Author: Hannah Sheffield

KT Insights
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Bonus Depreciation vs Section 179: What You Need to Know

As 2024 nears its end, business owners may ask, “How much equipment do I need to buy by December 31, 2024, to lower my tax bill?” In the past, this was a fairly cut-and-dry answer and easy to calculate. However, the new depreciation rules have taken their toll since bonus depreciation is no longer 100% and the Section 179 deduction is more prevalent.

To help you understand the difference here are some highlights of each:

Section 179 Deduction

  • The maximum Section 179 expense deduction for 2024 is $1,220,000, but this is reduced by the amount of Section 179 property placed in service during the tax year that exceeds $3,050,000.
  • Section 179 is available for tangible personal property (equipment, machines, etc.), specific qualified real property (roofs, HVAC systems, fire sprinklers), and off-the-shelf computer software.
  • The deduction is limited to the taxable income from each pass-through entity, and is also limited to all active trades or businesses reported on an owner’s Form 1040.
  • Section 179 cannot create a net operating loss or drive business income into a loss.
  • Sport utility vehicles are limited to $30,500.
  • Individuals who are married filing separately are considered one taxpayer in terms of the dollar limitations of Section 179.

Bonus Depreciation

  • For property placed in service after December 31, 2023, and before January 1, 2025, bonus depreciation is at 60% of the cost of the property. 
  • Bonus depreciation applies to both new and used property, as does Section 179.
  • Bonus depreciation is available for tangible personal property (equipment, machines, etc.) and real property with a life of 20 years or less, certain computer software, and water utility property.
  • The power of bonus depreciation is the ability to use it on 15-year land improvements and qualified improvement property (QIP).  QIP is an improvement to an interior portion of a non-residential building after it was first placed in service.
  • Bonus depreciation can create or increase a net operating loss. 
  • Unlike Section 179, there are no income limitations on each tax return.
  • Taxpayers can elect out of bonus depreciation by attaching a statement to their tax return.

Ultimately, the Section 179 deduction is more in favor of active business owners, but bonus depreciation is still a viable option. Please contact your advisor at KT for additional information and guidance.

October 1, 2024
| Hannah Sheffield
KT Insights
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Credits, Credits, Credits, and You Guessed it – More Credits!

There were many new and improved tax credits with the passing of the Inflation Reduction Act of 2022, and most of these improvements were effective starting in 2023. So, as you get ready to file for the 2023 tax season, think back on the year to see if any of these credits apply to you.

Here are four (of many) tax credits that stood out for individual taxpayers:

Energy Efficient Home Improvement Credit

Previously known as the Nonbusiness Energy Property Credit, the Energy Efficient Home Improvement Credit incentivizes homeowners to pay for several types of energy-efficient improvements, such as:

  • Exterior windows and doors
  • Home insulation
  • Heat pumps, water heaters, central air conditioners, furnaces, and hot water boilers
  • Biomass stoves and boilers
  • Electric panel upgrades

This credit can be used for improvements made to your principal residence or your second home. There is a $1,200 overall annual cap on the credit, so consider spreading out qualifying expenses over several years to maximize the annual credit. These new and improved rules are in effect through 2032.

Residential Clean Energy Credit

This credit is claimed by installing solar panels, but it can also apply to the cost of storage batteries, solar hot water heaters, fuel cells, small wind energy turbines, and geothermal heat pumps. Similar to the Energy Efficient Home Improvement Credit, these items qualify for your principal residence or second home. This credit is extended through 2034 and the credit amounts are updated to 30% for 2022-2032, 26% for 2033, and 22% for 2034. There is no annual or lifetime cap on this credit and any amount of credit not used in the current year will be carried forward.

New Clean Vehicle Credit

Previously known as the New Qualified Plug-In Electric Drive Motor Vehicle Credit, the New Clean Vehicle Credit incentivizes taxpayers to purchase new all-electric vehicles and hybrid plug-ins. The credit maximum remains $7,500, but it now has two components: a $3,750 credit if the electric vehicle complies with the domestic sourcing requirements for critical minerals used in the battery and a $3,750 credit if the electric vehicle satisfies domestic content requirements for battery components.

The income limits to qualify for this credit are $300,000 for married filing jointly, $225,000 for heads of household, and $150,00 for all other filers. The vehicle’s manufacturer suggested retail price (MSPR) cannot exceed $80,000 for vans, sport utility vehicles, or pickup trucks and $55,000 for all other vehicles. This credit is effective from 2023-2032.

Credit for Previously Owned Clean Vehicles

A qualified buyer of a previously owned clean vehicle is allowed a credit equal to the lesser of $4,000 or 30% of the vehicle’s sale price. To qualify as a previously owned clean vehicle, the vehicle must be a vehicle that meets the new clean vehicle requirements and is at least two years old. The income limits to qualify are lower than the New Clean Vehicle Credit at $150,000 for married filing jointly, $112,500 for heads of household, and $75,000 for all other filers. This credit is effective from 2023-2032.

Please contact your tax advisor at KT for more information on how you can take advantage of these credits.

February 6, 2024
| Hannah Sheffield
KT Insights
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New and Improved Energy Tax Credits

The Inflation Reduction Act (the Act) of 2022 extends and expands tax credits for making your home and vehicles more energy efficient. Here are a few noteworthy provisions in the Act.

Energy Efficient Home Improvement Credit (formerly known as the Nonbusiness Energy Property Credit)

The old credit, which is still in effect for 2022 tax returns, has a tiny $500 lifetime cap. Beginning in 2023, the old lifetime cap is gone; and instead, there is a $1,200 overall annual cap on the credit, along with annual caps for certain types of improvements. This credit helps homeowners pay for several types of energy efficient improvements including:

  • Exterior windows and doors
  • Home insulation
  • Heat pumps, water heaters, central air conditioners, furnaces, and hot water boilers
  • Biomass stoves and boilers
  • Electric panel upgrades

The new credit can be claimed for improvements made to your principal residence or your second home. Consider spreading out qualifying expenses over a number of years to maximize the $1,200 annual credit. The new rules are in effect through 2032.

Residential Clean Energy Credit

This credit is claimed primarily by installing solar panels, but it can also apply to the cost of storage batteries, solar hot water heaters, fuel cells, small wind energy turbines, and geothermal heat pumps installed in your principal residence or second home. The Act extends the credit through 2034 and updates the credit amounts to 26% through 2021, 30% for 2022-2032, 26% for 2033, and 22% for 2034. There is no annual or lifetime cap on this credit. The average solar project costs on a home are over $20,000 so this credit can save you more than $6,000.

New Clean Vehicle Credit (formerly known as the New Qualified Plug-in Electric Drive Motor Vehicle Credit)

The credit maximum remains $7,500 for buyers of new all-electric vehicles and hybrid plug-ins, but now it has two components: a $3,750 credit if the electric vehicle complies with the domestic sourcing requirements for critical minerals used in the battery and a $3,750 credit if the electric vehicle satisfies domestic content requirements for battery components. There are income limits and electric vehicle price caps for claiming the credit. This credit is effective from 2023-2032.

Credit for Previously Owned Clean Vehicles

A qualified buyer of a previously owned clean vehicle is allowed a credit equal to the lesser of $4,000 or 30% of the vehicle’s sale price. The credit is available to married filing jointly filers with modified adjusted gross income of $150,000 or less ($75,000 for singles) for the year of purchase and the preceding year. To qualify as a previously owned clean vehicle, the vehicle must be a vehicle that meets the new clean vehicle requirements and is at least 2 years old. This credit is effective from 2023-2032.

Please contact your Ketel Thorstenson tax advisor for more information on how you can take advantage of these credits. See my article “Inflation Reduction Act of 2022 – New and Improved Tax Credits” in the Fall 2022 KT Addition for more information about additional credits included in the Act.

January 24, 2023
| Hannah Sheffield
KT Insights
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Cash vs Accrual Methods of Accounting for the Construction Industry

Choosing an accounting method for your business may seem like an easy task but selecting the right accounting method can make an enormous difference for bank and bonding purposes. An accounting method is a set of rules used to determine how income and expenses are reported on your company’s tax return.

Two of the most common options are the cash and accrual methods of accounting. There are pros and cons for both methods, and one may be a better fit for your business than the other.

Cash Method

The cash method of accounting is the most common for small businesses, oftentimes the most tax efficient, and allows a business to have some flexibility. When using the cash method, a company reports income in the tax year the cash is received and deducts expenses in the tax year paid. Receipt of payment for a job, whether it is in the form of a check, cash, or credit to your account, is reported as income. The taxes due match the cash inflow and outflow of the business. Contractors generally have costs upfront before payment is rendered, making the cash method the most effective tax treatment for their business.

For example, your company is having a great 2022. Instead of paying bills the first week of 2023, have your accountant make a special check run the last day of the year. This will shift your tax deduction from 2023 to 2022.

However, not all businesses are eligible to apply the cash method of accounting. Any corporation or partnership, other than a tax shelter, that meets the gross receipts test, and a qualified personal service corporation can use the cash method. To meet the gross receipts test and be able to use the cash method of accounting in 2022, a corporation or a partnership must have average annual gross receipts of $27 million or less (indexed for inflation) for the prior three tax years.

Accrual Method

The accrual method of accounting is also common and oftentimes provides a more accurate picture of the business’s current position. The accrual method of accounting recognizes income and expenses as they are earned or incurred. For example, if a company buys materials and receives an invoice in 2022 but does not pay until 2023, the expense is deductible on the accrual method in 2022 because the company received the materials, and therefore, constructively incurred the expense.

Businesses change methods of accounting for multiple reasons. One of the most common reasons is they fail to meet the gross receipts test, as defined above. If a corporation or a partnership fails to meet the gross receipts test, then it may need to change its accounting method from cash to accrual in the year it failed the test. The entity must file Form 3115 to request the change. Businesses that prepare generally accepted accounting principle financial statements for their bank or bonding can still use the cash method for tax purposes if they meet the guidelines above.

Please contact your Ketel Thorstenson tax advisor for more information on which accounting method is the best choice for your business.

December 12, 2022
| Hannah Sheffield
KT Insights
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Inflation Reduction Act of 2022 – New and Improved Tax Credits

In an effort to protect taxpayers against the impending recession and economic downturn, the Inflation Reduction Act of 2022 (the Act) was signed and effective August 16, 2022. The Act includes new taxes and credits and over $80 billion allocated to the IRS. While much of the bill (especially the new taxes and IRS funding) is targeted to large corporations, there are new and enhanced energy credits which many taxpayers may benefit. This article highlights the credits that we think will be advantageous to you.

Nonbusiness Energy Property Credit

The Act increased the nonbusiness energy property credit from 10% to 30% of the amount paid for qualified expenses. The qualified energy efficiency improvements definition was also updated to include air sealing insulation in the definition of a building envelope component. In addition, it removed the requirement that expenditures must be made to the taxpayer’s principal residence—second homes can now earn the credit. The credit is further enhanced by increasing the annual limitation of $1,200 versus the previous $500 lifetime limitation. These updates apply to property placed in service between 2022 and 2032.

Residential Clean Energy Credit

The Residential Clean Energy Credit allows a tax credit for solar electric, solar hot water, fuel cell, small wind energy, geothermal heat pump, and biomass fuel property installed in homes. The Act extends the credit through 2034 and updates the credit amounts to 26% through 2021, 30% for 2022-2032, 26% for 2033, and 22% for 2034. The Act also adds qualified battery storage technology to the list beginning in 2023.

Accelerated Cost Recovery for Green Building Property

IRS Code Sec. 179D provides an accelerated cost recovery deduction for energy efficient commercial building (EECB) property for the year placed in service. This deduction is enhanced under the Act. It lowers the EECB efficiency standard requirement for deduction benefits from 50% to 25%. It also modifies the formula for calculating the maximum deduction and eliminates the allowance of partial deductions. The enhancement provides more detailed criteria for the allocation of the deduction when EECB property is installed on/in government property. These changes are effective beginning in 2023.

New Energy Efficient Home Credit

The New Energy Efficient Home Credit is an existing credit available to eligible building contractors. The credit is now available for qualified new energy efficient homes acquired by a homeowner before January of 2033. For a home to qualify, the home has to meet specified energy saving requirements and the contractor must meet certain wage requirements. A home must be certified as a zero-energy ready home under the zero-energy home program of the Department of Energy to meet the energy saving requirement. Any laborers employed to work on the construction of the home must be paid fair wages as compared to the local average to meet the wage requirement. Credits are available from $500 to $5,000, depending on the requirements satisfied.

New Clean Vehicle Credit

The New Qualified Plug-in Electric Drive Motor Vehicle Credit (NQPEDMV) has been renamed the New Clean Vehicle Credit. A taxpayer can receive $3,750 for meeting the critical minerals requirement and $3,750 for meeting the battery component requirement. The definition of a new clean vehicle has a couple different requirements. First, the minimum battery capacity has to be 7 kilowatt hours. Second, the seller of the new clean vehicle is required to provide a report to the buyer and the IRS containing the name and taxpayer identification number of the buyer, the vehicle identification number (VIN), the battery capacity of the vehicle, the verification that the original use of the vehicle commences with the taxpayer, and the maximum clean vehicle credit allowable to the buyer with respect to the vehicle. The credit can only be claimed for vehicles made by a qualified manufacturer and only one clean vehicle credit is allowed per vehicle. The limitation on the number of vehicles eligible for the credit has been eliminated. A few examples of eligible vehicles are Tesla Model 3, Ford Mustang Mach-E, Jeep Grand Cherokee PHEV. This credit is effective from 2023 through 2031.

Credit for Previously Owned Clean Vehicles

The credit for previously owned clean vehicles is equal to the lesser of $4,000 or 30% of the vehicle’s sales price. The credit is available to married filing joint filers with modified adjusted gross income of $150,000 or less ($75,000 for singles) for the year of purchase and the preceding year. To qualify as a previously owned clean vehicle, the vehicle must be a vehicle that meets the new clean vehicle requirements and is at least 2 years old. This credit is effective from 2023 through 2032.

Credit for Qualified Commercial Clean Vehicles

The credit for qualified commercial clean vehicles is a new credit allowed for businesses. The credit amount per vehicle is the lesser of 15% of the vehicle’s cost basis (30% for vehicles not powered by a gasoline or diesel engine) or the “incremental cost” of the vehicle i.e., the cost of a comparable vehicle powered solely by a gasoline or diesel engine. The maximum credit is $7,500 for vehicles with a gross vehicle weight rating of less than 14,000 pounds or $40,000 for heavier vehicles. This credit is effective for vehicles placed in service between 2023 through 2032.

Alternative Fuel Vehicle Refueling Property Credit

The Alternative Fuel Vehicle Refueling Property Credit has been enhanced for qualifying property placed in service between 2023 and 2032. The credit is 6% of the property’s cost (30% if the taxpayer meets the wage and apprenticeship requirements) and is limited to $100,000. The credit now includes bidirectional charging equipment and is available for electric charging stations for two- and three-wheeled vehicles that are intended for use on public roads. Charging or refueling property will only be eligible for the credit if it is placed in service within a low-income or rural census tract. Qualified census tracts in South Dakota include, but are not limited to Jackson, Todd, and Ziebach counties. The credit applies to each single unit, not all such property at a location and is effective between 2023 and 2032.

As you can see, the Inflation Reduction Act of 2022 enhances and creates many new energy related tax credits that may be beneficial for you and your business. Many of the enhancements include time extension and easing of qualification requirements allowing more taxpayers to qualify for the credits. The new credits reflect where technology improvements and global conservation efforts are continuing to advance. Please contact your Ketel Thorstenson tax advisor for more information on how you can take advantage of these credits.

September 27, 2022
| Hannah Sheffield
KT Insights
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Employee vs Independent Contractor – Who’s Who?

How do I determine whether a worker is an employee or an independent contractor? The easiest way to answer this question is, do I have control over that individual? If the answer is yes, then they should most likely be considered an employee. If the answer is no, then they should most likely be considered an independent contractor.

The IRS has compiled a “20 Factor Test” to help determine whether a worker is an employee or an independent contractor. The most important factors are in bold.

  1. Instructions to worker – If the employer has the right to control and direct the worker regarding the detail and means by which a task is achieved, the worker is generally considered an employee.
  2. Training
  3. Integration into business operations
  4. Requirement that services be rendered personally
  5. Hiring, supervising, and paying assistants
  6. Continuity of the relationship (permanency)
  7. Setting the hours of work
  8. Requirement of full-time work
  9. Working on employer premises
  10. Setting the order or sequence of work
  11. Requiring oral or written reports
  12. Paying worker by the hour, week, or month
  13. Payment of worker’s business and/or travel expenses
  14. Furnishing worker’s tools and materials – If the business furnishes sufficient tools, materials, and other equipment to complete tasks, then it’s generally considered an employee-employer relationship.
  15. Significant investment by worker
  16. Realization of profit or loss by worker
  17. Working for more than one business at a time – If the worker performs services for a number of unrelated businesses at the same time, the worker is generally considered an independent contractor.
  18. Availability of worker’s services to the general public
  19. Firm’s right to discharge work
  20. Worker’s right to terminate relationship

Let’s use an example to help understand the differences. Ted mows lawns and pulls weeds for XYZ once a week from May through October. He provides his own lawnmower and can perform these tasks at any time as long as it’s once a week. Ted also does this for five other businesses in town. He does his billing and scheduling from his own home office. Should Ted be considered an employee or independent contractor? He is an independent contractor. Why? In the grand scheme of things, he has control over what he does. XYZ hired him to do a specific task, but he has the authority to choose when and how that task is completed.

If on the other hand, Ted worked for a company that owned several apartments, mowed for them 4 days a week, used the company’s vehicles and mowers, and was paid an hourly wage – he undoubtedly is an employee.

The next big question, why does it matter? If the worker is considered an independent contractor the amounts paid to that individual are not subject to federal income tax withholding, but the independent contractor may have to pay self-employment tax. Also, if you pay the independent contractor $600 or more for services performed then the business will need to issue a form 1099 to that independent contractor for the year.

The biggest risk to an employer is to incorrectly treat a worker as a contractor, when in fact they are an employee. The employer could be subject to federal employment taxes, penalties, and interest. Also, federal and state unemployment taxes and worker compensation insurance. To add to the misery, the penalties and interest might amount to more than the actual tax.

All in all, determining whether a worker is an employee, or an independent contractor is a little tricky and convoluted. Please reach out to your tax professional at KTLLP if you have questions or want to discuss in more detail the differences between an employee and an independent contractor.

June 8, 2022
| Hannah Sheffield