Federal tax updates you need to know

By Art Auerbach, CPA, CGMA

The Inflation Reduction Act of 2022 includes several tax-related provisions CPAs should be aware of coming into tax season. Other issues of note are related to the Employee Retention Credit and the IRS penalty policy.

Penalty relief

At the recent American Institute of CPAs (AICPA) National Tax Conference, the IRS revealed that first-time penalty relief is applied automatically in most situations. However, this is a disadvantageous policy for taxpayers, as the first-time relief is only available once every three years. This happens even though the taxpayer may have a reasonable-cause excuse and would be entitled to relief. Experts recommend taxpayer send reasonable-cause appeals to the IRS. Thus, if within three years there is another attempt at penalty, relief may be available.

Most practitioners and the AICPA recommend, again, the IRS stop issuing penalty notices until they clear the backlog of unprocessed returns and correspondence. In September 2022, the AICPA requested the IRS expand, modify and clarify the scope of tax relief. The AICPA also has penalty abatement templates available for download for members.

Employee Retention Credit

Many of you and/or your clients may have been approached by third parties to sign up for additional Employee Retention Credits (ERC); companies may claim the practitioner missed this tax advantage. This is a new cottage industry seeking to take advantage of employers’ ignorance about the credit.

Last fall, the IRS warned employers to be wary of third-party ERC scams, and the AICPA has an excellent document downloadable for Tax Section members, “ERTC Fact or Fiction,” which breaks down the true and false claims. I suggest you obtain a copy of that document.

Inflation Reduction Act of 2022

President Biden signed the Inflation Reduction Act of 2022 (IRA) into law on Aug. 16, 2022, and this date is important particularly regarding the application of the clean vehicle credit.

Some of the key provisions involve the new Corporate Minimum Tax, the excise tax on certain stock redemptions, several energy credits, and additional funding for the IRS to improve service.

Corporate Minimum Tax

Is it estimated that this provision will only apply to 125 or 150 of the largest corporations. This is a 15% tax imposed on modified book income, assuming the corporation has adjusted book income of $1 billion for three consecutive years. S corporations, regulated investment companies, and REITS are exempt.

The Corporate Minimum Tax will be applied to years beginning after Dec. 31, 2022, and additional guidance is necessary before those involved begin the calculation.

Most practitioners will not be affected directly, but this could affect the investment philosophy of individuals as the corporations involved must pay the tax — potentially affecting the investment quality of those involved.

Additionally, some tax practices may be affected because of Financial Accounting Standards Board (FASB) pronouncements and proposed revisions to the AICPA Statements on Standards in Tax Services (SSTS).

Excise tax on stock repurchases

This is a 1% excise tax on stock repurchases by publicly traded corporations — not an income tax. It also applies to stock purchased by subsidiaries that are more than 50% owned by the parent. The tax does not apply if repurchases are less than $1 million or if contributed to an employee pension plan, employee stock ownership plan, or similar-type plan. This excise tax will apply for tax years beginning after 2022.

Some practitioners may have individual clients who are employees of these large corporations.

IRS additional funding

There are many facets to the funds allocated to the IRS in the IRA. First, the IRS is not going to add 86,500 employees. However, there are about 45,000 to 50,000 IRS employees due to retire or leave within the next couple of years, so this funding anticipates that happening.

How these funds will be spent is still dependent on the IRS developing a plan; Treasury Secretary Janet Yellen has given the IRS until February 2023 to develop such a plan.

Additionally, the IRS will have a new commissioner by that time. Needless to say, there is much that we in the practitioner community would like to have included in the plan, including a dedicated practitioner line or other means for us to communicate with the IRS. Stay tuned!

Energy credit provisions

The following is a list of the significant credits for you to examine on your own depending on your practice.

• Clean electricity and reducing carbon emissions
• Clean fuels
• Clean energy and efficiency incentives for individuals
• Clean vehicles
• Investment in clean energy manufacturing and energy security
• Superfund
• Incentives in clean electricity and clean transportation, and credit monetization

Again, most practitioners will not be involved with all these but should be most affected by the Clean Vehicle Credit.

Watch this one, as it has three periods involved:

• Jan. 1, 2022, to Aug. 16, 2022 (the date of enactment)
• Aug. 16, 2022, to Dec. 31, 2022
• After Jan. 1, 2023, until Dec. 31, 2032

The credit may not be claimed for vehicles whose manufacturer’s suggested retail price exceeds $80,000 for vans, pick-up trucks, or SUVs, and $55,000 for all other vehicles.

Taxpayers are ineligible for the credit if their modified adjusted gross income (AGI plus foreign income amounts excluded under Sec. 911, 931 or 933) for both the current and prior tax year exceeds $300,000 for married, filing jointly; $225,000 for head of household; or $150,000 for all other taxpayers.

This is a cliff test — if a taxpayer is $1 over the amounts listed, they are ineligible for the credit; and for vehicles placed in service after 2024, taxpayers will be able to transfer the credit directly to dealers that register with the Secretary of the Treasury and agree to various disclosure requirements (the credit can be applied to directly lower the taxpayer’s cash outlay for the car rather than having to wait to receive the benefit of the credit when the taxpayer files their tax return).

Beginning with vehicles acquired after 2023, purchasers may transfer the credit to the dealer (similar to the transfer allowed for the Clean Vehicle Credit). Taxpayers who entered into a binding written purchase agreement prior to Aug. 16, 2022, may elect to not have the IRA changes apply to their purchase even if the vehicle is placed in service after Aug.16, 2022.

A taxpayer can qualify for the credit for qualified purchases once every three years.

Regarding the credit for previously owned clean vehicles, a new 30% credit, up to a $4,000 maximum, is available for qualified used clean vehicles purchased after 2022 and before 2033 from dealers registered with the Secretary of Treasury.

To qualify for the credit, the vehicle’s sales price may not exceed $25,000, the vehicle must be at least two years old, and the vehicle must meet the requirements for the:

• Clean Vehicle Credit discussed above (other than the requirement that the vehicle’s final assembly be completed in the United States). 
• The Alternative Motor Vehicle Credit motor vehicle requirements under Sec. 30B(b)(3) (other than being new) and weigh less than 14,000 pounds.

To claim the credit for previously owned clean vehicles, the taxpayer’s modified AGI for the current and preceding taxable year cannot exceed $150,000 for married, filing jointly; $112,500 for head of household; and $75,000 for all other taxpayers.

Residential Clean Energy Credit

The Residential Energy Efficient Property Credit under Sec. 25D is renamed the “Residential Clean Energy Credit” and is also extended to apply to property placed in service prior to Jan. 1, 2035.

The old Residential Energy Efficient Property Credit was often referred to as the Solar Energy Credit, although it also applies to qualified fuel cell property, qualified small wind energy property, geothermal heat pump property, and biomass stove and water heater property. 

Battery storage technology is also added to the list of qualified expenditures eligible for the renamed credit, applicable to expenditures made after Dec. 31, 2022.

The full 30% credit is now available for eligible expenditures through the end of 2032, and the credit is phased down to 26% in 2033 and then 22% in 2034.
 
Please watch VSCPA communications for more information as details are revealed by the IRS.

Arthur Auerbach, CPA, CGMA, is an independent tax consultant located in Atlanta, Ga., specializing in tax consulting and estate and financial planning for individuals and closely held businesses. He is affiliated with the Asbury Law Firm as a consultant. Art is a member of the VSCPA Tax Advisory Committee and a former member of the AICPA’s Tax Executive Committee. He is currently chair of the Georgia Society Federal/State Task Force and a member of AICPA’s Tax Practice and Procedure Committee.