Category: Taxes

Section 179 Deductions

Tangible business assets include vehicles, equipment, and furniture. Depreciation is an accounting method used to allocate the cost of a tangible asset over its useful life. Depreciation ties the cost of using an asset with the benefit gained over its useful life. The IRS specifies the useful life of many types of assets under the Modified Accelerated Cost Recovery System (MACRS).

For example, if a realtor purchases a car to drive to showings for $30,000, the car would be depreciated over 5 years. Each year, depreciation would be deducted until the accumulated depreciation equals the purchase price.

However, taxpayers might prefer to deduct the full purchase price in the first year instead of over the useful life of the asset. Deducting the full cost of the asset would result in a lower taxable income and therefore a lower tax burden, leaving more cash on hand for investment in the business or for distributions to the owner during that year. Furthermore, the time value of money posits that a sum of money is worth more now than the same sum will be at a future date due to its earnings potential in the interim.

In some cases, the taxpayer can elect to immediately expense the asset rather than following the rates outlined in MACRS. The tax code has this provision in place to encourage business owners to grow their business with the purchase of new equipment.

Section 179 of the Internal Revenue Code outlines the requirements for an immediate deduction. For 2022, the maximum deduction is limited to $1,800,000. The property must be placed into service during the tax year in which the deduction is being claimed. In our realtor example, placing the car into service would be driving it to a business appointment. Assets must be used for business purposes more than 50% of the time to qualify for Section 179 deductions.

If you have questions about the purchase of business assets or any other tax-saving opportunities, call our office at 480-392-6801.

U.S. Energy Investments

Overview

While many potential tax saving strategies are limited to business owners, oil and gas deductions can benefit high-earning W-2 employees as well. Energy investments avoid the phased-out deductions for real estate losses that investors face between $100,000 and $150,000 in income. These investments offer large tax deductions in the first year followed by attractive returns in future years.

Upfront Tax Savings

Large deductions in the first year of investment provide immediate tax benefits. Intangible Drilling Costs (IDCs) are the expenses to develop an oil or gas well that are not a part of the final operating well. With an upfront investment of $100,000, a typical investor would receive $70,000 in IDC deductions in the first year. Furthermore, they would also receive a deduction of about $5,000 in the first year for depreciation of tangible equipment.

Future Returns

The deduction for depreciation of equipment is an estimated $5,000 per year for 7 years. Earnings on investments are estimated at 8.3%, and oil and gas fields generally have a lifespan ranging from 15 to 30 years. These investments are located on U.S. soil which increases the nation’s energy independence and protects the stability of the investment.

Next Steps

The best way to utilize the tax savings in oil and gas is to become a direct investor. We recommend investing with the U.S. Energy Development Corporation as a General Partner. For more information, contact K&R’s in-house financial advisor Rick Montgomery at [email protected].

Overview of the Inflation Reduction Act of 2022

Background

The Inflation Reduction Act that was signed into law in August is a remnant of the “Build Back Better Plan.” The original $6 trillion dollar proposal was supported by President Biden and essentially comprised his domestic agenda. While most of the original proposal died in legislation, a very limited portion of the plan was passed in the bipartisan Infrastructure Investment and Jobs Act.

Unlike the Infrastructure Investment and Jobs Act, the Inflation Reduction Act passed much more narrowly with a 220-207 vote in the house. In the Senate, Vice President Kamala Harris cast a tiebreaker in the final 51-50 vote.

The focus of the resurrected proposal was likewise narrow: investment in green initiatives and healthcare. What does this bill mean for American Taxpayers?

 

Key Provisions

Residential Energy Credits

Residential Energy Credits that were set to expire have been extended for 10 years to encourage investment in clean energy by American families. Congressional leaders hope that these incentives will reduce carbon emissions.

First, the credit for rooftop solar panels has been extended. Homeowners can also receive credits for making energy-efficient improvements to their homes. Qualifying projects include energy-efficient:

  • Water heaters
  • Heat pumps
  • HVAC systems
  • Windows
  • Doors

Starting in 2023, the credit for energy efficient residential improvements will be equal to 30% of the costs for all eligible home improvements made during the year. Furthermore, the $500 lifetime limit will be replaced by a $1,200 annual limit on the credit amount. To maximize tax savings, homeowners can time their qualifying home projects to claim the maximum credit each year.

Electric Vehicle Credits

Like the residential energy credits, electric vehicle credits are extended for 10 years. The credit applies to both new and used electric vehicles. One major change is the expansion of the credit from solely electric vehicles to any “clean vehicle” which includes hydrogen fuel cell cars.

Notably, the law limits the credit with caps on the taxpayer’s income and the retail sales price of the vehicle. The limits effectively exclude higher-priced luxury electric vehicles. On the other hand, the new law eliminates the 200,000-car cap for claiming the credit, which will allow manufacturers like Tesla, General Motors, and Toyota to qualify for the credit.

In addition, the law revived the tax credit for installing EV recharging equipment at personal residences. These residential and electric vehicle credits aim to incentivize taxpayers to reduce carbon emissions.

Healthcare

Beyond these “green”-focused credits, the Inflation Reduction Act also subsidizes healthcare initiatives. It extends premium reductions from the Affordable Care Act through 2025. Eligible individuals and families who purchase their health insurance through the federal Health Insurance Marketplace can continue to benefit from lower health care premiums, a policy that has been popular with taxpayers.

The Inflation Reduction Act also makes changes to Medicare prescription drug policies. First, it allows Medicare to negotiate the price of certain prescription drugs, bringing down the price beneficiaries will pay for their medications. In addition, Medicare recipients will have a $2,000 cap on annual out-of-pocket prescription drug costs, starting in 2025.

 

Funding the Bill

Since the environmental and healthcare programs in the bill will likely carry a high cost, taxpayers and experts alike have questioned how the act will be funded. Provisions include a 15% corporate minimum tax, an excise tax on stock repurchases, and, perhaps counterintuitively, an increase in IRS funding.

Corporate Minimum Tax

Media outlets have famously pointed out very large companies that pay very little in federal taxes—Amazon, Nike, and FedEx, just to name a few. Under the new law, large businesses with more than $1 billion in annual adjusted income will pay a minimum corporate tax rate of 15%. While there are significant differences in calculating income for tax purposes and income for financial statements, the corporate alternative minimum tax is based on financial statement income. Corporations will need to compute two separate calculations and pay the greater of the two.

Excise Tax on Stock Repurchases

A stock buyback occurs when a company that issues stock pays shareholders the market value per share to reacquire a portion of its ownership. Corporations might repurchase stocks for reasons including company consolidation, equity value increase, and looking more financially attractive. After December 31, 2022, covered corporations that repurchase stock will be subject to a 1% excise tax. This policy might incentivize corporations to return capital to shareholders through dividends rather than through stock repurchases, but it is unclear how companies will react.

IRS Funding

Over the next 10 years, the Inflation Reduction Act allots $80 billion of additional funding for the IRS. Proponents argue that the budget increases will allow the IRS to close the “tax gap.” The tax gap is the difference between what taxpayers owe in taxes and what they actually pay. Some estimates place the tax gap at $600 billion. Priorities will likely include increasing staffing levels and modernizing outdated processing systems. In the bill, $5 billion in spending is allotted for technology.

A Government Accountability Office report found that historically, lower-income taxpayers have faced higher-than-average IRS audit rates. 2021 data show that IRS audit rates for people with an annual income of less than $25,000 were five times higher than audit rates for high-income taxpayers. However, the Treasury Department has indicated that low or middle-income earners and small businesses will NOT be the focus of increased IRS enforcement activity.

 

Impact on Inflation

Despite the promising name, most experts suggest that the Inflation Reduction Act is unlikely to have an impact on inflation. The Penn Wharton Budget Model, a nonpartisan, research-based organization at the University of Pennsylvania, and the Congressional Budget Office, a federal agency that provides budget and economic information to Congress, are among the organizations that have expressed a lack of confidence in the legislation’s likelihood to lower inflation. While the opportunities for extended tax credits and lower healthcare costs are attractive to many taxpayers, the strain of inflation continues to weigh on American families.

Even faced with uncertain economic conditions, proactive tax planning can help taxpayers keep more of their income. If you have a question about qualifying for extended tax credits or want to explore strategies to lower your income tax burden, call our office at 480-392-6801.

Disaster Declarations

Natural phenomena such as floods, forest fires, hurricanes, tornadoes, and earthquakes pose unpredictable threats to life and property. When disaster strikes, the IRS has policies in place to attempt to ease the burden on affected taxpayers and businesses. But understanding your rights as a taxpayer would be a headache in the midst of an emergency. Read on to familiarize yourself ahead of the unthinkable with what disaster declarations do and don’t mean.

 

1. The IRS may only authorize relief for victims of disasters that have been recognized by the Federal Emergency Management Agency (FEMA).

The clearest way to qualify for disaster relief is to reside or have established a principal place of business in a qualifying area designated by FEMA. Taxpayers whose address of record is in an area qualifying for IRS disaster tax relief will automatically receive extra time from the IRS to file returns and pay taxes. For example, victims of the wildfires in Colorado earlier this year received an automatic extension of almost a month to May 16, 2022.

However, taxpayers who do not reside or do business in a disaster area may still qualify for relief if their tax records are stored in a designated disaster area. For example, if your tax preparer is located in a disaster area and unable to file or pay your taxes on your behalf, you qualify for relief. Similarly, a shareholder in an s-corporation or partnership qualifies for relief if they cannot obtain their tax records due to a designated disaster. But unlike those with an address of record in a disaster area, taxpayers who are affected by the storage of their records must request relief by calling the IRS’s Disaster Hotline at (866) 562-5227.

 

2. Taxpayers may deduct property losses that are not covered by insurance or other reimbursements.

For individuals, damaged or lost personal property can include homes, household items, and vehicles. However, losses on personal property are only deductible to the extent that they were not reimbursed by insurance. Taxpayers do not have to itemize their deductions to report these losses. Furthermore, taxpayers may choose whether to report the loss in the year that it occurred or on their prior-year return. Reporting the loss on the prior year is often more beneficial because it provides the funds from a refund more quickly.

Disaster loss rules are the same for renters and commercial property owners as they are for homeowners. For example, if a business loses a large piece of equipment with a tax basis of $100,000, and the insurance reimbursement was only $85,000, the tax deduction would be $15,000.

 

3. The Small Business Administration (SBA) offers financial help to business owners, not-for-profits, homeowners, and renters affected by disasters.

Help may include grants or low-interest loans. This influx of working capital is often enough for small businesses to weather the economic injury caused by a disaster.

Once again, the person or entity must be in a designated disaster area. In addition to FEMA, the President of the United States and the Secretary of Agriculture may make disaster declarations for purposes of SBA programs. The SBA website maintains a search feature for currently qualified disaster areas.

 

In Conclusion

According to the National Center for Environmental Information, Americans have experienced 310 natural disasters since 1980. The center estimates that the dollar value of damage from disasters has exceeded $1 billion (Consumer Price Index adjusted to 2021). Unfortunately, even taxpayers who never live through a disaster themselves likely know a friend or loved one impacted by the aftermath of a natural disaster. We hope that this brief overview of the special tax law provisions in place for victims of disasters provides some reassurance in the face of a crisis.

IRS Destroys 30 million Information Returns

In March of 2021, the IRS shocked taxpayers and tax preparers alike when an audit uncovered that the IRS office in Ogden, UT, had destroyed an estimated 30 million paper-filed information documents.

Yes, 30 MILLION.

 

What are the possible consequences of this mass destruction?

The IRS asserts that the data that was destroyed included only informational pages, like 1099s and W-2s. Officials insist that no actual tax return filings were destroyed. While neither K&R nor any other firm can verify that claim, we suspect that missing data will worsen the already overwhelming delays in processing returns.

For example, when a taxpayer’s return includes wages paid by an employer, the IRS has a system in place to compare the wages the taxpayer reports with the wages reported by the employer on the W-2. The missing data causes a mismatch that could trigger more notices sent by the IRS and longer delays in issuing refunds.

The IRS isn’t worried about the consequences: officials stated that the onus for providing proof of correct amounts rests on the taxpayer.

In the event of an IRS audit, how many average Americans could produce a 1099 from 3 years ago without major headaches?

 

Why did this happen?

The constraints of outdated technology. The IRS uses an imaging processing system to convert paper informational returns into a usable data format. However, the documents must be processed prior to the end of the year they were received in. Once the 2021 filing season began, documents received in 2020 could no longer be processed. Thus, the unprocessed documents were destroyed.

In an official statement, the IRS asserted that it intends to process all paper information returns received in 2021 and 2022. Only time will prove or disprove that promise. We do know that despite encouraging taxpayers to file electronically, the IRS continues to require paper filing of many documents including some amended tax returns.

 

What can your accounting firm do to protect you?

In times when taxpayers can’t rely on our government agencies, your accounting firm should protect you as a client by maintaining historical records with an emphasis on security.

Jessica, one of our staff members, recalls a very different experience as a customer at a big-name tax preparation service:

“When my first daughter was a toddler and my second was on the way, my spare moments were spent getting as much rest as possible. I didn’t have the energy the calculate the tax implications of selling my house in Texas! So, I made an appointment with another preparer for the first and only time.

I remember at the end of my appointment, the employee handed me a nice-looking folder with my documents and a printout of my tax return. . . that is the last time I remember seeing that folder. I’m sure that it’s in my house, tucked away somewhere.”

At K&R, we made the commitment several years ago to transition to a paperless office. We don’t handle original hard copies which could be damaged, lost, or stolen. Our clients have access to both their submissions and completed tax returns 24 hours a day through our online client portal.

As K&R clients face relocations, natural disasters, life changes, and even governmental misconduct, their tax information remains stored in one safe location.

The Best Time for Tax Planning: Today

Have you ever felt anxious going in to review your tax return? Have you ever been uncertain whether you were going to receive a refund or owe money to the IRS?

Too often, tax season brings unpleasant surprises like balances due and penalties. However, at K&R we believe that surprises at tax time are not only unpleasant but also unnecessary. By the time you reach the tax preparation stage, it is too late to implement many of the strategies that can save you money. When planning for taxes happens throughout the year, strategies for tax deferral and tax avoidance can be put into action.

Tax planning is especially effective for self-employed individuals or small business owners. Unlike W-2 employees, business owners have a much larger array of options for finding credits and deductions that make sense for the way you are already doing business. A tax advisor can help you strategically time expenditures that you already make like donations to charity or large purchases of equipment.

For many business owners, the last time that they evaluated the structure of their business was when it was formed. However, owners of LLCs have the flexibility to tell the IRS how they want to be taxed. Often, the default method is not the most beneficial for the taxpayer, especially as their income grows. For example, electing to be taxed as an s-corp can save business owners up to 15.3% in taxes annually, but the decision of if and when to make this election is different for every business. K&R performs analyses that consider projected income, profit margins, and other performance indicators to determine the most tax-efficient structure of your business.

Tax planning goes hand-in-hand with financial planning. The right professional services firm will consider both your short-term and long-term goals. Saving for retirement is a priority for almost everyone, but decisions such as investing in a traditional versus a ROTH retirement account can be overwhelming. Determining the most tax efficient option depends upon a variety of factors including your marginal tax bracket and the projected growth of your income. K&R employs an in-house financial advisor to ensure that your tax and financial planning are working in tandem.

As each new administration takes office in Washington, promises to improve federal tax law contribute to increasingly confusing rules and regulations. Most business owners do not have the time to devote to researching and implementing new tax strategies while also growing their businesses. The right financial services firm remains in front of these shifting opportunities. At K&R, we proactively reach out to clients that we think will be eligible for credits such as the Arizona Corporate Credit for school tuition organizations and the federal Employee Retention Credit.

EXPECT MORE than tax preparation from your accounting firm. Effective tax strategy must be timely and integrated with your financial goals. Your tax advisor should be as knowledgeable about tax strategy as they are about compliance.

Do you think K&R is the right advisor to help you save money on taxes? Call our office today at 480-392-6801 to set up your tax planning meeting.

Arizona Corporate Credits

Business owners in Arizona have a unique opportunity to offset their personal tax burden dollar for dollar by having their corporation make a charitable donation.  Specifically, s-corporations can donate up to the state income tax liability of the business owner for the given tax year.

 

Substantial Tax Savings

Unlike the Arizona individual credits, the Arizona business tax credit is eligible for a tax deduction on your federal business tax return. Your business will record the donation as a marketing expense, lowering your taxable income.

These credits require a minimum contribution of $5,000; however, this substantial investment carries even more potential for tax savings. Let’s consider the impact of even the minimum donation:

State                     $5,000 donation = $5,000 tax credit

Federal                 $5,000 donation x 24% marginal tax rate = $1,200 in tax savings

Total                      $6,200 in total tax savings

 

Applications and STOs

While the individual credit is available to every Arizona taxpayer, the corporate tax credit requires an application. Applications are open to c-corps, s-corps, and LLCs that are taxed as s-corps. Donations must be made to a School Tuition Organization (STO) certified by the Arizona Department of Revenue.

STOs award scholarships to underprivileged children so they can receive the education they deserve. Eligible students must meet a state defined low-income threshold. Donors can designate money to a particular school but not to a particular student.

 

Timing Considerations

Applications open July 1, but the state allocates a limited amount of funding to the credits on a first come, first served basis, so timing is critical.  Contributions must be made during the tax year for which the credit will be taken. If the application is approved, the business has 20 days to make the donation to the STO.

A new round of applications for this business credit opens to Arizona corporations on July 1, 2022. Remember that all donors MUST have prior approval by the state. K&R can connect you with a qualified STO and help with your application. To get started, call our office at 480-392-6801.

Maximize Your Impact with Arizona Tax Credits

Maximize Your Impact with Arizona Tax Credits

When faced with a balance due for state taxes, Arizona taxpayers have a choice on how they want those tax dollars to be used. Of course, they can simply pay the state. But more and more of our clients are exercising their ability to choose where their financial resources make an impact.

Do you have a passion for helping kids in the foster care system, sheltering animals in need, or supporting after school programs for students? Arizona Tax Credits allow taxpayers to use their money to support the causes they care about.

Arizona Tax Credits offer a dollar-for-dollar reduction of state income tax. That means that each dollar you donate reduces your tax burden by an equal amount. Taxpayers can completely wipe out their Arizona tax balance up to $4,635 for married couples filing jointly or $2,319 for individuals (as of 2021) by donating their tax liability to a qualified charitable organization.

What do I need to know about Arizona Tax Credits?

Donations must be made to qualified charities.

  • The list of organizations eligible for the credits varies slightly each year, so it is important to verify the status of the organization before writing a check. Churches and other religious organization are never eligible for the credit.

Donations used for the credit cannot be deducted on your federal tax return.

  • Since 2018, the federal government has closed this option. Keep in mind that while charitable donations on the federal level are a deduction that lowers your taxable income, tax credits directly lower the amount of tax that you owe.

Donations must be split across four categories to utilize the full amount (MFJ / Single limits):

  • Private Schools: $2,435 / $1,219
  • Qualified Charitable Organizations: $800 / $400
  • Qualified Foster Care Organizations: $1,000 / $500
  • Public Schools: $400 / $200

K&R partners with AZ Tax Credit Funds to facilitate contributions by our clients.
For more information or to donate now


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