Author: Leon Clinton

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 200,000 electric vehicles per manufacturer cap. 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.

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.

If you want to discuss tax credits that apply to electric vehicles, please call me on my direct line at 408-778-9651.

• By Leon Clinton
• October 25, 2022

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

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

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

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

You 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:

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

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

If you want to discuss the ERC, please call me on my direct line at 408-778-9651.

• By Leon Clinton
• October 18, 2022

Have you sold, or are you planning to sell commercial or rental property?

To avoid immediately paying capital gains tax on your profit, you have options:

• Deferring the capital gains tax using a Section 1031 exchange
• Deferring the capital gains tax using a qualified opportunity zone fund

With a Section 1031 exchange, you sell your property and invest all the proceeds in

another like-kind replacement property of equal or greater value.

With a qualified opportunity fund, you don’t acquire another property. Instead, you invest in a corporation, partnership, or LLC that pools money from investors to invest in property in areas designated by the government as qualified opportunity zones. Most qualified opportunity funds invest in real estate.

Which is better? It depends on your goals. There is no one right answer for everybody.

A Section 1031 exchange is preferable to a qualified opportunity fund investment if your goal is to hold the replacement property until death, when your estate will transfer it to your heirs. They’ll get the property with a basis stepped up to current market value, and then they can sell the property immediately, likely tax-free.

In contrast, your investment in a qualified opportunity fund requires that you pay your deferred capital gains tax with your 2026 tax return. That’s the bad news (only four years of tax deferral).

The good news: if you hold the qualified opportunity fund for 10 years or more, there’s zero tax on the appreciation.

In contrast, if you sell your Section 1031 replacement property, you pay capital gains tax on the difference between the original property’s basis and the replacement property’s sale amount.

And if you’re looking to avoid the headaches and responsibilities that come with ownership of commercial or rental property, the qualified opportunity fund does that for you.

If you’re looking for liquidity, the qualified opportunity fund gives you that because you need to invest only the capital gains to defer the taxes. With the 1031 exchange, you must invest the entire sales proceeds in the replacement property to avoid any capital gains tax.

Of course, you want your investment to perform. Make sure to do your due diligence, whatever your choice.

If you want to discuss Section 1031 exchanges or opportunity funds, please call me on my direct line at 408-778-9651.

• By Leon Clinton
• October 13, 2022