Amortizing Research and Experimentation Costs

March 7, 2023 by Jeffrey Silverberg CPA

Beginning in 2022, amendments made by the Tax Cuts and Jobs Act require taxpayers to amortize research and experimentation expenditures (R&E) over five years, or 15 years for foreign expenditures.

Prior to 2022, a taxpayer could elect to deduct research and experimental expenses, amortize them over a period of at least 60 months, or capitalize them to the related property. For both post-2021 and pre-2022 expenses, qualified research expenses must be incurred in connection with the taxpayer’s trade or business, and they must represent research and development costs in the experimental or laboratory sense. However, software developmental costs paid or incurred after 2021 are treated like other research expenses, and are no longer subject to the special rules that applied to such costs before 2022.

For post-2021 R&E expenditures, the amortization period begins at the mid-point of the tax year in which the expenditures are paid or incurred.

For pre-2022 expenditures, the elective amortization period began when benefits were first realized. For post-2021 R&E expenses, taxpayers must continue to amortize research or experimental expenditures for the five-year (or 15-year) period even if the related property is disposed of, retired, or abandoned during the amortization period. The disposition, retirement or abandonment does not accelerate the expense deduction.

For pre-2022 expenditures, the normal IRC §165 rules applied to research expenses. Thus, if the taxpayer had elected to amortize or capitalize the expenses, any expenses that had not yet been recovered were generally treated as a loss realized upon the disposition, retirement or abandonment.

The post-2021 switch to a five-year amortization period (15-years for foreign research) is a change in accounting method that is treated as initiated by taxpayers and made with the consent of the IRS. Thus, taxpayers do not have to file an accounting method change and no section 481(a) adjustment is required or allowed. Instead, the changes apply only on a cut-off basis to research or experimental expenditures paid or incurred in tax years beginning after December 31, 2021.

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If you need assistance or have any questions on the information in this article, please call your CironeFriedberg professional. You can reach us by phone at (203) 798-2721 (Bethel), (203) 366-5876 (Shelton), or (203) 359-1100 (Stamford) or email us at info@cironefriedberg.com.

Changes to the Electric Vehicle Tax Credit

February 13, 2023 by Jeffrey Silverberg CPA

Are you eligible for a tax credit for your electric vehicle? You might be if you bought a new, qualified, plug-in electric vehicle (EV) in 2022 or earlier.

Changes to the electric vehicle tax credit were made under the Inflation Reduction Act. There are new income limits for taxpayers to obtain the tax credit effective on 1/1/23. Federal adjusted gross income for single, head of household and married filing separate taxpayers cannot exceed $150,000, $225,000 and $300,000 respectively.

Questions & Answers About the EV Tax Credit

Q: How does the Inflation Reduction Act modify the existing tax credit for new electric vehicles?

The Inflation Reduction Act introduces a number of significant changes to the tax credit for new electric vehicles (section 30D). These changes will phase in over time. Effective immediately after enactment of the Inflation Reduction Act (after August 16, 2022), the tax credit is only available for qualifying electric vehicles for which final assembly occurred in North America. Further changes to the eligibility rules will begin in 2023.

Overall, the reforms in the Inflation Reduction Act mean that the tax credit for electric vehicles will evolve considerably over the coming months and years. However, the only change to the electric vehicle credit that takes effect immediately after the President signs the Inflation Reduction Act into law is the North America final assembly requirement.

Separately, starting in 2023, the Inflation Reduction Act also establishes tax credits for pre-owned clean vehicles (section 25E) and for commercial clean vehicles (section 45W). Treasury and the Internal Revenue Service will release more information on all the clean vehicle credits in the coming months.

Q: Now that the President has signed the Inflation Reduction Act into law, the North America final assembly requirement will enter into force after August 16, 2022. How do I know if an electric vehicle’s final assembly occurred in North America?

Dealers and consumers can follow a simple two-step process to check whether a vehicle’s final assembly occurred in North America.

First, the Department of Energy’s Alternative Fuels Data Center (AFDC) has developed a list of Model Year 2022 and 2023 electric vehicles that likely meet the North America final assembly requirement, available here: https://afdc.energy.gov/laws/inflation-reduction-act. Dealers and consumers can check this list to determine whether a make/model is potentially eligible for the credit in light of the final assembly requirement. Because some models are built in multiple locations, there may be vehicles on this list that do not meet the final assembly requirement in all circumstances.

Second, to identify whether a specific vehicle’s final assembly occurred in North America, dealers and consumers should enter the 17-character Vehicle Identification Number (VIN) into the National Highway Traffic Safety Administration’s VIN Decoder tool, available here: https://vpic.nhtsa.dot.gov/decoder/. Dealers and consumers can refer to the “Plant Information” field at the bottom of the page result, which expressly lists the build plant and country for the searched vehicle.

Q: How do I claim this credit?

Consumers that purchase a qualifying electric vehicle can continue to claim the electric vehicle tax credit on their annual tax filing. Starting in 2024, the Inflation Reduction Act establishes a mechanism that will allow car buyers to transfer the credit to dealers at the point of sale so that it can directly reduce the purchase price.

Q: If I signed a contract to purchase an electric vehicle prior to enactment of the Inflation Reduction Act (before August 16, 2022) but have not yet taken possession of the vehicle, will the changes in the Inflation Reduction Act impact my tax credit?

No. If you entered into a written binding contract to purchase a qualifying electric vehicle before the date of enactment of the Inflation Reduction Act (August 16, 2022), the changes in the Inflation Reduction Act will not impact your tax credit. You may claim the credit based on the rules that were in effect before August 16, 2022. The Internal Revenue Service provides information on “written binding contract” here.

Q: What if I purchase and take possession of a qualifying electric vehicle after August 16, 2022 but before the end of 2022?

The only change to the existing electric vehicle credit that takes effect after August 16, 2022 and before the end of 2022 is the introduction of the North America final assembly requirement. Otherwise, the rules in effect before enactment of the Inflation Reduction Act for the electric vehicle credit remain in effect, including the phase-out for manufacturers that have sold over 200,000 vehicles in the United States.

Q: Where can I find out more about the other changes taking effect starting next year?

The Internal Revenue Service and the Department of the Treasury will post information and request comments from the public on various existing and new tax credits in the coming weeks and months, including on further changes to eligibility rules for clean vehicle tax credits. Please look for updates on IRS.gov and other announcements from the Administration.

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Deducting Business Expenses: Separating Fact from Myth

February 6, 2022 by Jeffrey Silverberg CPA

When you’re filing your tax returns, what expenses can you deduct from business income? It’s a complex question. To start with, a business expense must be both ordinary and necessary to be deductible, according to the IRS. An ordinary expense is one that’s common and accepted in your trade or business.

A necessary expense is one that’s helpful and appropriate for your trade or business; it doesn’t always mean an indispensable cost. Since only business expenses are deductible, they must be separated from other types of expenses: those that are included in the cost of goods sold, capital expenses and personal expenses.

The cost of goods sold is figured by valuing inventory at the beginning and end of each tax year. The total value is deducted from your gross receipts to figure your gross profit for the year. If you include an expense in the cost of goods sold, you cannot deduct it again as a business expense.

Such expenses as the cost of products or raw materials, freight, storage, and direct labor costs including contributions to pensions or annuities for workers who produce the products and factory overhead all go into figuring the cost of goods sold.

You must capitalize some costs rather than deduct them. These costs, part of your investment in your business, are called capital expenses and are considered assets in your business. Generally, there are three types of costs that you should capitalize:

Startup costs.
Assets.
Improvements.

Note that you can decide to deduct or amortize some business startup costs.

You cannot deduct personal, living or family expenses. But if you have an expense for something used partly for business and partly for personal purposes, divide the total cost between the business and personal parts and then deduct the business part.

What if you use part of your home for business? You may be able to deduct expenses for the business use of your home. These may include mortgage interest, insurance, utilities, repairs and depreciation. If you use your car for your business, you can deduct car expenses. If you use your car for both business and personal purposes, you must divide your expenses based on actual mileage.

Other common business expenses include:

Employees’ pay — You can generally deduct the pay you give your employees for services they perform within your business.
Retirement plans — Retirement plans are savings plans offering tax advantages to set aside money for your and your employees’ retirement funds.
Rent expenses — Rent is any amount you pay for the use of property you don’t own. You can deduct rent as an expense only if the rent is for property you use in your trade or business. If you have or will receive equity in the title to the property, the rent is not deductible.
Interest — Business interest expense is an amount charged for the use of money you borrowed for business activities.
Taxes — You can deduct various federal, state, local and foreign taxes directly attributable to your trade or business as business expenses.
Insurance — Generally, you can deduct the ordinary and necessary cost of insurance as a business expense if it’s for your trade, business or profession.

This is just an introduction to a technical topic. Be sure to work closely with a qualified tax professional.

Can I Deduct That Business Meal?

January 19, 2022 by Jeffrey Silverberg CPA

Many changes have occurred with regard to meal and entertainment deductibility since the Tax Cuts and Jobs Act of 2017 (TCJA) and continuing with the Consolidated Appropriations Act of 2021 (CAA) signed into law on December 27, 2020.

In an effort to help the struggling restaurant industry during the COVID-19 pandemic, changes were made to allow a 100% deduction for business meal expenses incurred after December 31, 2020 through December 31, 2022. If meals are not provided by a restaurant, the deduction is still limited to 50%. On April 8, 2021, the IRS issued Notice 2021-25 to provide further guidance that a restaurant does not include businesses that primarily sell pre-packaged food or beverages not for immediate consumption.

On November 16, 2021, the IRS issued Notice 2021-63 to indicate that a taxpayer that properly applies the rules of Rev. Proc. 2019-48 may treat the meal portion of a per diem rate or allowance as being attributable to food or beverages provided by a restaurant.

What is Per Diem and how do we apply Rev. Proc. 2019-48?

A per diem allowance is an amount a business pays for lodging, meals, and incidental expenses incurred when traveling. The allowance is in lieu of paying employees for actual travel expenses.

The amount of expenses considered substantiated for each calendar day equals the lesser of the per diem allowance for that day or the amount computed at the federal per diem rate for the relevant location set by the U.S. General Services Administration.

No receipts are required to substantiate the deduction as long the employee provides the time, place, and business purpose of the travel for that day.

If the per diem allowance is only for meals and incidental expenses (i.e., there are no lodging costs) the amount considered substantiated is the same as above using the per diem allowance for meals and incidental expenses (M&IE).

A per diem allowance is treated as paid for M&IE only if:

The business pays the employee for actual expenses for lodging based on receipts submitted to the payor,
The business provides the lodging,
The business pays the actual expenses for lodging directly to the lodging provider,
The business does not have a reasonable belief that the employee will or did incur lodging expenses,
The allowance is computed on a basis similar to that used to compute an employee’s compensation (such as the number of hours worked, or miles traveled).

Businesses that pay employees on a per diem basis should review their procedures for compliance with Rev. Proc. 2019-48 so they can deduct their per diem payments to employees without limitation including 100% for meal costs.

The Tax Gap and Efforts to Raise Compliance

September 7, 2021 by Jeffrey Silverberg CPA

By Jeffrey Silverberg, Manager, CironeFriedberg, LLP On June 8, 2021, Charles P. Rettig, Commissioner of the Internal Revenue Service, addressed the Senate Finance Committee on the IRS budget issues and concerns over implementation of the American Rescue Plan Act of 2021. Mr. Rettig discussed the 2021 filing season and challenges to the IRS which included the following:

Efforts to reduce the tax gap. The tax gap is defined as the difference between the amount of tax owed by a taxpayer for a given year and the amount that is voluntarily paid on a timely basis. In dollar terms, this is the annual amount of tax noncompliance.
The tax gap has many causes but willful evasion is a contributing factor. More investments will be made by the IRS in improving the effectiveness and efficiency of their overall tax enforcement program with modernization of their systems. The IRS was allocated $13.6 billion for the agency in fiscal year 2022 to help achieve these goals. Hiring additional IRS staff to replace employees lost through attrition and to expand their workforce is also planned.
Advances in artificial intelligence, advanced data, and analytic strategies have enhanced the IRS capabilities in identifying noncompliance when compared to a few years ago. More tax gap approaches and methodologies will be soon be implemented to identify noncompliance.
Improve tax administration by increasing oversight of paid tax preparers and establish mandatory minimum competency standards. Some of the complexity in the tax law can contribute to the tax gap. Implementation of competency standards may help to reduce tax preparers who are not qualified to prepare returns or who refuse to sign the return they have been compensated for.
Introduction of comprehensive financial account reporting is on the horizon. Financial institutions would be required to report gross inflows and outflows for physical cash, transactions within a foreign account, and transfers to and from another account with the same owner. Separate reporting requirements would apply to those taxpayers that buy crypto assets from one broker and transfer them to another. Proposals are in the works but would not become effective until after December 31, 2022.

The tide may have turned as tax compliance audits have been at record lows due to lower IRS funding and resources for numerous years. As the deficit widens, greater enforcement of current tax laws will be a high priority and pursuit of the Commissioner’s mission on behalf of all taxpayers.

Amortizing Research and Experimentation Costs

Have Questions?

Changes to the Electric Vehicle Tax Credit

Questions & Answers About the EV Tax Credit

HAVE QUESTIONS?

Deducting Business Expenses: Separating Fact from Myth

Can I Deduct That Business Meal?

The Tax Gap and Efforts to Raise Compliance

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