Author: Ketel Thorstenson, LLP

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The Corporate Transparency Act: Update II

We continue to monitor Corporate Transparency Act (CTA) developments. Two recent regulatory actions were announced by the Financial Crimes Enforcement Network (FinCEN), the bureau responsible for enforcing CTA provisions. Both regulatory actions are intended to help ease the reporting burden on affected reporting companies.

For a general background of the CTA:

Making Translucency Out of Transparency: Our Take on the Corporate Transparency Act

The Corporate Transparency Act: An Update

Timeline to Report

The first regulatory development relates to the provisions in the originally issued CTA regulations requiring reporting companies formed on or after January 1, 2024, to file their reports within 30 days of formation. FinCEN recently issued proposed regulations to extend this deadline from 30 days to 90 days, but only for companies formed between January 1, 2024, and December 31, 2024. Presumably, new reporting companies formed on or after January 1, 2025, will be subject to the original 30-day requirement.

FinCEN Identifier Numbers

The second regulatory development relates to the requirement that reporting companies must disclose certain information regarding the individuals who “beneficially own” the reporting company. When companies related to the reporting company are thrown into the mix, the reporting requirements can get complicated and burdensome. FinCEN is attempting to mitigate some of this burden by issuing final regulations allowing the reporting company to use a unique FinCEN identifier number to report the related company, rather than requiring the reporting company to disclose the related company’s ultimate beneficial owners. FinCEN must still issue guidance on the process reporting companies use to request and be issued these identifier numbers, but this is a start in the right direction.

Ketel Thorstenson LLP’s role related to the CTA will be limited to providing education and awareness about the new reporting requirements. The CTA does not involve either the Treasury Department or the IRS and no CTA disclosures are required with any federal or state tax filings. Consequently, Ketel Thorstenson LLP is not allowed to be responsible for any client FinCEN filings. Ketel Thorstenson, LLP recommends that taxpayers look towards their legal counsel for further assistance.

November 22, 2023
| Ketel Thorstenson, LLP
KT Insights
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Autumn is a Time for Harvesting: Digital Asset Tax Loss Harvesting That Is!

As the year-end quickly approaches, strategic tax planning opportunities are ripe for consideration. But you need to move quickly before it’s too late!

One such opportunity involves harvesting unrealized tax losses from your digital currency portfolio. Like tax loss harvesting in general, this strategy consists of identifying your loss positions and offsetting those losses with investments in a gain position.

What makes digital asset loss harvesting unique is under current law, the “wash sale” rules don’t apply. For stock or securities, the wash sale rules prevent taxpayers from claiming a loss on the sale or other disposition of a stock or security if, within the 61-day period that begins 30 days before the sale, they acquire the same or substantially identical stock or securities.

The IRS currently considers digital assets to be “property” rather than “securities.”  That means that for 2023’s current year-end planning, you can identify those digital assets currently in a loss position, sell them to offset capital gains, and then repurchase the digital asset position.

But this strategic gem may soon vanish. As of this writing, President Biden’s proposed 2024 Budget Bill contains a provision which would apply the wash sale rules to digital assets beginning with the 2024 calendar year. If this sounds familiar, that is because the House-passed version of the Build Back Better Act of 2021 contained a similar provision. That legislation died, however, when Senator Joe Manchin refused to support it.

So, here we are at what could be a final opportunity to turn the crypto winter of losses into a bountiful harvest of opportunity. This idea is definitely worth reviewing.

November 16, 2023
| Ketel Thorstenson, LLP
KT Insights
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The Corporate Transparency Act: An Update

As promised in my earlier newsletter article “Making Translucency Out of Transparency: Our Take on the Corporate Transparency Act” (June 20, 2023), we are continuing to monitor developments on this new significant reporting law. 

As we rapidly approach 2024, which ushers in the first filing requirements under this law, it seems like a good time to remind you of the key concepts and deadlines of the Corporate Transparency Act (CTA).

Background

On January 1, 2021, Congress enacted the CTA as part of the Anti-Money Laundering Act of 2020. Congress passed the CTA to “better enable critical national security, intelligence, and law enforcement efforts to counter money laundering, the financing of terrorism, and other illicit activity.”

CTA and FinCEN

The CTA requires corporations, LLCs, and “other” entities to file a Beneficial Ownership Information (BOI) Report with the Department of Treasury’s Financial Crimes Enforcement Network (FinCEN).

On September 29, 2022, FinCEN issued its first rule implementing the CTA regarding who must file, the required information, when the first report must be filed, and when to update the report.

The FinCEN rule describes two types of reporting companies: a domestic reporting company and a foreign reporting company. A domestic entity is a corporation, LLC, or other entity created by the filing of a document with the Secretary of State. A foreign reporting company is a corporation, LLC, or other entity created in a foreign country that is registered to do business in the U.S. by filing a document with the Secretary of State or similar office.

The rule doesn’t specifically define “other entities”. However, FinCEN has said that it expects to include LLPs, LPs, and business trusts.

The FinCEN rule has 23 exemptions. Most of these exemptions relate to entities that are currently required to report BOI. These include companies that file reports with the SEC, banks, insurance companies, accounting firms, and tax-exempt entities.

Exemptions and Key Dates

One key exemption is “a large operating company,” which is a company that employs more than 20 full-time employees in the U.S., has a large operating presence in a physical office in the U.S., and that filed a federal tax or information return for the previous year showing it had more than $5 million in gross receipts or sales.

All domestic and foreign reporting companies created or registered on or after January 1, 2024, must file their initial report within 30 days of receiving notice of their creation or registration. All domestic and foreign companies created or registered before January 1, 2024, must file their initial report no later than January 1, 2025.

Beneficial ownership interests of the reporting companies must be disclosed in the initial report, and in the case of reporting companies created or registered on or after January 1, 2024, certain information about the company is required (e.g., name, trade names, DBA names, the street address of principal business, and the TIN for foreign businesses).

BOI includes full legal name, date of birth, current address, a unique identifying number from unexpired passports, state ID requirements, or driver’s license and an image of that document.

Reporting companies are required to report the following: legal name, any trade names (d/b/a), the current address of its primary place of business, the jurisdiction where it was formed, and the taxpayer identification number.

If the information changes, the company must file an updated report within 30 days of the change. If the report is inaccurate, a corrected report must be filed within 30 days of the mistake being discovered.

Currently there is no fee required in connection with filing the BOI Report.

BOI Information

A “beneficial owner” is any individual (1) who directly or indirectly exercises “substantial control” over the reporting company or (2) who directly or indirectly owns or controls 25 percent or more of the “ownership interests” of the reporting company. Substantial control includes senior officers and the individuals who can appoint and remove senior officers, but generally includes anyone who directs, determines, or has substantial influence over important decisions made by the company. Also, for companies created or registered on or after January 1, 2023, “company applicants” must disclose their information. Company applicants include individuals who first created or registered the company with the Secretary of State or directs that filing. There is a maximum of two company applicants required to be listed.

“Ownership interests” includes simple shares of stock as well as more complex instruments.

Beneficial owners, company applicants, and reporting companies can apply for a FinCEN identifier. This isn’t required but is supposed to help ease the administrative burden of filing. The application for this identifier includes the required information noted above, and therefore, the individual can simply provide this number to the various companies in which the individual has a disclosure requirement in lieu of completing separate reports.

Penalties are imposed for persons who willfully fail to complete this information. Such persons are liable for $500 per day the violation continues or $10,000 for a criminal violation. Person includes any individual, reporting company, or “other entity.”

How Is the BOI Report Filed?

FinCEN is currently working on its reporting system which it has named the Beneficial Ownership Secure System (BOSS). Due to the rigorous security and confidentiality requirements imposed by the CTA, FinCEN has its hands full developing a sophisticated technological infrastructure to handle these requirements. The planned date for the new system to begin accepting BOI reports is January 1, 2024, so we anticipate the system to be unveiled soon.

On September 18, 2023, FinCEN published the Small Entity Compliance Guide which is the most comprehensive guidance to date on compliance obligations.

We will continue monitoring developments to help you get ready for this significant compliance initiative.

Ketel Thorstenson, LLP’s role related to the CTA will be limited to providing education and awareness about the new reporting requirements.The CTA does not involve either the Treasury Department or the IRS, and no CTA disclosures are required with any federal or state tax filings. Consequently, Ketel Thorstenson, LLP cannot be responsible for any client FinCEN filings and no Ketel Thorstenson, LLP person should provide any legal advice (or assist with any filings) for a client regarding the CTA. If a client does ask for assistance, Ketel Thorstenson, LLP recommends that a client look towards their legal counsel for further assistance.

October 9, 2023
| Ketel Thorstenson, LLP
KT Insights
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The Bonus Depreciation Phaseout – Is the Party Almost Over?

Strategic Considerations for Construction Contractors

The Tax Cuts and Jobs Act of 2017 ushered in full 100% Bonus Depreciation expensing for qualified property acquired and placed in service in years beginning after September 27, 2017. This tax perk has proven to be a significant benefit for the construction industry. However, all of this is scheduled to end by 2027 unless Congress acts.

Phase-Out Schedule

2023 – 80% of cost basis

2024 – 60% of cost basis

2025 – 40% of cost basis

2026 – 20% of cost basis

By 2027 the bonus depreciation benefit is zero!

Since relying on Congress can be a risky proposition, here are some possible strategies to consider:

  • Consider whether Section 179 expensing can pick up the slack. 
    • Although Bonus Depreciation and Section 179 expensing are often confused with each other, they are very different provisions.
      • Section 179 is limited in the amount that can be expensed. For 2023, the maximum Section 179 expense limit is $1,160,000 and the maximum limit on property placed in service before phaseout is $2,890,000. There is also a Section 179 taxable income requirement.
      • Bonus Depreciation does not have these limitations. However, with Section 179, taxpayers can “cherry-pick” which assets they want to expense, which is not permissible under Bonus Depreciation rules.
  • Continue to take just Bonus Depreciation since even the phase-out percentages are beneficial.
    • An 80% cost deduction is still a very attractive tax benefit. So is 60%. Therefore, you may opt to continue with taking Bonus Depreciation on the qualified assets placed in service in 2023 and beyond.
  • Using a combination of Section 179 and Bonus Depreciation.
    • Under the tax law, Section 179 is considered first, and then Bonus Depreciation. Ketel Thorstenson can assist you in analyzing an optimal combination. Like most tax planning strategies, we have to model the scenarios before determining the optimal combination of Section 179 and Bonus Depreciation expensing.
  • Consider equipment leasing as an alternative.
    • Especially in the later years of the Bonus Depreciation phase-out periods, equipment leasing may be the most beneficial strategy for some companies.
  • Accelerate asset acquisitions to 2023.
    • In general, if you are planning to place a significant amount of assets in service in the next few years, you should consider accelerating them into 2023 since the 80% rate is applicable.

Feel free to contact Ketel Thorstenson if you would like to discuss these or any other alternatives.  Hopefully, Congress reverts back to 100% Bonus Depreciation expensing. But as I noted before, don’t count on it!

August 8, 2023
| Ketel Thorstenson, LLP
KT Insights
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Making Translucency Out of Transparency: Our Take on the Corporate Transparency Act

In an attempt to clarify entity ownership, Congress may have muddied the waters. On January 1, 2021, Congress enacted the Corporate Transparency Act (CTA) as part of the Anti-Money Laundering Act of 2020. Congress passed the CTA to “better enable critical national security, intelligence, and law enforcement efforts to counter money laundering, the financing of terrorism, and other illicit activity.”

While this intent is laudable, how does the new law’s implementation affect the average business and its owners? Here is what we know so far.

CTA and FinCEN

The CTA requires corporations, LLCs, and “other” entities to file a Beneficial Ownership Information (BOI) Report with the Department of Treasury’s Financial Crimes Enforcement Network (FinCEN).

On September 29, 2022, FinCEN issued its first rule implementing the CTA regarding who must file, the required information, when the first report must be filed, and when to update the report.

The FinCEN rule describes two types of reporting companies: a domestic reporting company and a foreign reporting company. A domestic entity is a corporation, LLC, or other entity created by the filing of a document with the Secretary of State. A foreign reporting company is a corporation, LLC, or other entity created in a foreign country that is registered to do business in the U.S. by filing a document with the Secretary of State or similar office.

The rule doesn’t specifically define “other entities”. However, FinCEN has said that it expects to include LLPs, LPs, and business trusts.

The FinCEN rule has 23 exemptions. Most of these exemptions relate to entities that are currently required to report beneficial ownership information. These include companies that file reports with the SEC, banks, insurance companies, accounting firms, and tax-exempt entities.

Exemptions and Key Dates

One key exemption is “a large operating company,” which is a company that employees more than 20 full-time employees in the U.S., has a large operating presence in a physical office in the U.S., and that filed a federal tax or information return for the previous year showing it had more than $5 million in gross receipts or sales.

All domestic and foreign reporting companies created or registered on or after January 1, 2024, must file their initial report within 30 days of receiving notice of their creation or registration. All domestic and foreign companies created or registered before January 1, 2024, must file their initial report no later than January 1, 2025.

Beneficial ownership interests of the reporting companies must be disclosed in the initial report, and in the case of reporting companies created or registered on or after January 1, 2024, certain information about the company is required (e.g., name, trade names, DBA names, the street address of principal business, and the TIN for foreign businesses).

BOI includes full legal name, date of birth, current address, a unique identifying number from unexpired passports, state ID requirements, or driver’s license and an image of that document.

Reporting Companies are required to report: Its legal name, any trade names (d/b/a), the current address of its principal place of business, the jurisdiction where it was formed, and its Taxpayer Identification Number.

If the information changes, the company must file an updated report within 30 days of the change. And if the report is inaccurate, a corrected report must be filed within 30 days of the mistake being discovered.

Currently there is no fee required in connection with filing the BOI Report.

BOI Information

A “Beneficial Owner” is any individual (1) who directly or indirectly exercises “Substantial Control” over the reporting company or (2) who directly or indirectly owns or controls 25 percent or more of the “Ownership Interests” of the reporting company. Substantial Control includes senior officers and the individuals who can appoint and remove senior officers, but generally includes anyone who directs, determines, or has substantial influence over important decisions made by the company. Also, for companies created or registered on or after January 1, 2023, “Company Applicants” must disclose their information. “Company Applicants” include individuals who first created or registered the company with the Secretary of State or directs that filing. There is a maximum of two Company Applicants required to be listed.

“Ownership Interests” includes simple shares of stock as well as more complex instruments.

Beneficial owners, company applicants, and reporting companies can apply for a FinCEN identifier. This isn’t required but is supposed to help ease the administrative burden of filing. The application for this identifier includes the required information noted above, and therefore, the individual can simply provide this number to the various companies in which the individual has a disclosure requirement in lieu of completing separate reports.

Penalties are imposed for persons who willfully fail to complete the information. Such persons are liable for $500 per day the violation continues or $10,000 for a criminal violation. Person includes any individual, reporting company, or “other entity”.

How Is the BOI Report Filed?

At this writing, we don’t know because FinCEN is still designing and building a new system called the Beneficial Ownership Secure System to collect and store CTA reports. This system is not currently available and will not accept reports prior to January 1, 2024.

We will continue monitoring CTA developments, but until then, the waters are still a bit muddied. Let’s hope translucency of transparency is soon achieved!

June 20, 2023
| Ketel Thorstenson, LLP
KT Insights
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SD State Sales Tax: New Rate Effective July 1, 2023

On March 27, 2023, House Bill 1137 was signed into law. This bill decreases the state sales and use tax rate from 4.5% to 4.2%, effective July 1, 2023. Additional rates affected by the change are the special jurisdiction tax, excise tax on farm machinery and attachment units, the amusement device tax, and the motor vehicle gross receipts tax. To facilitate reporting, there will be 4.5% and 4.2% lines on sales tax return forms after July 1, 2023.

The rate reduction will be repealed automatically in four years, ending on June 30, 2027. This bill does not change any municipal sales and use tax rates, the municipal gross receipts tax rate, the tourism tax rate, or the contractor’s excise tax rate.

Cash v Accrual

One important piece of information needed to determine how to implement this change is whether a business files SD sales tax returns on a cash basis or accrual basis. A cash basis filer reports sales to the state based on when payments from customers are received, while an accrual basis filer reports sales based on when invoices are issued to customers.

This accounting method can be found on your original sales tax application, by calling the South Dakota Department of Revenue (SD DOR) at 1-800-829-9188, or by opening a Live Chat on the SD DOR website and asking their representative. You will need your license number available if you call or chat.

Here is an example of how to manage the change as a cash basis versus accrual basis filer. In this case, the customer is charged $100 before taxes. (City and other taxes are excluded.)

Date InvoicedDate PaidSale AmountTax Charged and Remitted to State
Cash Basisn/a06/30/2023$100.004.5% = $4.50
Cash Basisn/a07/01/2023$100.004.2% = $4.20
Accrual Basis06/30/2023n/a$100.004.5% = $4.50
Accrual Basis07/01/2023n/a$100.004.2% = $4.20

Please note that point of sale systems, cash registers, and/or accounting software will need to be updated to reflect the rate change. System providers are best able to help you change the sales tax rates in your business systems.

Other Situations

Situations in which tax treatment may be less clear are customer deposits, customer refunds, and items removed from inventory for business use.

For customer deposits, the sales tax accounting method determines which rate to use. For a cash basis filer, use the rate in effect when the deposit is received. For an accrual basis filer, use the rate in effect at the time the deposit is billed, or recorded in the business books – consistent with how the business currently reports those deposits.

Customer refunds for returned merchandise should be paid at the rate charged on the original purchase. To report returns of the 4.5% rate after July 1, 2023, please refer to the SD DOR website FAQs for an example of how that should be reported on the sales tax return.

Use tax for items removed from inventory for business use or as materials used on construction projects, should be calculated at the rate in effect when the item is removed from inventory.

Resources

Reach out to the SD DOR with specific questions – dor.sd.gov. Once there, click “Latest News” in the upper right-hand corner, and then click on House Bill 1137. The link “2023 Legislative Changes” has Frequently Asked Questions that address most situations affected by the rate change.

The SD DOR representatives are friendly, knowledgeable, and want to help all businesses understand and correctly apply sales tax rates. Their Live Chat feature also allows you to receive a copy of the chat transcript for future reference.

June 20, 2023
| Ketel Thorstenson, LLP
KT Insights
 |

2022 – Last Year for 100% Bonus Depreciation?

Since the 2017 Tax Cuts and Jobs Act, businesses have been allowed to write-off 100% of the cost of eligible property in the year the property is placed into service by using bonus depreciation. To qualify for bonus depreciation, the property placed into service must have a useful life of 20 years or less and be depreciated using the Modified Accelerated Cost Recovery System method. Property such as qualified improvement property, farm shops, car washes, computer software, vehicles, and equipment are all popular items that qualify for bonus depreciation.

There are many benefits to taking bonus depreciation. Unlike the Section 179 deduction, another method available for depreciating assets at an accelerated rate, bonus depreciation does not have a limitation on the maximum deduction. For tax years 2018-2022, the maximum bonus depreciation has been 100% of the cost of the qualified assets placed into service. For example, if a taxpayer buys (and places into service) a $100,000 qualified asset, they can take a $100,000 deduction in 2022. Bonus depreciation can also reduce income below zero, meaning it can create losses to offset other income and even create net operating losses. In contrast, Section 179 cannot be used to reduce business income below $0. As such, the maximum Section 179 deduction is limited to business income.

Another benefit to bonus depreciation is that it is an automatic deduction, meaning that the taxpayer receives it by default unless they opt out. If the taxpayer elects out of using bonus depreciation, they must do so for all property with the same useful life purchased in the year. For example, if a taxpayer buys two five-year assets and does not want to use bonus depreciation on one, they must elect out of using bonus depreciation on both, since both are five-year properties. This is one downside of bonus depreciation – it is not as flexible and easily tailored to the taxpayer’s needs. It is a one-size-fits-all approach to accelerated depreciation.

One downside to bonus depreciation is that the deduction rules are more volatile. The maximum deduction limit has changed drastically throughout recent years. Before the Tax Cuts and Jobs Act, the maximum bonus depreciation deduction was limited to 50% of the cost of qualified property. Then, from 2018-2022, it jumped to 100%. As it stands now, we are posed to lose the 100% bonus depreciation deduction starting in 2023, when the deduction will be reduced to 80% of qualifying expenses. After 2023, the deduction will continue to decrease by increments of 20% every year until it hits 0%, meaning no bonus depreciation allowed in 2027. The constant changes in the maximum deduction allowed on a year-by-year basis underscore the importance of using tax planning in the coming years.

Some states, such as MN, do not allow bonus depreciation, causing complex calculations on each return. Of course, in Wyoming and South Dakota we have no such hassle, as we don’t have an income tax.

Please reach out to your tax advisor at Ketel Thorstenson to discuss bonus depreciation and your specific tax situation.

March 21, 2023
| Ketel Thorstenson, LLP
KT Insights
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Gifting – Is it Taxable?

We often get questions from our clients on gifting and its potential tax implications. A gift of money or property is not deductible on your personal income tax return nor does the recipient report the gift as income on their tax return. Gifts, however, may be subject to the federal gift tax. The gift tax is a tax on transfers of money or property to other people while getting nothing (or less than full value) in return.

Few people actually owe gift tax due to the annual gift tax exclusion and currently high lifetime exemption. For 2022, the annual gift tax exclusion was $16,000, and the exclusion will be raised to $17,000 for 2023. The exclusion amount is per recipient which means that a married couple can give a married child and spouse up to $68,000 in 2023 without reducing their lifetime estate exemption. Only gifts over the annual exclusion threshold must be reported on a gift tax return, Form 709.

A gift over the threshold amount simply uses a piece of your lifetime estate tax exemption. With the estate tax exemption at $12,920,000 per person in 2023, most taxpayers do not need to worry about paying estate and gift taxes. Keep your eye on the calendar though – beginning in 2026, the lifetime exemption is set to revert to 50% of current levels.

The general rule is that any gift is a taxable gift; however, there are many exceptions to this rule. Generally, the following are not considered taxable gifts:

  • Gifts that are not more than the annual exclusion.
  • Gifts consisting of direct payments to providers for medical and education expenses.
  • Gifts to your spouse.
  • Gifts to a political organization.

Since tax and gifting implications vary for each individual, please reach out to your tax advisor at Ketel Thorstenson to discuss your situation.

March 7, 2023
| Ketel Thorstenson, LLP
KT Insights
 |

Homing in on Home Energy Credits

Thinking about some home improvements? Maybe Uncle Sam can help you finance them with Energy Efficient Home Improvement credits.

Energy Efficient Home Improvement credit

The Nonbusiness Energy Property credit was revived by the Inflation Reduction Act of 2022 and renamed the Energy Efficient Home Improvement credit. Congress extended the credit to tax year 2022 and inserted new provisions applying to tax years 2023 – 2032.

Tax Year 2022

How much is the credit for 2022?

The credit for eligible property placed in service in 2022 is the sum of the following two components:

  • 10% of amount paid or incurred for Qualified Energy Efficiency Improvements installed during tax year
  • Amount of Residential Energy Property Expenditures paid or incurred during taxable year

What property is credit eligible for 2022?

  • Qualified Energy Efficiency Improvements (eligible for 10% of the cost of the property) relating to component installations on a principal residence:
    • Any insulation material or system designed to reduce heat in a dwelling
    • Exterior windows and skylight
    • Exterior doors
    • Metal or asphalt roofs designed to reduce heat
  • Residential Energy Property Expenditures that qualify if installed on a principal residence:
    • Electric heat pump water heaters meeting Department of Energy standards
    • Electric heat pumps meeting specific efficiency standards
    • Central air conditioners meeting specific efficiency standards
    • Qualified natural gas, propane or oil water heaters
    • Qualified natural gas, propane or oil furnace, or hot water boilers
    • Advanced main air circulating fans used in a natural gas, propane, or oil furnace meeting Department of Energy test standards

What is the lifetime limit for 2022?

The overall lifetime credit limit for 2022 is $500. However, the $500 lifetime credit limit ends in 2023 in favor of an annual credit limit of $1,200.

There is also a lifetime credit limit for 2022 of $200 specifically for exterior windows and skylights. In 2023, this $200 lifetime limit is replaced by an annual limit of $600.

What are the 2022 credit limits for specific items?

Annual credit limits for items under the Residential Energy Property:

  • Air circulation fans in natural gas, propane or oil furnaces – $50
  • Natural gas, propane or oil furnaces, or hot water boilers – $150
  • Electric heat pump water heaters, electric heat pumps, central air conditioners, and natural gas, propane, or oil water heaters – $300

Tax Years 2023 through 2032 – The New Rules

The Inflation Reduction Act of 2022 made significant revisions. The changes, set to go into effect for property placed into service for tax year 2023, include:

  • Credit percentage increase – 10% to 30%
  • 30% credit applies to Residential Energy Property
  • Residential Energy Property includes second homes
  • New category of eligible costs – “Home Energy Audits”
  • $500 lifetime limit replaced by $1,200 annual limit
  • $200 lifetime limit for exterior windows and skylights replaced by $600 annual limit
  • Qualified Energy Efficiency Improvements includes insulation air-sealing materials and systems
  • Qualified Energy Efficiency Improvements excludes roofs
  • Residential Energy Property includes biomass stoves and air-sealing materials placed in service in 2023 or later
  • Residential Energy Property includes improvements to panelboards, sub-panelboards, branch circuits, or feeders placed in service in 2023 or later

Questions for 2023

How much is the credit for 2023 – 2032?

The credit for 2023 – 2032 is now equal to 30% of the sum of:

  • Amounts paid or incurred for Qualified Energy Efficiency Improvements installed during year
  • Amount of Residential Energy Property for year
  • Amounts paid during year for “Home Energy Audits”

What is eligible for 2023?

Qualified Energy Efficiency Improvements made to a principal residence for 2023 are the same as 2022, except that roofing no longer qualifies. The following items qualify:

  • Insulation materials or systems, including air-sealing materials or systems, specifically and primarily designed to reduce heat loss of a dwelling
  • Exterior windows and skylights
  • Exterior doors

Residential Energy Property can also be made to a second home and include:

  • Electric or natural gas heat pump water heaters meeting highest efficiency tier established by the Consortium for Energy Efficiency (CEE)
  • Certain electric heat pumps meeting highest efficiency tier established by the CEE
  • Certain central air conditioners meeting highest efficiency tier established by the CEE
  • Natural gas, propane or oil furnaces, or hot water heaters meeting highest efficiency tier established by the CEE
  • Natural gas, propane or oil furnaces, or hot water boilers meeting highest efficiency tier established by the CEE
  • Biomass stoves or boilers used to heat a residence, with a thermal efficiency rating of at least 75%
  • Oil furnaces and hot water boilers placed in service 2023 – 2026 which meet or exceed 2021 Energy Star efficiency criteria and use eligible fuel blends, or those placed in service after 2026 that achieve annual fuel use efficiency rate of 90 and are rated for use with eligible fuel blends
  • Improvements or replacement of panelboards, sub-panelboards, branch circuits, or feeders installed according to National Electric Code, have a load capacity of not less than 200 amps, and are installed along with other properties for which a credit is allowed under section 25C

What classifies a “Home Energy Audit”?

Home Energy Audits are inspections and reports with respect to a dwelling in the United States owned or used as a principal residence that:

  • Identify significant and cost-effective energy efficiency improvements, including estimates of actual cost savings of each improvement
  • Are conducted and prepared by a certified home energy auditor

What about annual credit limits for specific items for 2023?

For 2023, the credit generated by the following items cannot exceed:

  • Energy audits – $150
  • Exterior door – $250
  • All exterior doors – $500
  • Exterior windows and skylights; central air conditioners; electric panels and related equipment; natural gas, propane or oil furnaces, or hot water boilers – $600 annual aggregate total
  • Electric or natural gas heat pump water heaters; electric or natural gas heat pumps; certain biomass stoves and boilers – $2,000
    • For this category, the $1,200 total credit annual limit and the $600 limit on energy property may be exceeded

To better understand these tax changes and how they may apply to your planned home improvements, please contact your KTLLP Tax Advisor.

January 19, 2023
| Ketel Thorstenson, LLP