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During the first year of the pandemic, many homeowners spent their downtime upgrading their homes. 2020 alone saw a three percent uptick in spending on home improvements – to the tune of nearly $420 billion nationwide. This included modifications for remote work, online schooling, and leisure activities at home.

Between remodeling, high inflation, and today’s elevated real estate prices, it’s important to review your homeowner’s insurance policy to ensure it is up to date. Does it include enough coverage for recent upgrades to your home? Does it carry an inflation factor to ensure coverage is on par with more expensive building material costs and labor increases? Do you have coverage for ancillary factors, such as the cost of meeting local building ordinances or flood insurance for today’s extreme weather events?

Replacement vs. Actual Value

One term to check on your policy’s declaration page is whether your coverage is determined by replacement cost or actual cash value. Replacement costs will pay for repairs to your home or replace your personal property (e.g., laptop, television) up to coverage limits, regardless of its current value. In other words, the policy will pay for a new computer even if your old one was three years old.

Actual cash value refers to a cash payout equal to the current value of your property. In other words, if your computer was three years old, you will receive the cash value of a three-year-old computer – which will not likely cover the cost of a new replacement.

Guaranteed Replacement

In lieu of upgrading your home’s cost coverage each year, you might have the option to pay for a guaranteed replacement, which is an extra fee that ensures the policy will cover the entire cost to rebuild your home. Extended replacement cost coverage pays out a certain percentage above your policy’s stated dwelling coverage limit if the cost to rebuild is higher than the face amount. For example, a policy with $200,000 coverage and 25 percent extended replacement coverage will pay up to $250,000 to rebuild your home.

Ordinance Coverage

Homeowners who live in older homes should consider adding ordinance coverage if it is not standard under their policy. Ordinance coverage pays for the cost to meet current building codes should you need to rebuild. These fees can be substantial and would have to be paid out-of-pocket if you don’t have this form of coverage. Note, too, that although guaranteed replacement cost coverage might offer a higher payout, that is only for the material and labor costs to rebuild – not local ordinance fees, licenses, or inspections.

Inflation Impact

As you review your current policy, note that the section labeled “Coverage A” represents the amount available to rebuild your home. It generally rises by two to three percent each year for basic cost-of-living increases. However, it is worth noting that building materials, such as lumber and steel, increased by 19 percent in 2021, and in June the general inflation rate increased to 9.1 percent, its highest level in more than 40 years.

Because rising home building costs, high inflation, and the increasing number of weather events have plagued the home insurance industry, policy premiums are starting to increase at a higher rate each year than in the past. In addition to higher costs due to supply chain disruptions and inflation, the home building industry is hampered by a lack of qualified workers – and experienced workers are demanding higher pay. This is yet another component that is factored into calculating insurance premiums. Basically, anything that would lead to a higher cost to repair your home will result in higher rates.

Insurance companies calculate your policy premiums by multiplying your home’s replacement rate with your home’s current value. Therefore, a combination of higher building costs and higher real estate values have contributed to higher insurance premiums. Some states have set an annual percentage cap on how much insurance companies can raise homeowner rates each year. However, given the increasing number of extreme weather events (e.g., storm surges, wildfires) in recent years, state legislators also have increased those rate caps so that insurers have the latitude to cover excess payouts. Note that rate increases vary by geographical area and are based on local weather activity, labor costs, and building supplies.

Some insurance policies offer an inflation guard, which automatically increases coverage limits to match inflation rates when the policy is renewed.

Flood Damage

Be aware that homeowners insurance does not cover flood damage. Mortgage lenders require homes located in government-designated Special Flood Hazard Areas (SFHA) to purchase a separate flood insurance policy. However, we have seen inland and even metropolitan areas that are not located in flood zones devastated by the effects of storm surges following hurricanes. Homeowners who live in these higher-risk areas should consider purchasing a separate flood insurance policy as well.

COVID-19 impacted the economy dramatically, and commercial real estate was no exception in terms of decreased values. Often, the real property could no longer service the debt used to finance it. This debt restructuring and resulting debt forgiveness can result in taxable income.

Taxable Income and Debt Cancellation

If you have an $80,000 loan and the bank reduces the amount you owe down to $50,000, then you have an economic benefit of $30,000, which should be treated as taxable income. This is indeed how the cancellation of debt is treated, but there are exceptions, such as in the case of bankruptcy or insolvency. There is another unique scenario that applies only to commercial real estate.

Assuming that the taxpayer is not a C-corporation, debt cancellation is excludable from taxable income if it results from qualified real property business indebtedness (QRPBI). QRPBI is debt taken on to buy real property used for commercial purposes. Starting in 1993, debt used for building or improving a property also qualifies.

As we all know, there is no such thing as a free lunch. For debt cancellation to not be considered current taxable income, the taxpayer must reduce their basis in the real property by this same amount. This does not cancel the income; instead, it defers its recognition and helps cash flow as a result. Below, we look at an example of how this works.

Illustrative Example

Assume David bought a property in 2017 and he uses it for business purposes. In 2022, the property has a first mortgage of $200,000 and a second mortgage of $100,000 (both with the same bank), with a fair market value (FMV) of $240,000. He negotiates with the bank to reduce the second mortgage down to $20,000, resulting in income from the cancellation of debt of $80,000.

The amount of debt cancellation that can be deferred is equal to the amount of the second mortgage before the debt cancellation, less the FMV minus the first mortgage. In David’s case, before debt cancellation, the FMV ($240k) minus the first mortgage ($200k) was $40,000. The balance of the second mortgage ($100k) exceeded this by $60,000. Out of the total debt cancellation of $80,000, this $60,000 is subject to deferral, with only the remaining $20,000 reported as immediate taxable income.

The $60,000 is not considered as taxable income only to the extent that David has sufficient adjusted tax basis in the depreciable real property to absorb this as a reduction in basis. Assuming this is the case, the basis reduction applies the first day of the tax year after the debt cancellation (unless the property is sold before year-end — then it applies immediately).

In the example above, David would include the $10,000 of cancellation of debt income on his 2022 tax return and adjust his basis in the real property by $60,000 as of Jan. 1, 2023.

Filing Mechanics

For real estate held via partnerships instead of by individuals, determining if a debt is QRPBI qualified happens at the entity level, although reductions of basis are done at the individual level for each partner, allowing individual planning. The election to defer the cancellation of debt income is recorded on Form 982.

Conclusion

The COVID pandemic caused many real estate investors to restructure their debts. The option to defer debt income cancellation offers a great tax planning opportunity by delaying taxable income and improving cash flows.

Many companies are eligible for tax write-offs for certain equipment purchases and building improvements. These write-offs can do wonders for a business’s cash flow, but whether to claim them isn’t always an easy decision. In some cases, there are advantages to following the regular depreciation rules. So it’s critical to look at the big picture and develop a strategy that aligns with your company’s overall tax-planning objectives.

Background

Taxpayers can elect to claim 100% bonus depreciation or Section 179 expensing to deduct the full cost of eligible property up front, in the year it’s placed in service. Alternatively, they may spread depreciation deductions over several years or decades, depending on how the tax code classifies the property.

Under the Tax Cuts and Jobs Act (TCJA), 100% bonus depreciation is available for property placed in service through 2022. Without further legislation, bonus depreciation will be phased down to 80% for property placed in service in 2023, 60% in 2024, 40% in 2025, and 20% in 2026; then, after 2026, bonus depreciation will no longer be available. (For certain property with longer production periods, these reductions are delayed by one year. For example, 80% bonus depreciation will apply to long-production-period property placed in service in 2024.)

In March 2020, a technical correction made by the CARES Act expanded the availability of bonus depreciation. Under the correction, qualified improvement property (QIP), which includes many interior improvements to commercial buildings, is eligible for 100% bonus depreciation not only following the phaseout schedule through 2026 but also retroactively to 2018. So, taxpayers that placed QIP in service in 2018 and 2019 may have an opportunity to claim bonus depreciation by amending their returns for those years. If bonus depreciation isn’t claimed, QIP is generally depreciable on a straight-line basis over 15 years.

Sec. 179 also allows taxpayers to fully deduct the cost of eligible property, but the maximum deduction in a given year is $1 million (adjusted for inflation to $1.08 million for 2022), and the deduction is gradually phased out once a taxpayer’s qualifying expenditures exceed $2.5 million (adjusted for inflation to $2.7 million for 2022).

Examples

While 100% first-year bonus depreciation or Sec. 179 expensing can significantly lower your company’s taxable income, it’s not always a smart move. Here are three examples of situations where it may be preferable to forgo bonus depreciation or Sec. 179 expensing:

1. You’re planning to sell QIP. If you’ve invested heavily in building improvements that are eligible for bonus depreciation as QIP and you plan to sell the building in the near future, you may be stepping into a tax trap by claiming the QIP write-off. That’s because your gain on the sale — up to the amount of bonus depreciation or Sec. 179 deductions you’ve claimed — will be treated as “recaptured” depreciation that’s taxable at ordinary-income tax rates as high as 37%. On the other hand, if you deduct the cost of QIP under regular depreciation rules (generally, over 15 years), any long-term gain attributable to those deductions will be taxable at a top rate of 25% upon the building’s sale.

2. You’re eligible for the Sec. 199A “pass-through” deduction. This deduction allows eligible business owners to deduct up to 20% of their qualified business income (QBI) from certain pass-through entities, such as partnerships, limited liability companies and S corporations, as well as sole proprietorships. The deduction, which is available through 2025 under the TCJA, can’t exceed 20% of an owner’s taxable income, excluding net capital gains. (Several other restrictions apply.)

Claiming bonus depreciation or Sec. 179 deductions reduces your QBI, which may deprive you of an opportunity to maximize the 199A deduction. And since the 199A deduction is scheduled to expire in 2025, it makes sense to take advantage of it while you can.

3. Your depreciation deductions may be more valuable in the future. The value of a deduction is based on its ability to reduce your tax bill. If you think your tax rate will go up in the coming years, either because you believe Congress will increase rates or you expect to be in a higher bracket, depreciation write-offs may be worth more in future years than they are now.

Timing is everything

Keep in mind that forgoing bonus depreciation or Sec. 179 deductions only affects the timing of those deductions. You’ll still have an opportunity to write off the full cost of eligible assets; it will just be over a longer time period. Your tax advisor can analyze how these write-offs interact with other tax benefits and help you determine the optimal strategy for your situation.

©2022

Understanding how cash flow is measured and analyzed is an important step for businesses. Business owners should constantly monitor and adjust their operations to increase the chances of becoming and staying cash flow positive.

JP Morgan Chase & Co. (JPM) monitors small business activity and presents some sobering statistics for businesses’ cash flow challenges. For a median small business, JPM has found the middle amount of daily cash outflows to be $374 and average daily cash inflows to be $381. The middle statistics for small businesses hold an average daily cash balance of $12,100 and an average of 27 cash buffer days in reserve.

Defining Free Cash Flow to Equity

The Free Cash Flow to Equity (FCFE) calculation measures how much money a company produces that can be dispersed to equity holders. One way to determine this figure is to subtract Capital Expenditures from Cash from Operations and then add Net Debt Issued to the remaining figure.

FCFE = Money from Operations – Capital Expenditures + Net Debt Issued

Interpreting the FCFE’s Results

This metric helps businesses, investors, and professional financial experts determine how much money is available for a business’ disbursement of dividends and/or share buybacks. The more easily dividends and share buybacks are available via a better FCFE, the better a company is performing financially.

Even though the FCFE can tell how much shareholders may receive, there is no requirement that any of that amount be paid to shareholders. This valuation is preferred for companies that do not pay a dividend. One alternate source of funding buybacks or dividends is through retained earnings from past quarters.

Free Cash Flow to the Firm (FCFF)

Looking at how well a business runs, this calculation examines a company’s cash flow health once taxes, investments, depreciation, and working capital are deducted, along with factoring in costs for current and long-term assets. It evaluates how much money the business could disburse to equity and debtholders once the company satisfies its financial obligations.

A company’s FCFF shows how much it has available to issue dividends, buy back shares, or satisfy debt obligations. If the FCFF is negative, there is no consideration for investors, as the business cannot meet existing bills and capital expenditures. When a negative result is found, there is a reason to see if and why there’s not enough revenue. Interested parties should consider f it is a short-term need or if the business model needs to be re-tooled.

How FCFF is Calculated

Free cash flow to the firm can be calculated with the following formula:

FCFF = Operating Cash Flow + [Interest Expense × (1 – Tax Rate)] – Capital Expenditures

Putting FCFF in Perspective

FCFF must be taken as a part of the holistic analysis, whether it is an investor or the business itself analyzing numbers. If a business is reporting high FCFF figures, an analysis must be taken to ensure long-term investment in business structures, cars/trucks, tooling, and business development are accurately reported. If businesses institute collection protocols sooner than standard, run low inventories or extend satisfying their own financial obligation, it can lower what a business owes and revise its working capital numbers – but that is generally temporary.

With cash flow’s impact on a business’ operation so integral, understanding how it is calculated is the first step to making smarter operational and investment decisions.

If you had to make a list of some of the biggest issues that plague small business owners regularly, cashflow problems would undoubtedly be right at the top.

Cash flow is about more than just the money coming into and going out of your business. It represents your ability to capitalize on opportunities as an entrepreneur as opposed to watching them pass you by because you lack the necessary cash on hand. It’s about making sure that you have the cash inflow you need to pay your employees on time. It’s about understanding how you’re going to pay vendors and other suppliers to get your products and services into the hands of the people who need them on time. The list goes on and on.

Based on this, it should not come as a surprise that an estimated 82% of all small businesses that close do so because of a significant cash flow problem. When you also consider the fact that the number of small businesses that fail to make it beyond their fifth anniversary is estimated to be 48%, it’s easy to see why this is one critical aspect of being an entrepreneur that you do not want to overlook.

To be clear, none of this is to say that if you manage to avoid significant cash flow problems you’re guaranteed to run a successful business for years to come. Unfortunately, the situation is a lot more malleable than that – there are still a lot of other variables that need to be accounted for. It’s simply that proper cash flow forecasting is imperative to avoid a lot of the major mistakes that new entrepreneurs in particular commonly make. It will also help avoid disruption and can be a key contributing factor in your business’s ability to scale and grow larger over time.

Thankfully, getting a handle on cash flow problems as a small business owner isn’t necessarily as difficult as one might assume. It does, however, require you to keep a number of crucial things in mind along the way.

The Ins and Outs of Cash Flow: Breaking Things Down

First, it’s important to get a handle on just what is meant by the term cash flow in the first place. Generally speaking, it can be separated into two categories: cash inflow and cash outflow.

Cash inflow refers to the amount of money that is coming into your business at any given time. This is typically represented by the money being generated when you sell your products or services. Note that not every dollar that comes into the organization is revenue, mind you – you still have expenses and things of that nature to account for.

Cash outflow, as the name suggests, is the money going out of your business. This includes not just payments to people like your employees but also payments to vendors and other suppliers. Regular expenses and debt payments would also fall under the cash outflow umbrella.

These two concepts are closely related and a cash flow problem in one area will almost immediately start to impact the other. If you start making late payment after payment to your suppliers, for example, your relationship will be harmed, and you may find it difficult to find people to work with in the future. Making a late credit card or other debt payment could hurt your ability to borrow (and negatively impact your credit rating). It can even harm your reputation not just with your customers, but with your employees as well.

All of this is why there are no such things as “small” cash flow problems.” What seems like a minor issue at first will soon snowball into something far bigger if left unchecked, which is why you need a stable foundation in place to avoid these types of situations altogether.

Pay Attention to How (and Why) You’re Borrowing

By far, one of the most important ways to make sure you have a handle on your cash flow situation is to gain as much insight as possible into the money that you’re borrowing – and why.

An entrepreneur rarely has the money on hand to build an entire enterprise on their own without taking out additional debt like small business loans. Many even use business credit cards and similar borrowing techniques to get up and running and to make sure that things are running as efficiently as possible.

Having said that, you need to pay careful attention to borrowing too much or borrowing from sources that are too expensive. If you have too many loans with a high-interest rate, you may be paying more each month than that money is bringing into your business. If you start to miss a payment or two, those interest rates could increase even further – causing you to take on additional debt just to stay afloat.

If possible, refinance any high-interest-rate credit cards and similar loans to take advantage of more favorable terms and conditions. Likewise, don’t borrow additional money if you’re already strapped or if it just doesn’t make long-term financial sense to do so.

Maintain Those Cash Reserves

One of the biggest lessons that many small business owners learned given everything going on in the world over the last few years has to do with the importance of cash reserves.

One day, everything is going smoothly and exactly as expected. The next day, something unprecedented happens – like a sudden global pandemic begins, forcing most businesses to indefinitely close their doors without any indication of when or even how they’d re-open again.

According to one recent study, 17% of small business owners said that they’d have to shut down permanently if they were faced with just a two-month-long revenue loss. This is why cash reserves are critical – they help you prepare for whatever life happens to throw at you, regardless of how unexpected it may be.

In other words, don’t immediately spend every extra dollar coming into your business after expenses and other payments are accounted for. Try to build up as large of a reserve as possible so that if something does happen, you’ll at least be able to weather the storm for a while until you come up with a more permanent solution or until conditions return to normal.

Monitor Your Receivables

To circle back around to the concept of how devastating a late payment can be, another one of the biggest sources of cash flow problems touches on the same idea, albeit from a different perspective: your accounts receivable status.

Simply put, accounts receivable refers to the money that you are being paid by your customers (either standard consumers who purchase a product or service or other businesses) in exchange for something of value. If you’re a B2B organization that sells a product to other businesses, for example, you likely send out invoices to those customers regularly. That represents money you are owed, certainly – but the longer those invoices go unpaid, the more likely you are to wind up in a decidedly negative cash flow position.

Not only is this a common problem that a lot of businesses face, but it’s also one that is, unfortunately, getting worse. One survey conducted in 2020 showed that over the course of the previous two years, small business owners reported that their rate of outstanding receivables increased a massive 81%. Keep in mind that this survey was also taken prior to the onset of the pandemic, meaning that this number probably only got higher over the following two years.

In an effort to help prevent this from becoming a major cash flow issue for your own small business, there are a few important steps you can take. First, make sure that you’re closely following all outstanding invoices in the first place. You can’t collect on invoices that you’re not sure were sent in the first place. You need a system in place that clearly outlines who owes what amount of money, when those invoices are due, and who has paid and who hasn’t.

Likewise, to entice certain people who may make regular late payments, you could offer some type of pricing discount or other incentives. You could offer a discount of a certain percentage if the invoice is paid immediately, for example. Or a similar reduction in prices if the invoice is paid in cash. Yes, you’ll lose out on a bit of money from offering a discount, but you’ll avoid having to wait for indefinite amounts of time to gain access to the money that you are owed. Never neglect payment terms like this as far as cash flow is concerned.

Work With a Financial Professional

Another one of the most common cash flow problems that new entrepreneurs deal with in particular involves attempting to handle all aspects of this part of their business on their own.

By now, you’re an expert in running your business – that doesn’t make you an expert on the financial side of the equation. Simply keeping up with something like accounts receivable information or expenses can quickly become a full-time job, which is a problem since you already have one of those you’re supposed to be devoting the majority of your attention to.

Thankfully, the solution is clear: find a financial professional that you trust who has experience in the specific industry that you’re operating in. Not only will they be able to help you come up with an effective cash flow management strategy, but they can put together essential documents like a cash flow statement and cash flow forecast data as well. The former paints a vivid picture of where you stand today, while the latter helps you see what you will achieve if you stay on the current trajectory.

A cash flow forecast is particularly important as, if you’re on a trajectory for poor cash flow or even negative cash flow, you’ll know about it as soon as possible so that you can hopefully do something about it. Even if everything is going smoothly, they’ll still ensure you have the most accurate and actionable information to make the best decisions for your business.

Keep Control Over Your Expenses

Finally, one of the most common cash flow problems that a lot of businesses face has to do with ballooning expenses. Yes, certain things are beyond your control that are “costs of doing business” – like the amount you’re paying for utilities to run a physical location, for example.

But especially if you’re experiencing dwindling cash flow, there are several steps you should take immediately. Take a look at all the business services you’re paying for and stop the ones that aren’t absolutely necessary, at least temporarily. If the issue is that your suppliers are increasing their prices, try to find ones that offer similar items at lower costs without compromising quality.

In general, look for opportunities to reduce your operating costs as much as you can, at least for a little while. It can certainly help ward off any impending disaster and allow you to get back on your feet through a series of strategic financial moves in the days and weeks to come.

In the end, especially in the early days of any small business, you need to come to terms with the fact that cash flow will matter more than profit. You’re not going to break even overnight, but negative cash flow and related issues could bring your organization to its proverbial knees before you know it.

Not only does something like a cash flow forecast help give you advanced notice of any problems that you may encounter in the future, but it also makes sure that you have the cash on-hand needed to fend off unexpected situations. It puts you in a better position to capitalize on opportunities and helps your business continue to scale and evolve over time. When you also consider the fact that it will also help lower your stress levels as an entrepreneur because you can spend less time worrying about money and more time putting it to good use, you’re looking at a perfect storm in the best possible way.

If your business is experiencing cash flow problems or you want to talk over budgeting or other cash flow tips, reach out to our office for a consultation. We are here to help.

Going all the way back to 2006, except for 2008, the federal tax code has offered a tax credit for making energy-saving improvements to a taxpayer’s home. This credit had expired after 2021 but has been given renewed life and substantially enhanced by the Inflation Reduction Act of 2022.

Under the old law, the credit had a lifetime cap of $500, which many taxpayers had taken advantage of in the previous 16 years, while others could not remember if they had used the entire lifetime credit during those years. As a result, with a lifetime cap of only $500, and a small credit rate of only 10%, the credit had become less of an incentive for taxpayers to make energy-saving improvements to their homes and was frequently disregarded.

Now with the passage of the Inflation Reduction Act of 2022, this credit once again becomes a meaningful incentive for taxpayers to make energy-saving improvements to their homes. The new legislation not only did away with the minimal $500-lifetime limit by replacing it with a $1,200 annual limit, but it also increased the credit rate from 10% to 30%.

The legislation also made the changes retroactive to include home energy-saving improvements for 2022 and extending the credit through 2032.

As before, under prior law, certain credit limits apply to the various types of energy-saving improvements. Although not a complete list, the following are credit limits that apply to various energy-efficient improvements under the new law:

• $600 for credits concerning residential energy property expenditures, windows, and skylights.
• $250 for any exterior door ($500 total for all exterior doors).
• $300 for residential qualified energy property expenses
• Notwithstanding these limitations, a $2,000 annual limit applies to amounts paid or incurred for specified heat pumps, heat pump water heaters, and biomass stoves and boilers.
• The $1,200 credit amount is increased by up to $150 for the cost of a home energy audit.
• The new law adds Air Sealing Insulation as a creditable expense.
• However, the new law eliminates treatments of roofs as creditable after 2022.

Under the new law, the one making the improvements and claiming the credit need only be a resident of the home and not necessarily the owner.

Home Energy Audit – A home energy audit is an inspection and written report for a dwelling unit located in the United States and owned or used by the taxpayer as the taxpayer’s principal residence which:

• Identifies the most significant and cost-effective energy efficiency improvements for the dwelling unit, including an estimate of the energy and cost savings for each such improvement, and
• Is conducted and prepared by a home energy auditor that meets the certification or other requirements specified by IRS. The amount of the credit allowed with respect to a home energy audit can’t exceed $150.

Identification Number Requirement – The Act added a new provision that bars the credit unless the energy-saving item is produced by a qualified manufacturer, and the taxpayer includes the qualified product identification number of the item on their tax return for the tax year the credit is claimed. However, that requirement does not take effect until after December 31, 2024, giving qualified manufacturers time to comply.

Other Credit Issues:

• It is a nonrefundable personal tax credit and is allowed against the alternative minimum tax (AMT) if the taxpayer is subject to the AMT.
• There are no credit carryover provisions if the credit is not fully utilized in the year of the home energy improvements.
• Unlike the solar credit, this credit doesn’t have any specific prohibitions against swimming pools or hot tubs.

If you have questions related to how you might benefit from the enhanced and extended tax credit for making energy-saving improvements to your home, please give our office a call.

With the recent passage of the Inflation Reduction Act of 2022, the electric vehicle credit has undergone some major changes. Although most of the changes take effect in 2023, to qualify for the current credit, vehicles purchased after August 15, 2022, are required to meet the final assembly requirement of the new law.

That requirement necessitates that vehicles sold after August 15, 2022, undergo final assembly in North America.

“Final assembly” means the manufacturer must produce new clean vehicles at a plant, factory, or other place located in North America from which the vehicle is delivered to a dealer with all component parts necessary for the mechanical operation of the vehicle included with the vehicle.

The U.S. Department of Energy has prepared a preliminary list of Model Year 2022 and early Model Year 2023 vehicles that may meet the final assembly in North America requirement.

Although the current law phasing out the credit once a manufacturer has produced 200,000 vehicles has been eliminated beginning in 2023, it still applies for vehicles sold in 2022. Even though those vehicles meet the final assembly requirement, because of the 200,000 limit they may not qualify for credit or reduced credit in 2022 but will again qualify in 2023 under the new rules. The U.S. Department of Energy list tags those that have reached the 200,000 limit. Visit the IRS site for a list of qualifying vehicles to see if a vehicle might still qualify for a reduced credit.

Transition Rule – The legislation also provides a transition rule where a taxpayer who, from January 1, 2022, and before August 16, 2022, purchased, or entered a written binding contract to purchase, a new plug-in electric drive motor vehicle and placed that vehicle in service on or after August 16, 2022, may elect to use the credit rules in effect before the Inflation Reduction Act changes, thus avoiding the final assembly and other requirements of the new law.

The New Law – The new law, generally effective beginning January 1, 2023, includes some new stringent requirements including that the critical minerals and other battery components used in the manufacture of a qualifying vehicle be from North America. Because of the current limited availability of these critical minerals this requirement is being phased in through 2029, giving manufacturers time to develop North American sources for these materials.

Also beginning in 2023, the law imposes income limits on who qualifies for the credit, as well as limiting the cost of the vehicles eligible for the credit as follows: 

Income limit – No credit is allowed for any tax year if the lesser of the modified adjusted gross income (MAGI) of the taxpayer for the:

• Current tax year, or
• The preceding tax year

Exceeds the threshold amount as indicated in the table below. Thus there is no phaseout; just one dollar over the limit and no credit will be allowed.

MAGI means adjusted gross income increased by any foreign earned income and housing exclusions and excluded income from Guam, American Samoa, the Northern Mariana Islands, and Puerto Rico.

Manufacturer’s Suggested Retail Price Limitation – No credit is allowed for a vehicle with a manufacturer’s suggested retail price of more than the following:

New Vehicle Definition – Where under prior law a qualifying vehicle was required to have a battery with a minimum of 4 kilowatts-hours, after 2022 a qualifying vehicle’s battery must be a minimum of 7 kilowatts-hours.

Transfer of Credit to the Dealer – After 2022, the new law adds an interesting twist that allows a taxpayer to utilize the credit to reduce the vehicle’s cost. This is accomplished by the taxpayer, who, on or before the purchase date, can elect to transfer the clean vehicle credit to the dealer from whom the taxpayer is purchasing the vehicle in return for a reduction in purchase price equal to the credit amount.

Making the election cannot limit the use or value of any other dealer or manufacturer incentive to buy the vehicle, nor can the availability or use of the incentive limit the ability of the taxpayer to make the election.

A buyer who has elected to transfer the credit for a new clean vehicle to the dealer and has received credit from the dealer but whose MAGI exceeds the applicable limit is required to recapture the amount of the credit on their tax return for the year the vehicle was placed in service.

Credit For Used Vehicles – The new law includes a credit for used clean vehicles that cost $25,000 or less that are purchased from a dealer. This credit is limited to the first time the vehicle is resold and available only to taxpayers whose MAGI is no more than half that of the MAGI limit for the new clean vehicle credit. The credit amount is the lesser of $4,000 or 30% of the purchase price. However, other details of this credit need further guidance from the IRS. Watch for additional information in the future.

If you have questions about these new rules on the clean vehicle credit, please give our office a call.

All too often, taxpayers wait until after the close of the tax year to worry about their taxes and miss opportunities that could reduce their tax liability or financially benefit them. Mid-year is the perfect time for tax planning. The following are some events that can affect your tax return; you may need to take steps to mitigate their impact and avoid unpleasant surprises after it is too late to address them. Here are some events that can trigger tax consequences. Did you (or are you going to):

• Get Married, Divorced, or Become Widowed?
• Change Jobs or Has Your Spouse Started Working?
• Have a Substantial Increase or Decrease in Income?
• Have a Substantial Gain from the Sale of Stocks or Bonds?
• Buy or Sell a Rental?
• Start, Acquire, or Sell a Business?
• Buy or Sell a Home?
• Retire This Year?
• Reach Age 72 This Year?
• Refinance Your Home or Take Out a Second Home Mortgage This Year?
• Receive a Substantial Inheritance This Year?
• Take Advantage of Tax-Beneficial Retirement Savings?
• Make Any Significant Equipment Purchases for Your Business?
• Purchase a New Business Vehicle and Trade-in or Dispose of the Old One?
• Adequately Document Your Cash and Non-Cash Charitable Contributions?
• Keep Up With Your Estimated Tax Payments?
• Make Any Unplanned Withdrawals from an IRA or Pension Plan?
• Add a Solar Electric System to Your Home or Purchase an Electric Vehicle?
• Hire Veterans or Other Individuals in Your Business Who May Qualify for the Work Opportunity Tax Credit?
• Trade or Sell Cryptocurrency?
• Incur Expenses Adopting a Child?
• Start Receiving Social Security Benefits?
• Exercise an Employee Stock Option?
• Start Using a Part of Your Home for Business This Year?
• Exchange Real Properties Used in Your Trade or Business or Held for Investment?
• Start a Retirement Plan in Your Self-Employment Business?
• Make Gifts of Over $16,000 to Any One Individual This Year?

Of course, these are not the only issues that have tax consequences.

If you anticipate or have already encountered any of the above events or conditions, it may be appropriate to consult with our office—preferably before the event—and definitely before the end of the year.

Fall is here and so are many of the holidays we love. Whether it’s Halloween, Thanksgiving, or the December holidays, here are some fail-safe things you can do to make sure everyone shows up and has a good time.

Throw a Potluck

One of the easiest ways to lure people away from their desks is – you guessed it – food. Create a sign-up sheet with different categories to make sure you have enough savory and sweet dishes, and provide options for those with dietary restrictions. If you’re the organizer, you might supply the drinks and utensils, maybe even some appetizers or snacks. Depending on the holiday, you might also suggest a theme. If it’s Halloween, you could ask folks to bring their spookiest fare.

Have a Raffle

This is yet another way to get people out of their offices. Everyone who shows up gets a ticket and on the back, they’ll sign their name. At different times during the party, have a drawing. Maybe leave the big prize to the end. You could even stipulate that people must be present to win. Some of the prizes you could offer are gift cards, smart watches, paid time off (PTO), or tickets to an event (a sporting event, a concert, etc.). A weekend at a local hotel (think staycation) or airline tickets are also attractive options. If resources allow, the sky’s the limit.

Designate Secret Santas

During December, this is always a big hit. Employees draw random names and get paired up with someone. The Secret Santa is given a wish list to choose from to give to their giftee. A smart idea is to set a monetary limit, such as gifts for under $25. After opening the present, the giftee has to guess who gave them the gift.

Set Up Games

Think giant Jenga. Pin the carrot nose on the snowman. Cornhole. These can be scheduled or ongoing. And best of all, it’s easy and uncomplicated. Employees can come and go as they wish. A little competition while everyone is noshing is a surefire way to foster employee bonding.

Host a White Elephant Gift Exchange

This is another classic. Everyone brings a wrapped gift and then you draw numbers. People sit in a circle with the presents in the middle, select their gifts in numerical order and unwrap them for all to see. But here’s the fun part: You can steal a gift that someone before you has unwrapped, which causes that person to either select a gift from the pile or steal from someone else. After three steals, the gift is frozen with whoever has it.

Volunteer Together

Working side by side with your colleagues for a purpose greater than yourself always cultivates a sense of community. For example, you could print off blank cards with your company logo on them, then ask employees to send a note of thanks to deployed military members. Another thing you could do with the cards is send a word of encouragement to those who live in places like The Salvation Army. The holidays can bring up lots of emotions, and sending positive messages to others is always a reward in and of itself. After all, when you give, you receive.

Whether you try one or all of these ideas, taking a break from the grind and enjoying a little non-work fun is not just necessary, it’s critical. When employees can cut loose, as well as feel appreciated and cared for, you’ll likely have a happier, healthier workplace.

Sources

https://www.indeed.com/career-advice/career-development/office-holiday-party

Deepfake technology utilizes machine learning and artificial intelligence (AI) to manipulate or create synthetic audio, video, and images that appear authentic. Deepfakes are commonly featured in entertainment and politics to spread false information and propaganda. For instance, deepfake has been used to show a celebrity or leader saying something that they didn’t, and this creates fake news.

Unfortunately, in deepfakes, cybercriminals have found a new tool for cyberattacks. Cybercriminals are now using deepfakes to pose a variety of enterprise risks.

How Cybercriminals Are Using Deepfakes

Deepfake technology is now used to create scams, hoaxes, and false claims that undermine and destabilize organizations. For instance, a manipulated video might show a senior executive associated with fake news, such as admitting to a financial crime or spreading misinformation about a company’s products. Such corporate sabotage costs a lot of time and money to disprove and can impact a business’s reputation.

Another way businesses can be negatively impacted is through social engineering attacks such as phishing, which rely on impersonation to compromise an email. Similarly, social engineering using deepfakes can feature voice or video impersonations. A good example of such an impersonation was reported in The Wall Street Journal, in which fraudsters used AI to mimic a CEO’s voice. This incident happened in March 2019, when criminals impersonated a chief executive’s voice to direct payment of $243,000.

Cybercriminals can execute social engineering attacks by accessing readily available information online. They can research a business, employees, and executives. The criminal will even use an actual event picked from social media – for instance, a financial director who is just returned to work from a holiday – to sound more legitimate.

This emerging security threat is also made possible by the development of video editing software that can swap faces and alter facial expressions. Such developments have enabled deepfakes to fool biometric checks (like facial recognition) to verify user identities.

The deepfake cybersecurity threat has become such a concern that the Federal Bureau of Investigation (FBI) has issued a Private Industry Notification (PIN) cautioning companies of the possible use of fake content in a newly defined cyberattack vector referred to as Business Identity Compromise (BIC).

How to be Prepared and Protect Against Deepfakes

Deepfake videos and images can be recognized by checking for unnatural body shape, lack of blinking in videos, unnatural facial expressions, abnormal skin color, bad lip-syncing, odd lighting, awkward head and body positioning, etc. However, cybercriminals keep evolving and creating more convincing deepfakes.

Other measures introduced to combat deepfakes include creating solutions that detect deepfakes. There also was an introduction of deepfake legislation in the National Defense Authorization Act (NDAA) in December 2019.

Unfortunately, this has not been enough, and enterprises have the task of helping reduce the impact of these attacks. The following measures can help:

Use anti-fake technologies

Businesses should explore automated technologies that help identify deepfake attacks. They should also consider watermarking images and videos.

Enforce robust security protocols

Implement security protocols to help avoid deepfakes, such as automatic checks for any procedure involving payments. For instance, putting systems that allow verification through other mediums.

Develop new security standards

As security threats keep evolving, so should security standards within a company. For instance, introduce new security standards involving phone and video calls.

Employ training and awareness

Enterprises should enforce regular training and raise awareness among employees, management, and shareholders on the dangers of deepfakes to businesses. When all involved parties are trained to identify deepfake social engineering efforts, this will help reduce the chances of falling victim.

Keep user data private

Deepfake attackers use the information found in public domains such as social media. Although not a failsafe procedure, company profiles can be made private. Users also should avoid adding or connecting with strangers they don’t know and posting too much personal information online.

Implement a disinformation response policy

Some deepfake incidents are out of control for an enterprise, such as fake videos purporting to be from top management. However, establishing a disinformation response plan will help in cases of a reputation crisis. This should include monitoring and curating all multimedia output – which will help present original content to the public as authentic content.

Conclusion

Deepfake is an emerging cybersecurity concern that requires enterprises to be aware of  potential threats and stay prepared. Although it might be possible to identify a poorly generated deepfake with the naked eye, the technology continues to advance. In response, countermeasures must keep pace.