When Aaron Judge’s record-breaking 62nd home run ball was snagged by Cory Youmans, he may have captured a plus $2 million payday according to experts in sports memorabilia. So with that in mind, when does he owe tax on this windfall, and at what rate? Possible scenarios:
- He keeps the ball until he dies. No current tax on the ball while in his possession and at death it is part of his estate that gets this collectible – a new value equal to the appraised value at the date of death to the heirs of the estate. His estate may have an estate tax to pay, however, the heirs that receive it will owe no tax until they sell it and if they sell it for more than the date of death value, then the gain is a long-term capital gain of a collectible at 28%.
- He gives the ball back to Aaron Judge and the Yankees. The IRS has stated that in the past this is not a taxable event to someone like Corey Youmans.
- He decides to give the ball to a charity. Generally, you get a larger deduction if you give a long-term capital gain property (property held for more than one year). So the gift is valued at the fair market value as of the date of the gift, therefore a $2 million gift for tax purposes in our example. Note, gifts of property held for a year or less are considered short-term appreciated assets, and the gift is limited to the lesser of cost or basis (cost of the ticket) in our example. Charitable contributions here would be reported on Form 1040 Schedule A and limited to 60% of the taxpayer’s adjusted gross income, any balance can be carried over for up to 5 years. See IRS Publication 561, IRS Publication 526, Form 8283, and Form 1098C.
- If he sells the ball to someone else. If he sells the ball in one year or less, then the gain is ordinary income to him. If he holds the ball for one year and one day or longer, then it is taxed at the capital gains rate of a collectible which is 28%.
What is Section 179, and how has it changed?
Internal Revenue Code Section 179 allows businesses to expense the full purchase price of qualifying equipment and/or software purchased during the tax year. When you buy a piece of qualifying equipment, you may be able to deduct the full purchase price on your business income tax return.
Before the TCJA, the government capped business taxpayers’ Section 179 deduction at $500,000, with a phase-out beginning at $2 million. The new Act raised the deduction limit to $1 million and the phase-out threshold to $2.5 million. This increases Section 179 benefits for small and mid-size businesses that spend less than $3.5 million per year for equipment.
What is changing in 2022?
Section 179 Maximum Deduction
2019 $1,000,000
2020 $1,040,000
2021 $1,050,000
2022 $1,080,000
Phase-out threshold
2019 $2,500,000
2020 $2,590,000
2021 $2,620,000
2022 $2,700,000
What is Bonus Depreciation?
Bonus Depreciation, according to the Internal Revenue Service (IRS), allows business taxpayers to deduct additional depreciation for the cost of qualifying business property, beyond normal depreciation allowances. It’s intended to spur capital purchases by all business taxpayers, small, mid-sized, and large.
Before the TCJA, the IRS limited Bonus Depreciation to new equipment. The law now allows for depreciation on used equipment, though it must be “first use” by the purchasing business. The rules allow Bonus Depreciation to be 100 percent for all qualified purchases made between September 27, 2017, and January 1, 2023. Bonus Depreciation then ramps down starting in 2023.
How can both deductions work together?
While each deduction can help businesses deduct purchasing costs for their property, combining them can offer the greatest possible benefits. IRS rules require that most businesses apply Section 179 first, followed by bonus depreciation.
Here’s why you might consider using both deductions:
- Limited circumstances for stand-alone 179 benefits.
The Section 179 expense limit, along with the $2,700,000 phase-out threshold, are now permanent parts of the tax code. However, since Bonus Deprecation now covers new and used equipment, the benefits of Section 179 by themselves would only apply to taxpayers with specific business circumstances. - Short-term consistency with the bonus depreciation limit.
With the Bonus Depreciation limit of 100 percent through 2022, businesses have a greater incentive to make near-term purchases. Before the TCJA, was passed, the bonus depreciation limit varied from year to year. - Expands qualifying equipment beyond physical hardware.
The new rules include software, which may mean they can now benefit companies that aren’t necessarily purchasing heavy equipment.
Bonus Depreciation is at 100% in 2019-2022, in 2023 it drops to 80% for both new and used equipment placed in service by December 31st. It drops each year until 2026 when it sunsets (expires) to the law before the Tax Cuts and Jobs Act, therefore, 0%.
Calculate your potential savings
If you’re wondering how Section 179 and bonus depreciation could affect your business tax deductions, check out the calculator below:
2022 Example
Cost of equipment
$3,000,000
Section 179 deduction
$780,000
Bonus depreciation deduction
$2,220,000
Total first-year deduction
$3,000,000
Cash savings on purchase (assuming a 21% C-Corp tax bracket)
$630,000
Lowered cost of equipment (after tax savings)
$2,370,000
Medicare Part B premium decrease in 2023
Medicare Part B premium 2022 is $170.10 – a $21.60 increase from the $148.50 per month rate paid in 2021. For 2023 that rate per month will decrease to $164.90 per month. Why is it going down? Two main reasons for a decrease in the premium; first, the 14.5% increase from 2021 to 2022 was unjustified and caused a major outcry from retirees and seniors on Medicare and their advocates in Washington, and the second reason is; the higher inflation rates in 2022 also hit the senior market.
Social Security Cost-of-Living Adjustment Will Be 8.7% in 2023
The 2023 cost-of-living adjustment (COLA) is the highest in 40 years. The cost-of-living increase from 2021 – 2022 was 5.9% the highest in four decades at that time. The last time it was higher was in 1981 when it increased by 11.2%.
The COLA applies to about 70 million Social Security and Supplemental Security Income beneficiaries. The COLA is tied to inflation, the change is based on the Consumer Price Index for Urban Wage Earners and Clerical Workers or CPI-W. The SSA calculates the annual COLA by measuring the change in CPI-W from the third quarter of the preceding year to the third quarter of the current year.
In 2021 the COLA increase was 1.3%, 2022 it was 5.9% and in 2023 its 8.7%
The COLA increase is both good and bad. Good because it is needed to help offset the inflationary cost of living and bad because the economy is in an inflationary cycle that negates the increase.
What is causing this inflation we are living with?
There are many contributing factors, however, the administration’s policy of trying to eliminate the petroleum industry and rapidly replace it with GREEN energy is a large part of it. Remember that petrochemicals derived from oil and gas make the manufacturing of over 6,000 everyday products and high-tech devices possible. Think of the myriad of objects we use daily that are made of petrochemicals. Petrochemical products include plastics, rubbers, resins, synthetic fibers, adhesives, dyes, detergents, pesticides, and petroleum-derived paints and coatings to name a few. It affects fuel costs, which directly affects transportation costs. As petroleum prices go higher so too does almost everything else we consume. We even need petroleum to manufacture the green energy we wish to convert to. An acceptable balance could be achieved without all this pain, by offering incentives; tax credits, manufacturing credits, and subsidies to individuals and businesses. Increased government spending is another part of the inflation under this administration. This nation took in a record $4 trillion in the fiscal year 2021 ending September 30, 2021, and under this administration, we spent almost $7 trillion. In the fiscal year 2022 ending September 30, 2022, we are estimated to take in $5 trillion – again a record, however, we spent $6.27 trillion. The high level of government spending is very inflationary.
Student Loan Forgiveness
On October 17, 2022, The U.S. Department of Education officially launched a website accepting applications for student loan forgiveness. After almost two months since President Joe Biden signed an executive order to forgive some student loans for many Americans, the U.S. Department of Education has officially launched a website accepting applications for student loan forgiveness. Biden announced the action on August 24, 2022.
Under the program, those with federally guaranteed student loans can have up to $20,000 of their eligible student loan debts forgiven, depending upon certain qualifying factors. Those who had also received Pell Grants, which are for lower-income students, can have up to $20,000 forgiven, while non-Pell Grant recipients can have up to $10,000 in debts forgiven.
However, in both cases, the borrowers are only eligible if they have individual income under $125,000 (or $250,000 for married couples).
The website for applying for student loan forgiveness is:
https://studentaid.gov/debt-relief/application
The Biden administration had made this effort part of its campaign, citing the rising costs of higher education. The order also cuts undergraduate student loan payments in half, based on a new income-based repayment plan. The plan caps monthly payments for these loans at five percent “of a borrower’s discretionary income.”
Note, many individuals with high student loan debt file “married filing separately” to lower the monthly discretionary income, which lowers the loan premium payment.
Avoid These Mistakes When Converting to an S Corporation
At first glance, the corporate tax rules for forming an S corporation appear simple. They are not.
Basic Requirements
Here is what your business must look like when it operates as an S corporation:
- The S corporation must be a domestic corporation.
- The S corporation must have fewer than 100 shareholders.
- The S corporation shareholders can be only people, estates, and certain types of trusts.
- All stockholders must be U.S. residents.
- The S corporation can have only one class of stock.
Simple, right? But what often appears simple on the surface is not so simple at all.
Don’t Forget Your Spouse
If you live in a community property state, your spouse by reason of community property law may be an owner of your corporation. This can be true whether or not your spouse has stock in his or her own name.
If your spouse is an owner, your spouse has to meet all the same qualification requirements you do. This can raise two issues:
- If your spouse does not consent to the S corporation election on Form 2553, your S corporation is not valid.
- If your spouse is a non-resident alien, your S corporation is not valid.
Converting an LLC to an S Corporation
Method 1. To convert your LLC to an S corporation for tax purposes, you can use a method we call “check and elect.” It’s easy—just two steps. First, you “check” the box to make your LLC a C corporation. Then, you “elect” for the IRS to tax your C corporation as an S corporation.
Here’s how you take the two steps:
- File IRS Form 8832 to check the box that converts your LLC to a C corporation.
- Then file Form 2553 to convert your C corporation into an S corporation.
Method 2. Your LLC can skip the C corporation step and directly elect S corporation status by filing Form 2553.
Loans That Terminate S Corporation Status
Don’t make a bad loan to your S corporation. With the wrong type of loan, you enable the IRS to treat that loan as a second class of stock that disqualifies your S corporation.
Small loans are okay. If the loan is less than $10,000 and the corporation has promised to repay you in a reasonable amount of time, you escape the second-class-of-stock trap.
Larger loans are more closely scrutinized. If you have a larger loan, your loan escapes the second-class-of-stock trap if it meets the following requirements:
- The loan is in writing.
- There is a firm deadline for repayment of the loan.
- You cannot convert the loan into stock.
- The repayment instrument fixes the interest rate so that the rate is outside your control.
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 in 2020 and 2021. He qualified for $260,000 of tax credits (think cash). You could be like John.
You claim and adjust the ERC using IRS Form 941-X, which you can file anytime on or before March 15, 2024, if you file your taxes as a partnership or an S corporation, or April 15, 2024, if you file on Schedule C of your Form 1040 or as a C corporation.
You have three ways to qualify for the ERC:
- 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.
- 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.
- 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.
Outgoing IRS Commissioner’s Term Ends and Acting Commissioner Appointed
IRS Commissioner Charles Rettig’s term ends November 12th, 2022, and his replacement was named by Treasury Secretary Janet Yellen on October 28th, 2022. Part of Commissioner Rettig’s statement is shown below:
“As the end of my term approaches, I want to share with you that Doug O’Donnell, the IRS Deputy Commissioner for Services and Enforcement, has been selected to serve as acting IRS Commissioner. His selection, announced today by Treasury Secretary Yellen, will keep our important work for our nation moving forward until a new IRS commissioner is nominated by the Administration and confirmed by the Senate.
Doug has spent more than 36 years at the IRS in a variety of roles, and he has a strong set of skills and insight needed for this critical role. He will work closely with our agency’s senior leaders and Deputy Commissioner for Operations Support Jeff Tribiano to continue work on the Inflation Reduction Act provisions, including efforts related to IRS transformation, implementation of green provisions, and other new tax laws. I’ve relied on Doug’s insight and knowledge during my term as Commissioner, and he is the ideal person to lead the agency during this period.”
I was on a Webinar on the 26th of this month when commissioner Rettig spoke about the many challenges the IRS has faced these past few years, especially the past two years. During the past tax season, IRS received over 221 million calls and had a staff of only 5,000 to handle them. Nobody wants excuses when a job is not completed well, however, it is amazing that the IRS functioned at all, and they handled many elements of service to the public superbly. There are approximately 83,000 IRS employees when the CARES Act and the Secure Act were made into law. Hundreds of millions of checks went out to the public as part of the national emergency due to COVID, however, Congress enacted the law and gave the IRS the responsibility to carry out the implementation and enforcement of the Acts without any additional manpower to support the additional workflow. Over the past two tax seasons, 2020 – 2021 three stimulus checks, and advanced childcare checks had to go out to millions of Americans who qualified. This became their most pressing priority.
The Inflation Reduction Act has appropriated $80 billion to the IRS. Much has been said about hiring 87,000 new auditors, however, 40 percent of that budget is to revitalize, and modernize the existing IRS. No one likes the possibility of IRS audits, however, bringing the IRS into the 21st century is overdue.
How will the IRS hire and train the 87,000 new auditors as this is more than double the current employment of the IRS? Commissioner Rettig suggested starting an IRS College and soliciting volunteers from the practitioner community to train the new auditors. As he said, who is better to know when an audit should be closed? Good idea, however, we will see how much support there is.
Thanksgiving
I want to wish everyone a happy Thanksgiving day. We have so much to be thankful for, and my prayers are for those that suffer throughout the world, please take time to count your blessings.
Respectfully,
Al Whalen, EA, ATA, CFP®
www.whalengroup.com
al@whalengroup.com
Sources:
CPA Journal
Accountant’s Daily Insights
CNBC – Lorie Konish
Bradford Tax Institute
Kiplinger Tax Letter
Center for Medicare and Medicaid Services
The Tax Foundation
CPA Practice Advisor