges a 2.49% convenience fee. The total fee to the service provider will be $62.25. Generally, the minimum convenience fee is $1.00 and they can rise to as much as 3.93% of your payment.

The following are some tax payments that can be made with a credit card:

• Individual income tax returns (Form 1040)
• Estimated income taxes for individuals (Form 1040-ES)
• Unemployment taxes (Form 940)
• Quarterly employment taxes (Form 941)
• Employers annual federal tax returns (Form 944)
• Corporate income tax returns (Form 1120)
• S-corporation returns (Form 1120S)
• Extension for corporate returns (Form 7004)
• Income tax returns for private foundations (Form 990-PF)

However, as is the case is with the EFW option, if a service provider fails to forward your payment to the Treasury, you are responsible for the missed payment, including potential penalties and interest.

Electronic Federal Tax Payment System

EFTPS is a system that allows individuals and businesses to pay all their federal taxes electronically, including income, employment, estimated, and excise taxes. EFTPS is available to both individuals and businesses and, once enrolled, taxpayers can use the system to pay their taxes 24 hours a day, seven days a week, year round. Businesses can schedule payments 120 days in advance while individuals can schedule payments 365 days in advance. With EFTPS, you indicate the date on which funds are to be moved from your account to pay your taxes. You can also change or cancel a payment up to 2 business days in advance of the scheduled payment date.

EFTPS is an ideal payment option for taxpayers who make monthly installment agreement payments or quarterly 1040ES estimated payments. Businesses should also consider using EFTPS to make payments that their third-party provider is not making for them.

EFTPS is a free tax payment system provided by the Treasury Department that allows you to make all your tax payments on-line or by phone. You must enroll in EFTPS, however, but the process is simple.

We would be happy to discuss these payment options and which may best suit your individual or business needs. Please call our office learn more about your on-line federal tax payment options.

A lump-sum of social security benefits is usually included in gross income for the year in which it is received. However, a recipient may choose to include in gross income the total amount of benefits that would have been included in gross income in the appropriate year if the payments had been received when due.

Lump-sum payments

If a recipient attributes benefits to a prior tax year, a smaller portion of the benefits may be subject to tax. This can occur when (1) a recipient's modified adjusted gross income (AGI) in the current year is more than the prior tax year's AGI or (2) a recipient used a higher base amount due to filing status in the prior year.

The IRS provides worksheets to assist recipients in determining whether they should attribute retroactive benefits to a prior tax year. Once the decision is made, IRS consent is needed to revoke it. A taxpayer who fails to attribute benefits to a prior year must include the lump-sum payment with income for the year in which the payment is received.

Repayment of benefits

When a recipient has to repay excessive benefits that were paid in error, the repayments reduce the amount of benefits taken into account for tax purposes in the year the repayment is made. Repayments are shown separately on the individual's Form SSA-1099, Social Security Benefit Statement.

If the repayment occurs during the same year the benefits are received, an adjustment is made for that year. If the repayment is made in a subsequent year, the recipient subtracts the repayment from the benefits received in the repayment year.

Example.  Shane received $7,500 in social security benefits in year 1 and $7,500 in year 2. In year 2, the Social Security Administration informed him that he should have only received $7,000 in benefits for each year. Shane immediately repaid $1000 in year 2. His taxable benefits for year 2 are as follows:

• Benefits received in year 2 = $7500,
• Repayments made in year 2 = $1000,
• Taxable benefits for year 2 = $6500 ($7500-$1000).

You may want to figure out whether attributing your retroactive benefits to a prior tax year would be more advantageous than including the benefits in gross income in the year received. If you need further assistance with this matter please give us a call.

A major repair to a business vehicle is usually deductible in the year of the repair as a "maintenance and repair" cost if your business uses the actual expense method of deducting vehicle expenses. If your business vehicle is written off under the standard mileage rate method, your repair and maintenance costs are assumed to be built into that standard rate and no further deduction is allowed.

Standard mileage rate

The standard mileage rate for business use of a vehicle is 48.5 cents per mile for 2007. The standard mileage rate replaces all actual expenses in determining the deductible operating business costs of a car, vans and/or trucks. If you want to use the standard mileage rate, you must use it in the first year that the vehicle is available for use in your business. If you use the standard mileage rate for the first year, you cannot deduct your repairs for that year. Then in the following years you can use the standard mileage rate or the actual expense method.

Actual cost

You can deduct the actual vehicle expenses for business purposes instead of using the standard mileage rate method. In order to use the actual expenses method, you must determine what it actually cost for the repairs attributable to the business. If you have fully depreciated your vehicle you can still claim your repair expenses.

Exceptions

Of course, the tax law is filled with exceptions and that includes issues relating to the deductibility of vehicle repairs and maintenance. Some ancillary points to consider:

• If you receive insurance or warranty reimbursement for a repair, you cannot "double dip" and also take a deduction;
• If you are rebuilding a vehicle virtually from the ground up, you may be considered to be adding to its capital value in a manner in which you might be required to deduct costs gradually as depreciation;
• If you use your car for both business and personal reasons, you must divide your expenses based upon the miles driven for each purpose.

You may want to calculate your deduction for both methods to determine which one will grant you the larger deduction. If you need assistance with this matter, please feel free to give our office a call and we will be glad to help.

If someone told you that you could exchange an apartment house for a store building without recognizing a taxable gain or loss, you might not believe him or her. You might already know about a very valuable business planning and tax tool: a like-kind exchange. In some cases, if you trade business property for other business property of the same asset class, you do not need to recognize a taxable gain or loss.

Not a sale

An exchange is a transfer that is not a sale. Essentially, it is a trade of like property.

In an exchange, property is relinquished and property is received. If the transaction includes money or property that is not of a like kind (referred to as "boot"), the transaction does not automatically become a sale. Any gain realized in the transaction, however, is recognized in that tax year to the extent of boot received.

In a like-kind exchange, the basis in the property received is the same as the basis in the property relinquished, with some adjustments. Any unrecognized gain or loss on the relinquished property is carried over to the replacement property. At a future time, the gain or loss will be recognized. If there is boot in the exchange and the gain is recognized, basis is increased by the amount of recognized gain.

The like-kind rules also require that property must be business or investment property. The taxpayer must hold both the property traded and the property received for productive use in its trade or business or for investment. Additionally, most stocks, bonds and other securities are not eligible.

Example

Jesse owns an office supply company and wants to expand his business. Carmen owns a restaurant and also wants to expand her business. Both individuals own parcels of land for investment that would benefit their respective expansion plans. The adjusted basis of both properties is $250,000. The fair market value of both properties is $400,000. Jesse and Carmen engage in a like-kind exchange. Neither Jesse nor Carmen would report any gain or loss.

More than two properties

Like-kind exchanges can involve more than two properties. While the rules are complicated, the basic approach is to combine properties into groups consisting of the same kind or class. If you are interested in a like-kind exchange involving more than two properties, we can help you.

Timing

The exchange does not have to take place at a given moment. If property is relinquished, the replacement property can be identified and received anytime within a specific period. Replacement property must be identified within 45 days after property is relinquished. The replacement property has to be received within 180 days after the transfer but sooner if the tax return is due before the 180 days are over (although the due date takes into account any extension that is permitted).

Reporting

A like-kind exchange must be reported to the IRS. The report must be made even if no gain is recognized in the transaction.  Again, our office can help you make sure that everything that needs to be reported to the IRS is reported.