Major Tax Changes That Will Affect You in 2023

by | Oct 12, 2022 | Business Deductions

Say Goodbye to 100 Percent Bonus Depreciation in 2023

All good things must come to an end. On December 31, 2022, one of the best tax deductions ever for businesses will end: 100 percent bonus depreciation.

Since late 2017, businesses have used bonus depreciation to deduct 100 percent of the cost of most types of property other than real property. But starting in 2023, bonus depreciation is scheduled to decline 20 percent each year until it reaches zero in 2027.

For example, if you purchase $100,000 in equipment for your business and place it in service in 2022, you can deduct $100,000 using 100 percent bonus depreciation. If you wait until 2023, you’ll be able to deduct only $80,000 (80 percent).

Does this mean you should rush out and purchase business property before 2022 ends to take advantage of the 100 percent bonus depreciation? Not necessarily. For many businesses, an alternative is not going away: IRC Section 179 expensing.

Both IRC Section 179 expensing and bonus depreciation allow business owners to deduct in one year the cost of most types of tangible personal

property, plus off-the-shelf computer software. Both can be used for new and used property acquired by purchase from an unrelated party. Both also can be used to deduct various non-structural improvements to non-residential buildings after they are placed in service.

Moreover, the two deductions aren’t mutually exclusive. You can apply Section 179 expensing to qualifying property up to the annual limit and then claim bonus depreciation for any remaining basis. Starting in 2023, when bonus depreciation will be less than 100 percent, any basis left after applying Section 179 and bonus depreciation will be deducted with regular depreciation over several years.

 

But there are some significant differences between the two deductions:

  • Section 179 expensing is subject to annual dollar limits that don’t apply to bonus depreciation. But the limits are so large that they don’t affect most smaller businesses.
  • Section 179 expensing requires more than 50 percent business use to qualify for and retain the Section 179 deduction. For bonus depreciation, you face the more than 50 percent business use requirement only for vehicles and other listed property.
  • Unlike bonus depreciation, Section 179 expensing is limited to your net taxable business income (not counting the Section 179 deduction) and cannot result in a loss for the year.
  • The 2022 Section 179 deduction is limited to $27,000 for SUVs. There is no such limit on bonus depreciation.
  • You can use bonus depreciation to deduct land improvements with a 15-year class life, such as sidewalks, fences, driveways, landscaping, and swimming pools.

 

Generally, there is no great need to purchase and place the property in service by the end of 2022 to take advantage of 100 percent bonus depreciation. But there can be exceptions.

For example, if you own a rental property and want to make substantial landscaping or other land improvements, you’ll get a larger one-year depreciation deduction using 100 percent bonus depreciation in 2022 than if you wait until 2023, when the bonus will be only 80 percent.

 

Buying an Electric Vehicle? Know These Tax Law Changes

There’s good and bad news if you’re in the market for an electric or plug-in hybrid electric vehicle.

The good news is that the newly enacted Inflation Reduction Act includes a wholly revamped tax credit for electric vehicles that starts in 2023 and continues through 2032.

The bad news is that the credit, now called the “clean vehicle credit,” comes with many new restrictions.

 

The clean vehicle credit remains at a maximum of $7,500. But beginning in 2023, to qualify for the credit,

  • you will need an adjusted gross income of $300,000 or less for marrieds filing jointly or $150,000 or less for singles; and
  • you will need to buy an electric vehicle with a manufacturer’s suggested retail price below $80,000 for vans, SUVs, and pickup trucks, or $55,000 for other vehicles.

 

But that’s not all. The 2023-and-later credit includes new domestic assembly and battery sourcing requirements.

The new law reduces or eliminates the credit when the vehicle fails the battery sourcing requirements. Currently, no electric vehicle will qualify for the full $7,500 credit. Manufacturers are working feverishly to change this, but it could take a few years.

The new credit is not all bad—it eliminates the cap of 200,000 electric vehicles per manufacturer. Thus, popular electric vehicles manufactured by GM, Toyota, and Tesla can qualify for the new credit if they meet the price cap and other requirements.

And then, starting in 2024, you can qualify for a credit of up to $4,000 when purchasing a used electric vehicle from a dealer (not an individual). But income caps also will apply to this credit.

Also, starting in 2024, you’ll be able to transfer your credit to the dealer in return for a cash rebate or price reduction. This way, you can benefit from the credit immediately rather than waiting until you file your tax return.

If you are locked out of the new credit because your income is too high or you wish to purchase a too-expensive electric vehicle, consider buying a qualifying electric vehicle (assembled in North America) on or before December 31, 2022.

If you buy an electric vehicle for business use in 2023, you have a second option: the commercial clean vehicle credit.

 

Claim Your Employee Retention Credit

If you had W-2 employees in 2020 and/or 2021, you need to look at the Employee Retention Credit (ERC).

As you likely know, it’s not too late to file for the ERC. And now is a good time to get this done.

You can qualify for 2020 credits of up to $5,000 per employee and 2021 credits of up to $7,000 per employee for each of the first three quarters. That’s a possibility of $26,000 per employee.

One of our clients—let’s call him John—had 10 employees during 2020 and 2021. He qualified for $260,000 of tax credits (think cash). You could be like John.

 

You have three ways to qualify for the ERC:

  1. Significant decline in gross receipts. Here, you compare the gross receipts quarter by quarter to those in 2019. To trigger any ERC under this test, you need a drop of more than 50 percent in 2020 and a drop of more than 20 percent in 2021.
  2. Government order that causes more than a nominal effect. Here, your best bet is to use the safe harbor for nominal effect. This requires looking at either your 2019 quarterly receipts or your 2019 quarterly hours worked by employees and seeing that the 2020 or 2021 shutdown order would have affected the 2019 figures by more than 10 percent.
  3. Government order causes a modification to your business. Here, you also have a safe harbor. The IRS deems that the federal, state, or local COVID-19 government order had a more-than-nominal effect on your business if it reduced your ability to provide goods or services in the normal course of your business by not less than 10 percent.

 

The ERC can help all businesses that qualify, even those businesses that did not suffer during the COVID-19 pandemic.

 

 

How To Treat Cryptocurrency on Your Idaho Tax Return

by | Oct 7, 2022 | Business Deductions

The IRS recently issued new cryptocurrency guidance and is hot on your trail if you bought and sold cryptocurrency and didn’t report it on your tax return.

Here are the tax basics: You’ll treat cryptocurrency as property for tax purposes:

  • If you receive bitcoin in exchange for your services, then your income is the fair market value of the bitcoin received. Your basis in the bitcoin received is its fair market value at the time of receipt plus any transaction fees incurred.
  • If you receive bitcoin in exchange for your property, then your gain or loss is the fair market value of the bitcoin received less the adjusted basis of your property given up. Your basis in the bitcoin is its fair market value at the time of receipt plus any transaction fees incurred.
  • If you give bitcoin in exchange for services, then the value of the expense is the fair market value of the bitcoin given. Also, the value of the services received less the adjusted basis of the bitcoin is a gain or loss to you.
  • If you give bitcoin in exchange for someone’s property, then your gain or loss is the fair market value of the property you received less the adjusted basis of your bitcoin.

 

Cryptocurrency is a capital asset (provided you aren’t a trader). Therefore,
  • you pay tax on any gain at reduced rates, and
  • losses are subject to capital loss limitation rules.

 

Forks

In the cryptocurrency world, a fork occurs when the digital register that logs transactions of a particular cryptocurrency diverges into a new digital register. There are two types of forks:

  • one in which you don’t get cryptocurrency, and
  • one in which you get new cryptocurrency.

 

The IRS ruled that

  • a fork in which you don’t get cryptocurrency is not a taxable event, and
  • a fork in which you get new cryptocurrency is a taxable event and you’ll recognize ordinary income equal to the fair market value of the new cryptocurrency received.

 

Example. You own J, a cryptocurrency. A fork occurs and you receive three units of K, a new cryptocurrency. At the time of the fork, K has a value of $20 per unit. You’ll recognize $60 of ordinary income due to the fork.

 

Specific Identification

When selling property, you generally sell it on a first-in, first-out (FIFO) basis, unless you are eligible to use the specific identification method. You want to use the specific identification method if you can because you can select the amount of gain or loss your sale will create. With FIFO, you have no choice.

 

To use the specific identification method, you’ll have to either
  • document the specific unit’s unique digital identifier, such as a private key, public key, and address, or
  • keep records showing the transaction information for all units of a specific virtual currency, such as bitcoin, held in a single account, wallet, or address.

 

This information must show
  • the date and time you acquired each unit;
  • your basis and the fair market value of each unit at the time you acquired it;
  • the date and time you sold, exchanged, or otherwise disposed of each unit;
  • the fair market value of each unit when you sold, exchanged, or disposed of it; and
  • the amount of money or the value of property received for each unit.

 

New Meals Deduction Rules for Your Idaho Business

by | Sep 7, 2022 | Business Deductions

Here’s good news for business meals: the Tax Cuts and Jobs Act (TCJA) removed the “directly related and associated with” requirements from Coeur d’Alene business meals.

The net effect of this change is to subject business meals once again to the pre-1963 “ordinary and necessary” business expense rules.

You are going to like these rules.

 

Restaurants and Bars

Question 1. If, for business reasons, you take a customer to breakfast, lunch, or dinner at a restaurant or hotel, or to a bar for a few drinks, but you do not discuss business, can you deduct the costs of the meals and drinks?

Answer 1. Yes. Even though you did not discuss business, the law provides that if the circumstances are of a type generally considered conducive to a business discussion, you may deduct the expenses for meals and beverages to the extent they are ordinary and necessary expenses.

Consider this “no discussion” meal a “quiet business meal.”

Question 2. What are circumstances conducive to a business discussion?

Answer 2. This depends on the facts, taking into account the surroundings in which the meals or beverages are furnished, your business, and your relationship to the person entertained. The surroundings should be such that there are no substantial distractions to the discussion.

Generally, a restaurant, a hotel dining room, or a similar place that does not involve distracting influences, such as a floor show, is considered conducive to a business discussion. On the other hand, business meals at nightclubs, sporting events, large cocktail parties, and sizable social gatherings would not generally be conducive to a business discussion.

 

Meals Served in Your Home

Question 3. Does a business meal served in your home disqualify the deduction?

Answer 3. No, as long as you serve the food and beverages under circumstances conducive to a business discussion. But because you are in your home, the IRS adds that you must clearly show that the expenditure was commercially rather than socially motivated.

Goodwill Meals

Question 4. If, for goodwill purposes, you take a customer and his or her spouse to lunch and don’t discuss business, will the cost of the lunch become non-deductible?

Answer 4. Not if, in light of all facts and circumstances, the surroundings are considered conducive to a business discussion, and the expenses are ordinary and necessary expenses of carrying on the business rather than socially motivated expenses.

Question 5. Is the situation the same if the taxpayer’s spouse accompanies the taxpayer at a dinner for business goodwill reasons?

Answer 5. Yes, the meal is deductible. This is true whether or not the customer’s spouse is present. Again, the meal must meet the ordinary and necessary business expense standards.

 

Document the Meal Deductions

You need to keep records that prove your CDA business meals are ordinary and necessary business expenses. You can accomplish this by keeping the following:

  1. Receipts that show the purchases (food and drinks consumed)
  2. Proof of payment (credit card receipt/statement or canceled check)
  3. Note of the name of the person or persons with whom you had the meals
  4. Record of the business reason for the meal (a short note—say, seven words or fewer)

 

The costs of your Coeur d’Alene business meals continue to be 50 percent deductible (as they were before the TCJA).

Donation Tax Write-Off Rules

by | Aug 10, 2022 | Business Deductions

Giving to your church, school, or other 501(c)(3) charity is a noble act no matter how you choose to give.

But for the purposes of tax savings, some forms of giving are much more beneficial to you than others. As a Coeur d’Alene business owner, you can use some business strategies to get the money to these institutions as business expenses.

While this does not change anything from the institution’s perspective, it hugely increases your tax savings.

The Tax Cuts and Jobs Act (TCJA) makes it harder to benefit from your personal donations.

 

Let’s say you donate $10,000 to a church, school, or other 501(c)(3) charity:

  1. Will you get a tax deduction—in other words, will you itemize?
  2. Will you benefit from the entire $10,000 as an itemized deduction? In other words, did the $10,000 simply put you over the hump that beat the standard deduction?
  3. Say you can deduct all $10,000 as an itemized deduction. Would making it a business deduction increase the tax benefit value to you?

 

The TCJA made two big changes that make it less likely that you will itemize. First, the TCJA set a $10,000 limit on your state and local income and property tax deductions. Second, it increased the 2020 standard deductions (adjusted for inflation) to

  • $12,400 for individuals, and
  • $24,800 for married couples filing jointly.

 

Even if you make a big donation, think about the problem this creates—suppose you are married and donate $17,000 to charity. If this is your only itemized deduction, your donation does you no good because it’s less than $24,800.

 

Fortunately, there’s a much more tax-savvy way to give.

As a CDA business owner, you can make a few modifications and convert your church, school, and other 501(c)(3) donations to a different type of deduction—an ordinary business expense—which increases the tax savings that land in your pocket year after year.

To turn a charitable donation into a business expense, the donation has to be involved in some way in promoting your business. In one way or another, you need to prove that your strategy has as its purpose attracting customers and revenue for your business.

 

The tax law rule is that your donation must

  • have a direct relationship to your business, and
  • create a reasonable expectation for a commensurate economic return.

 

Here are four examples of successful business practices that benefit charities and create business deductions:
  1. In the Marcell case, the owner of a trucking company contributed cash to a hospital because he wanted to impress the chairman of the charity drive, who was a potential customer. The court found that Philip Marcell had a reasonable expectation for a commensurate return on his donation and treated the contribution as a business expense.
  2. ABC Company attaches rebate slips to some of its products that it sells to customers. The customers can then present the rebate slips to the charity, at which point ABC Company pays the charity the amount listed on the slip.
  3. In Revenue Ruling 72-314, the IRS ruled that the stockbroker corporation that paid 6 percent of its brokerage commissions to the neighborhood charity could deduct the payments as business expenses because there was a reasonable expectation that the arrangement with the charity would direct new business to the brokerage and help retain existing business.
  4. Sarah Marquis, a sole-proprietor travel agent, made payments to charities on the basis of business they did with her. She had 30 charities as clients, and those 30 charities accounted for 57 percent of her CDA business.

 

Important Tax Complications of Renting Your CDA Home

by | Jul 6, 2022 | Business Deductions

You must consider the Coeur d’Alene vacation home rules when you:
  • rent a bedroom in your home and also use it personally, or
  • rent your beach home (or any other home you own) and also use it personally.

 

Personal Use of the Dwelling

Rent or use by relatives. Personal use includes more than meets the eye. You have personal use of a dwelling when you rent to or allow use by a relative. The rent charged makes no difference.

 

Paying and non-paying relatives who use your Coeur d’Alene vacation home complicate your deductions. Such use by your relatives is personal use by you. The relatives who come with this personal-use taint include your

 

  • mom and dad,
  • brothers and sisters (whole and half),
  • sons and daughters,
  • grandchildren and grandparents, and
  • spouse.

 

Planning tip. Do not rent to the tainted relatives.

 

Co-owners

Co-owners must count both use by their relatives and use by themselves as personal use. Thus, if you own a Coeur d’Alene rental home with others, make sure you know about the personal use by the co-owners and also use by their tainted relatives.

 

Charitable Donations

Charitable donations produce personal use. No matter how much the charitable donor pays for use of your dwelling unit, the IRS counts the charitable use as personal use by you.

If you donate a week of Coeur d’Alene vacation-home use to your school’s annual auction, you have a week of personal use. It makes no difference what the successful bidder pays for that week of use.

Double whammy. Your charitable gift of the right to use your dwelling unit for the week does not produce a deductible contribution for you. The IRS regulations deny a charitable contribution deduction for a gift of the right to use property.

Thus, the charitable gift penalizes you twice. First, the days you donate are days of personal use by you. Second, your donation of the days does not create a charitable deduction for you.

 

Swaps

Swaps produce personal use. Similarly, you have personal use when you swap dwelling units with a friend or under an exchange agreement. Swaps and bargains produce personal days. You count as personal use of your dwelling unit any days that you

  • allow a person to use your unit under an agreement that lets you use another dwelling, whether or not you charge rent; or
  • charge less than fair rent.

 

Example 1. You and Nelson swap one week of vacation-home use. Nelson’s use of your dwelling unit during the one-week swap counts as personal use by you.

Example 2. You and Johnson rent each other’s mountain homes for a week at fair market rent. Johnson’s rental of your dwelling unit during that one week counts as personal use by you.

Example 3. You charge your child’s favorite teacher only 67 percent of the fair rent to use your beach home for a week. The teacher’s use of the beach home counts as personal use by you.

 

Repair Days

Repair days do not produce personal use. Tax law says that you do not use your dwelling unit on days when your principal purpose for such use is repair or maintenance. To qualify the day as a repair day, you must work substantially full-time repairing or maintaining the dwelling unit.

Example 4. You and your spouse arrive Thursday evening at your lakeside cottage after a long drive, but in time for a late dinner at the cottage. You spend a normal workday on both Friday and Saturday getting the unit ready for rental. Your spouse does no work on the house and simply relaxes at the beach.

You depart Sunday, a little before noon. According to the IRS’s examples, your principal purpose for that trip is maintenance. You do not count Thursday, Friday, Saturday, or Sunday as days of personal use. The repair days are non-use days.

Example 5. You own a Coeur d’Alene mountain cabin that you rent in the summers. You spend a week at the cabin with your family. The family members work substantially full-time repairing the cabin. You spend about three to four hours each day during that week helping, and the rest of the time fishing, hiking, and relaxing. According to the IRS, your family’s principal purpose of that week’s stay is maintenance; therefore, the days are not days of personal use.

Again, the repair days are non-use days.

 

Rented Fewer Than 15 Days

Tax-free income. If you rent your dwelling for fewer than 15 days, you do not report the rental income or any rental expenses on your tax return. The income is tax-free. You do not share it with the government.

Planning tip. Do you have an event coming to your area that might command high rents? Examples include a major golf tournament, Olympic event, or other activity that could allow you to rent at a high rate for a short period.

Say you have a summer home on Lake Coeur d’Alene and a major golf tournament comes to town. You rent the home for $10,000 a week for two weeks. You have $20,000 of tax-free income.

 

Personal Residence or Rental?

The amount of personal use determines how you will treat your tax deductions on the dwelling. You have a tax code-defined rental of the dwelling when your personal use is either

  • 14 days or less, or
  • 10 percent or less of the days rented.

Example 6—rental. You rent your resort home 260 days. You use it personally for 26 days. Ten percent of your resort home is a personal home. Ninety percent is a rental property.

Example 7—hobby rental. With 30 days of personal use of the resort home in example 6, you have a residence. Your deductions on the rental part during the current tax year may not exceed your rental income (i.e., you have no tax shelter possibility).

Excess deductions carried forward. When the law deems your dwelling a residence, the deductions attributable to the rental are limited to gross rental income. The good news is that you carry forward the deductions in excess of the gross income limit to next year.

 

Treatment as a Rental Property

If, based on your rental and personal use, tax law classes your Coeur d’Alene summer home as a rental property, you should follow the IRS allocation method to get the best tax breaks.

Personal part of interest lost. If tax law classes your dwelling as a rental property, any mortgage interest allocated to your personal use is non-deductible consumer interest (ouch!).

Passive loss rules. The dwelling classified as a rental property faces the passive loss rules.

Seven-day rule. The dwelling that is a rental under the 14 days and 10 percent tests is not rental real estate under the passive loss rules if the average rental period during the year is seven days or less.