Author: Leon Clinton

The federal government wants you to go green if you own a commercial or residential rental building.

The newly enacted Inflation Reduction Act extends and expands valuable tax credits for solar panels or other renewable energy installations and electric vehicle charger units. Also, the long-available accelerated tax deduction for commercial building energy improvements is now easier to get and potentially worth much more.

These credits and deductions are complicated and subject to new restrictions.

Business Energy Investment Tax Credit

You can claim the Business Energy Investment Tax Credit (ITC) if you install solar, wind, or other renewable energy facilities in your commercial or rental buildings.

The Inflation Reduction Act retroactively increased this credit from 26 percent to 30 percent for projects begun before 2025.

Starting in 2023, you can qualify for 10 percent bonus credits available for projects

• complying with domestic content requirements,
• located in low-income communities, or
• located in communities involved with fossil fuels.

You also can claim an additional 20 percent ITC by participating in various federal housing programs.

One more thing: the ITC is non-refundable, but it is transferable. You can sell it to an unrelated taxpayer.

The ITC above expires in 2025, to be replaced with a new technology-neutral 30 percent clean electricity ITC.

Energy Efficient Commercial Buildings Deduction

This tax deduction enables owners of commercial buildings and multifamily residential buildings of four stories or more to deduct in one year all or part of the cost of various energy improvements made as part of a plan to reduce total energy costs. Such improvements include heating and cooling systems, roofs, walls, floors, and interior lighting.

Under the old deduction, building owners had to improve a building’s energy efficiency by 50 percent.

Now, building owners have to improve energy efficiency only by a minimum of 25 percent. In addition, starting in 2023, the new law increases the deduction to $5.00 per building square foot if the owners meet prevailing wage and apprenticeship requirements. If not met, the building owner may claim only a $1.00 per square foot maximum deduction.

The old deduction was $1.88 per square foot.

The buildings deduction is complex; to get it, you’ll likely need to hire a heating and ventilating engineer, a refrigeration engineer, an illumination engineer, or other similar experts.

Electric Vehicle Charger Credit

The new law extended to 2032 the credit for installing electric vehicle charger units in commercial or rental buildings. But starting in 2023, some rules change:

• The 30 percent credit is available only for projects that comply with prevailing wage and apprenticeship rules; otherwise, it’s 6 percent.
• The credit is available only for properties in low-income or rural areas.
• The annual cap on the credit increases to $100,000 per unit.

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

• By Leon Clinton
• November 8, 2022

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:

1. The S corporation must be a domestic corporation.
2. The S corporation must have fewer than 100 shareholders.
3. The S corporation shareholders can be only people, estates, and certain types of trusts.
4. All stockholders must be U.S. residents.
5. 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:

1. If your spouse does not consent to the S corporation election on Form 2553, your S corporation is not valid.
2. 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:

1. File IRS Form 8832 to check the box that converts your LLC to a C corporation.
2. 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 Exterminate 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:

1. The loan is in writing.
2. There is a firm deadline for repayment of the loan.
3. You cannot convert the loan into stock.
4. The repayment instrument fixes the interest rate so that the rate is outside your control.

If you are thinking of converting to or forming an S corporation and want to talk to me, please call me on my direct line at 408-778-9651.

• By Leon Clinton
• November 1, 2022

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