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Deputy Secretary of the Treasury Wally Adeyemo was out promoting the positives of the Inflation Reduction Act in an apparent effort to counteract the messaging from Republicans who are working to abolish the law as well as to replace the IRS with a national sales tax.

Speaking January 17, 2023, at a White House event, Deputy Secretary Adeyemo described the law as "the most significant piece of legislation in our country’s history when it comes to building a clean energy future," and highlighted the law’s tax incentives aimed at getting more Americans to invest in clean energy.

For example, he noted the $1,200 available to people for making homes more energy efficient with new insulation, doors, windows, and other upgrades. He also highlighted the up to $2,000 available to upgrade existing furnaces and air conditioners with energy efficient heat pumps, as well as tax credits to help defray the cost of installing solar panels on their home rooftops.

Adeyemo also highlighted the tax incentives related to the purchase of clean vehicles, including up to a $7,500 tax credit for a new vehicle and up to $4,000 for a pre-owned vehicle.

"Treasury is working expeditiously to provide clarity and certainty to taxpayers, so the climate and economic benefits of this historic legislation can be felt as quickly as possible," he said.

Adeyemo also referenced the additional funding the Internal Revenue Service is receiving due to the Inflation Reduction Act. He noted that a "well-resourced IRS … is essential for effective implementation of the IRA’s clean energy credits and other tax benefits, and for ensuring fairness of our tax system overall."

Countering Republican Messaging

Adeyemo’s comments come as Republicans in their new majority in the House of Representatives begin to work on abolishing the IRA and dismantling the IRS.

Already passed in the GOP-led House is the Family and Small Business Taxpayer Protection Act (H.R. 23), which would eliminate the additional IRS funding in the IRA and in particular targets the 87,000 new hires by the agency. GOP messaging continues to misrepresent those new hires as all being IRS agents who will target low- and middle-income taxpayers with audits, despite the stated purposed of those new hires to be primarily for customer service, with the new agents that do get hired to be used to target the wealthiest taxpayers in an effort to ensure they are paying their fair share and to close the tax gap.

Indeed a one-sheet on the H.R. 23 posted to the House Ways and Means website highlights that the bill is targeting the 87,000 new hires which it claims will all be agents. The bill passed the House on January 9, 2023, by a 221-210 vote along party lines. The Senate is likely not going to take up the bill and President Biden already threatened a veto if the bill made it to his desk.

The Congressional Budget Office estimates that enacting this bill would actually reduce revenue by nearly $186 billion and increase the deficit by more than $114 billion.

House Republicans also introduce a bill (H.R. 25) that would abolish the IRS and replace its revenue generating taxation authority with a national sales tax of 23 percent, with a means-tested monthly sales tax rebate available to taxpayers who qualify. No further action on this bill has been taken.

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The IRS has issued the luxury car depreciation limits for business vehicles placed in service in 2023 and the lease inclusion amounts for business vehicles first leased in 2023.

Luxury Passenger Car Depreciation Caps

The luxury car depreciation caps for a passenger car placed in service in 2023 limit annual depreciation deductions to:

$12,200 for the first year without bonus depreciation
$20,200 for the first year with bonus depreciation
$19,500 for the second year
$11,700 for the third year
$6,960 for the fourth through sixth year

Depreciation Caps for SUVs, Trucks and Vans

The luxury car depreciation caps for a sport utility vehicle, truck, or van placed in service in 2023 are:

$12,200 for the first year without bonus depreciation
$20,200 for the first year with bonus depreciation
$19,500 for the second year
$11,700 for the third year
$6,960 for the fourth through sixth year

Excess Depreciation on Luxury Vehicles

If depreciation exceeds the annual cap, the excess depreciation is deducted beginning in the year after the vehicle’s regular depreciation period ends.

The annual cap for this excess depreciation is:

$6,960 for passenger cars and
$6,960 for SUVS, trucks, and vans.

Lease Inclusion Amounts for Cars, SUVs, Trucks and Vans

If a vehicle is first leased in 2023, a taxpayer must add a lease inclusion amount to gross income in each year of the lease if its fair market value at the time of the lease is more than:

$60,000 for a passenger car, or
$60,000 for an SUV, truck or van.

The 2023 lease inclusion tables provide the lease inclusion amounts for each year of the lease.

The lease inclusion amount results in a permanent reduction in the taxpayer’s deduction for the lease payments.

Vehicles Exempt from Depreciation Caps and Lease Inclusion Amounts

The depreciation caps and lease inclusion amounts do not apply to:

cars with an unloaded gross vehicle weight of more than 6,000 pounds; or
SUVs, trucks and vans with a gross vehicle weight rating (GVWR) of more than 6,000 pounds.

So taxpayers who want to avoid these limits should "think big."

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IRS has reminded eligible workers from low and moderate income groups to make qualifying retirement contributions and get the Saver’s Credit on their 2022 tax return. Taxpayers have until the due date for filing their 2022 return, that is April 18, 2023, to set up a new IRA or add money to an existing IRA for 2022.

IRS has reminded eligible workers from low and moderate income groups to make qualifying retirement contributions and get the Saver’s Credit on their 2022 tax return. Taxpayers have until the due date for filing their 2022 return, that is April 18, 2023, to set up a new IRA or add money to an existing IRA for 2022. The Retirement Savings Contributions Credit, also known as the Saver’s Credit, helps offset part of the first $2,000 workers voluntarily contribute to Individual Retirement Arrangements, 401(k) plans and similar workplace retirement programs. The credit also helps any eligible person with a disability who is the designated beneficiary of an Achieving a Better Life Experience (ABLE) account, contribute to that account. The Saver’s Credit is available in addition to any other tax savings that apply, and contributions to both, Roth and traditional IRAs qualify for the credit.

Taxpayers participating in workplace retirement plans must make their contributions by December 31, 2022. The Saver’s Credit supplements other tax benefits available to people who set money aside for retirement. The Service also urges employees who are unable to set aside money in 2022, to schedule their 2023 contributions soon, so their employers can begin withholding them in January, 2023.

The IRS also informs taxpayers about the eligibility and restrictions to Saver's Credit:

Saver's Credit can be claimed by married couples filing jointly with incomes up to $68,000 in 2022 or $73,000 in 2023, heads of household with incomes up to $51,000 in 2022 or $54,750 in 2023, married individuals filing separately and singles with incomes up to $34,000 in 2022 or $36,500 in 2023.
Eligible taxpayers must be at least 18 years of age.
Anyone claimed as a dependent on someone else’s return cannot take the credit, and any person enrolled as a full-time student during any part of 5 calendar months during the year, cannot claim the credit.

A taxpayer’s credit amount is based on their filing status, adjusted gross income, tax liability and amount contributed to qualifying retirement programs or ABLE accounts. The Service has cautioned that, though the maximum Saver’s Credit is $1,000 ($2,000 for married couples), it was often much less.

The IRS has also announced that, any distributions from a retirement plan or ABLE account, reduces the contribution amount used to figure the credit. For 2022, this rule applies to distributions received after 2019 and before the due date, including extensions, of the 2022 return.

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The IRS and Treasury have announced have released a list of clean vehicles that meet the requirements to claim the new clean vehicle tax credit, along with FAQs to help consumers better understand how to access the various tax incentives for the purchase of new and used electric vehicles available beginning January 1, 2023.

The IRS and Treasury have announced have released a list of clean vehicles that meet the requirements to claim the new clean vehicle tax credit, along with FAQs to help consumers better understand how to access the various tax incentives for the purchase of new and used electric vehicles available beginning January 1, 2023. The Service has clarified the incremental cost of commercial clean vehicles in 2023 and stated that, for vehicles under 14,000 pounds, the tax credit was 15-percent of a qualifying vehicle’s cost and 30-percent if, the vehicle is not gas or diesel powered.

The Service has also given a notice of intent to propose regulations on the tax credit for new clean vehicles, to provide clarity to manufacturers and buyers, on changes that take effect automatically on January 1, such as Manufacturer’s Suggested Retail Price limits. The notice has further clarified, that a vehicle would be considered as placed in service, for the purposes of the tax credit, on the date the taxpayer takes possession of the vehicle, which may or may not be the same date as the purchase date.

In order to help manufacturers identify vehicles eligible for tax credit, when the new requirements go into effect after a Notice of Proposed Rulemaking is issued in March, the Treasury also released a white paper on the anticipated direction of their upcoming proposed guidance on the critical minerals and battery components requirements and the process for determining whether vehicles qualify under these requirements.

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The Treasury Department and the Internal Revenue Service have issued guidance pertaining to the new credit for qualified commercial clean vehicles, established by the Inflation Reduction Act of 2022 ( P.L. 117-169). Notice 2023-9 establishes a safe harbor regarding the incremental cost of certain qualified commercial clean vehicles placed in service in calendar year 2023.

Credit for Qualified Commercial Clean Vehicles

The amount of the credit is equal to the lesser of (1) 15% of the basis of the vehicle (30% if the vehicle is not powered by a gasoline or diesel internal combustion engine), or (2) the incremental cost of the vehicle. The credit is limited to $7,500 for a vehicle with a gross vehicle weight rating (GVWR) of less than 14,000 pounds, and $40,000 for other vehicles.

A qualified commercial clean vehicle’s incremental cost is the excess of the vehicle’s purchase price over the price of a comparable vehicle. A comparable vehicle is any vehicle that is powered solely by a gasoline or diesel internal combustion engine and is comparable in size and use to the qualified vehicle.

Under Code 45W(c), a qualified commercial clean vehicle includes a vehicle treated as a motor vehicle for purposes of title II of the Clean Air Act and manufactured primarily for use on public streets, roads, and highways (not including street vehicles); and mobile machinery (as defined by Code 4053(8)).

Safe Harbor

The Treasury Department reviewed a Department of Energy incremental cost analysis (DOE analysis) of current costs for all street vehicles in calendar year 2023. The DOE analysis determined and/or provided the following:

the incremental cost of all street vehicles (other than compact car PHEVs) that have a gross vehicle weight rating of less than 14,000 pounds will be greater than $7,500;
the incremental cost for compact car PHEVs, including mini-compact and sub-compact cars, will be less than $7,500;
an incremental cost analysis of current costs for several representative classes of street vehicles with a gross vehicle weight rating of 14,000 pounds or more in calendar year 2023; and
the incremental cost will not limit the available credit amount for vehicles placed in service in calendar year 2023.

Accordingly, the Treasury Department and IRS will accept a taxpayer’s use of the incremental cost published in the DOE Analysis to calculate the credit amount for compact car PHEVs placed in service during calendar year 2023, and for the appropriate class of street vehicle to calculate the credit amount for vehicles placed in service during calendar year 2023.

A taxpayer's use of $7,500 as the incremental cost for all street vehicles (other than compact car PHEVs) with a gross vehicle weight rating of less than 14,000 pounds to calculate the credit for vehicles placed in service during calendar year 2023.

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The IRS announced a delay in reporting thresholds for third-party settlement organizations (TSPOs). As a result of this delay, third-party settlement organizations will not be required to report tax year 2022 transactions on a Form 1099-K to the IRS or the payee for the lower, $600 threshold amount enacted as part of the American Rescue Plan Act of 2021 ( P.L. 117-2).

Background

Code Sec. 6050W requires payment settlement entities to file an information return for each calendar year for payments made in settlement of certain reportable payment transactions. The annual information return must set forth the (1) name, address, and taxpayer identification number (TIN) of the participating payee to whom payments were made; and (2) gross amount of the reportable payment transactions with respect to that payee. The returns must be furnished to the participating payees on or before January 31 of the year following the calendar year for which the return was made. Further, the returns must be filed with the IRS on or before February 28 (March 31 if filing electronically) of the year following the calendar year for which the return was made.

Transition Period

A TPSO will not be required to report payments in settlement of third party network transactions with respect to a participating payee unless the gross amount of aggregate payments to be reported exceeds $20,000 and the number of such transactions with that participating payee exceeds 200. This condition applies to calendar years beginning before January 1, 2023. The Service will not assert penalties under Code Sec. 6721 or 6722 for TPSOs failing to file or failing to furnish Forms 1099-K unless the gross amount of aggregate payments to be reported exceeds $20,000 and the number of transactions exceeds 200.

For returns for calendar years beginning after December 31, 2022, a TPSO would be required to report payments in settlement of third party network transactions with any participating payee that exceed a minimum threshold of $600 in aggregate payments, regardless of the number of such transactions. The delay does not affect requirements of Code Sec. 6050W that were not modified by the American Rescue Plan Act. Taxpayers that have performed backup withholding under Code Sec. 3406(a) during calendar year 2022 must file a Form 1099-K, Payment Card and Third-Party Network Transactions, with the IRS and furnish a copy to the payee if total payments to and withholding from the payee exceeded $600 for the calendar year.

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The IRS has notified taxpayers of the applicable reference standard required to be used to determine the amount of the energy efficient commercial building (EECB) property deduction allowed under Code Sec. 179D as amended by the Inflation Reduction Act of 2022 (IRA) ( P.L. 117-169).

The IRS has notified taxpayers of the applicable reference standard required to be used to determine the amount of the energy efficient commercial building (EECB) property deduction allowed under Code Sec. 179D as amended by the Inflation Reduction Act of 2022 (IRA) ( P.L. 117-169). Further, the IRS has announced the existing reference standard, affirmed a new reference standard and clarified when each of the two reference standards will apply to taxpayers. The effective date of this announcement is January 1, 2023.

The American Society of Heating, Refrigerating, and Air Conditioning Engineers (ASHRAE) and the Illuminating Engineering Society of North America Reference Standard 90.1-2019 has been affirmed as the applicable Reference Standard 90.1 for purposes of calculating the annual energy and power consumption and costs with respect to the interior lighting systems, heating, cooling, ventilation, and hot water systems of the reference building as follows:

For property for which construction begins after December 31, 2022, ASHRAE 90.1-2019 will be the applicable standard for property that is placed in service after December 31, 2026.
Taxpayers who already began or will begin construction by December 31, 2022, or who already placed property in service or will place property in service by December 31, 2026, are not subject to the updated Reference Standard 90.1-2019. For such property, the applicable Reference Standard 90.1 is Reference Standard 90.1-2007.
Taxpayers who begin construction before January 1, 2023 may apply Reference Standard 90.1-2007 regardless of when the building is placed in service.

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The Treasury Department and the IRS have provided guidance announcing that they intend to issue proposed regulations to address the application of the new one-percent corporate stock repurchase excise tax under Code Sec. 4501, which was added by the Inflation Reduction Act of 2022 ( P.L. 117-169).

Excise Tax on Stock Repurchases

Beginning in 2023, a publicly traded U.S. corporation is subject to a one-percent excise tax on the value of its stock that the corporation repurchases during the tax year, effective for stock repurchases made after December 31, 2022. Repurchases include stock redemptions, as well as economically similar transactions as determined by the Treasury Secretary.

The excise tax does not apply if:

the total value of the stock repurchased during the tax year does not exceed $1 million;
the repurchased stock (or its value) is contributed to an employee pension plan, employee stock ownership plan (ESOP), or similar plan;
the repurchase is by a regulated investment company (RIC) or a real estate investment trust (REIT);
the repurchase is part of a reorganization in which no gain or loss is recognized;
the repurchase is treated as a dividend; or
the repurchase is by a dealer in securities in the ordinary course of business.

Interim Guidance

The interim guidance is intended to clarify excise tax calculation, and the application of Code Sec. 4501 to certain transactions and other events occurring before the proposed regulations are issued.

Among other things, the interim guidance addresses the $1 million de minimis exception; the stock repurchase excise tax base; redemptions and economically similar transactions; acquisitions by specified affiliates, applicable specified affiliates, or covered surrogate foreign corporations; timing and fair market value of repurchased stock; statutory exceptions; and a netting rule. The guidance also includes illustrative examples.

Reporting

The proposed regulations are anticipated to provide that the stock repurchase excise tax must be reported on IRS Form 720, Quarterly Federal Excise Tax Return. To facilitate the tax computation, the IRS also intends to issue an additional form that taxpayers will be required to attach to Form 720.

Although Form 720 is filed quarterly, the Treasury and IRS expect the proposed regulations to provide that the stock repurchase tax will be reported once per tax year, on the Form 720 that is due for the first full quarter after the close of the taxpayer’s tax year.

Applicability Dates

The proposed regulations are anticipated to provide that rules consistent with those in the guidance will generally apply to repurchases of stock of a covered corporation made after December 31, 2022, and to issuances of stock made during a tax year ending after December 31, 2022. Rules consistent with those in the guidance on purchases funded by applicable specified affiliates will apply to repurchases and acquisitions of stock made after December 31, 2022, that are funded on or after the date the guidance is released to the public.

Until the proposed regulations are issued, taxpayers can rely on the rules in the guidance.

Request for Comments

Interested parties can submit written comments on the rules by or before 60 days after the date the guidance is published in the Internal Revenue Bulletin. Comments may be submitted by the Federal E-rulemaking Portal ( https://www.regulations.gov), or by mail to Internal Revenue Service, CC:PA:LPD:PR ( Notice 2023-2), Room 5203, P.O. Box 7604, Ben Franklin Station, Washington, D.C., 20044. Refer to Notice 2023-2.

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With the transition of leadership from Democrats to Republicans in the House of Representatives comes new rules that legislators must adhere to, and they could have implications on tax policy.

The rules, which were adopted January 9, 2023, almost exclusively along party lines (only one Republican voted against and no Democrats voted in favor), contain two key provisions that could impact tax policy in at least the next two years. First is the need for a supermajority of lawmakers to vote in favor of a tax rate increase and the second is a replacement of the "pay as you go" rule {any increase in spending needs a mechanism to fund the increase) to a "cut as you go" rule, which means any increase in spending in one area must be offset by a cut of funding in another area.

A summary of the rules states that it "restores a requirement for a three-fifths supermajority vote on tax rate increases." This is likely to have little impact as there likely will not be many, if any, proposals to increase taxes coming out of the GOP-led House, especially considering many Republicans signed a pledge to oppose increase taxes.

"While it is unsurprising that Republicans approved this rule, it undermines the stated goal of lowering the debt," Joe Hughes, federal policy analyst at the Institute on Taxation and Economic Policy, stated in a blog on the rules. He added that "there is a clear contradiction in stating that government should take on less debt while putting tight restraints on the government’s ability to pay for things."

The second provision, cut as you go, requires that increases in mandatory spending programs, including programs such as Social Security, Medicare, veterans’ benefits and unemployment compensation, be offset by cuts to other mandatory spending programs.

"This means that the House cannot even pass increases to these programs that are fully paid for with new revenue, unless they also cut some other program in this category," Hughes notes.

This could make passage of enhancements to popular tax provisions more problematic. For example, the cut as you go rule "makes it harder to enhance proven and effective policies like the Child Tax Credit (CTC) or Earned Income Tax Credit (EITC) because the refundable portions of the credits—the amount that can exceed the income tax a family would otherwise owe—are counted as mandatory spending under the budget scoring rules used by Congress," Hughes writes, noting that any improvements would require cuts to another essential program like Social Security or Medicare.

"Advocates and lawmakers hoping to restore the 2021 expansion, or otherwise improve the CTC or EITC, will now face an even tougher road ahead" due to the cut as you go rule, he states.

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Despite a significant number of challenges faced by taxpayers in 2022, National Taxpayer Advocate Erin Collins has reason to be more optimistic for 2023.

"We have begun to see the light at the end of the tunnel," Collins wrote in the 2022 annual NTA report to Congress, released on January 11, 2023. "I’m just not sure how much further we have to travel before we see sunlight."

Despite a significant number of challenges faced by taxpayers in 2022, National Taxpayer Advocate Erin Collins has reason to be more optimistic for 2023.

"We have begun to see the light at the end of the tunnel," Collins wrote in the 2022 annual NTA report to Congress, released on January 11, 2023. "I’m just not sure how much further we have to travel before we see sunlight."

She highlighted three key areas that are providing a foundation for the optimistic outlook for this year:

The IRS has largely worked through its backlog of unprocessed returns, though there still remains a high volume of suspended returns and correspondence;
Congress has provided funding to increase customer service staffing; and
The agency has already added 4,000 new customer service and is seeking to add 700 additional employees to provide in-person help at its Taxpayer Assistance Centers.

Collins did caution that while she is optimistic for the future, the near term will still be faced with challenges. In particular, she noted that while new staff are being trained, some of the issues that have been plaguing the IRS will continue.

"As new employees are added, they must be trained." Collins noted. "For most jobs, IRS does not maintain a separate cadre of instructors. Instead, experienced employees must be pulled off their regular caseloads to provide the initial training and act as on-the-job instructors. In the short run, that may mean that fewer employees are assisting taxpayers, particularly experienced employees who are likely to be the most effective trainers."

2022 Challenges

Taking into consideration the time needed to train new employees, some of the challenges from 2022 that were highlighted in the report could still be an issue early into 2023.

That could mean ongoing processing and refund delays. The COVID-19 pandemic created a significant backlog of unprocessed returns and while the IRS has made strides to reducing that backlog, as of December 23, 2022, the agency reported it still has a backlogged inventory of about 400,000 individual tax returns and about 1 million business tax returns. It could also mean ongoing delays in processing taxpayer correspondence and other cases in the Accounts Management function.

Another issue that could linger as more employees are being trained is getting a live person on the telephone. NTA reported that about one in eight calls from taxpayers to the agency made it through to a live person, with hold times for taxpayers averaged 29 minutes.

Tax professionals were able to get through to a live person about ever one in six calls to the Practitioner Priority Service, with about 25 minutes of hold time on average.

"Tax professionals are key to a successful tax administration," Collins wrote. "The challenges of the past three filing seasons have pushed tax professionals to their limits, raising client doubts in their abilities and created a loss of trust in the system."

Recommendations

The report makes a number of recommendations both to the IRS and legislative recommendations to strengthen taxpayer rights and improve tax administration.

To the IRS, Collins recommends a couple of employee-related items – hiring and training more human resource employees to manage the hiring of all agency employees and ensuring all IRS employees are well-trained to do their jobs.

On the IT front, she also recommended improvements to online account accessibility and functionality to make them comparable to private financial institutions’ online accounts, as well as temporarily expand the uses of the documentation upload tool or similar technology. Also, there was a call to enable all taxpayers to e-file their tax returns.

Among the legislative recommendations are amending the “lookback period” to allow tax refunds for certain taxpayers who took advantage of the postponed filing deadlines due to COVID-19; establish minimum standards for paid tax preparers; expand the U.S. Tax Court’s jurisdiction to adjudicate refund cases and assessable penalties; modify the requirement that written receipts acknowledge charitable contributions must predate the filing of a tax return; and make the Earned Income Tax Credit structure simpler.

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The American Recovery and Reinvestment Act of 2009 (2009 Recovery Act) extended the 50-percent additional first-year bonus depreciation allowed under the Economic Stimulus Act of 2008, providing a generous boost for many businesses in 2009 in light of the economic downturn. Under the 2009 Recovery Act, all businesses, large or small, can immediately depreciate an additional 50-percent of the cost of certain qualifying property purchased and placed in service in 2009, from computer software to plants and equipment.

The American Recovery and Reinvestment Act of 2009 (2009 Recovery Act) extended the 50-percent additional first-year bonus depreciation allowed under the Economic Stimulus Act of 2008, providing a generous boost for many businesses in 2009 in light of the economic downturn. Under the 2009 Recovery Act, all businesses, large or small, can immediately depreciate an additional 50-percent of the cost of certain qualifying property purchased and placed in service in 2009, from computer software to plants and equipment. Moreover, the 50-percent bonus depreciation allowance can be taken together with any Code Sec. 179 expensing, which was also extended through 2009.

Bonus basics

The 2009 Recovery Act (just as with the 2008 Stimulus Act) allows all businesses to take a bonus first-year depreciation deduction of 50-percent of the adjusted basis of qualified property purchased and placed in service for use in your trade or business after December 1, 2009, and generally before January 1, 2010. Bonus depreciation is allowed only for: (1) tangible property to which MACRS applies that has an applicable recovery period of 20 years or less, (2) water utility property, (3) certain computer software, and (4) qualified leasehold improvement property. It is not allowed for intangible property, with the exception of certain computer software.

Bonus depreciation can be claimed for both regular and alternative minimum tax (AMT) liability. It is also important to note that, since bonus depreciation is treated as a depreciation deduction, it is subject to recapture as ordinary income under certain provisions of the Internal Revenue Code. And if you have a tax year that is less than 12 months, the amount of the bonus depreciation allowance is not affected by a short tax year.

Computing your bonus depreciation

To figure your allowable 50-percent bonus depreciation deduction, you must multiple the unadjusted depreciable basis of the property by 50 percent. This is the amount of additional first-year depreciation you can deduct in 2009. For example, you purchase qualifying property for your business in 2009 that costs $150,000. You are allowed an additional first-year depreciation deduction of $75,000.

Note. The "unadjusted depreciable basis" is the property's cost (including amounts you paid in case, debt obligations, or other property or services, plus any amounts you paid for items such as sales tax, freight charges, installation, or testing fees).

Regular depreciation. After you have computed the 50-percent bonus depreciation allowance for the property, you can use the remaining cost to compute your regular MACRS depreciation for 2009 and subsequent years. Under MACRS, the cost or other basis of an asset is generally recovered over a specific recovery period. In this case, the property must have a recovery period of 20 years or less.

Example. Assume that in 2009 a taxpayer purchases new depreciable property and places it in service. The property's cost is $1,000 and it is 5-year property subject to the half-year convention. The amount of additional first-year depreciation allowed under the provision is $500. The remaining $500 of the cost of the property is deductible under the rules applicable to 5-year property. Thus, 20 percent, or $100, is apportioned to 2009, which computes to an additional $50 regular depreciation deduction in 2009 under the half-year convention. Accordingly, the total depreciation deduction with respect to the property for 2009 is $550. The remaining $450 cost of the property is recovered under otherwise applicable rules for computing depreciation in subsequent years.

Code Sec. 179 expensing. The 50-percent bonus depreciation allowance is taken after any Code Sec. 179 expense deduction and before you compute regular depreciation under MACRS rules. Therefore, the cost (basis) of the property must be reduced by the amount of any Code Sec. 179 expense allowance claimed on the property before computing the 50-percent bonus depreciation allowance (multiplying the property's basis by 50-percent). Regular depreciation under MACRS is then computed after you have reduced the basis by any Code Sec. 179 expensing allowance and the 50-percent bonus depreciation allowance.

Example. On April 14, 2009, Tom bought and placed in service in his business qualified tangible property that cost $1 million. He did not elect to claim the Code Sec. 179 expensing deduction and he claims no other credits or deductions related to the property. He may deduct 50-percent of the cost ($500,000) for purposes of the 2009 special bonus depreciation. He will use the remaining $500,000 of the property's cost to figure his regular MACRS depreciation deduction for 2009 and the years thereafter.

Example. The facts are the same as above, except Tom uses the Code Sec. 179 expensing deduction. On April 14, 2009, Tom bought and placed in service in his business qualified tangible property that cost $750,000. He elects to deduct $250,000 of the property's cost as a Code Sec. 179 deduction. Tom will apply the 50-percent bonus depreciation allowance to $500,000 ($750,000 - $250,000), which is the cost of the property after subtracting the section 179 expensing deduction. Tom will then deduct 50-percent of the cost after section 179 expensing ($250,000) for purposes of the 2009 special bonus depreciation. He will use the remaining $250,000 of the property's cost to figure his regular MACRS depreciation deduction for 2009 and the years thereafter.

Computing bonus depreciation can be a complicated process, as many variables may come into play. Our tax professionals can help determine the best way for your business to utilize the new bonus depreciation allowance together with other tax incentives to achieve significant tax savings.

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On December 18, 2007, Congress passed the Mortgage Forgiveness Debt Relief Act of 2007 (Mortgage Debt Relief Act), providing some major assistance to certain homeowners struggling to make their mortgage payments. The centerpiece of the new law is a three-year exception to the long-standing rule under the Tax Code that mortgage debt forgiven by a lender constitutes taxable income to the borrower. However, the new law does not alleviate all the pain of all troubled homeowners but, in conjunction with a mortgage relief plan recently announced by the Treasury Department, the Act provides assistance to many subprime borrowers.

On December 18, 2007, Congress passed the Mortgage Forgiveness Debt Relief Act of 2007 (Mortgage Debt Relief Act), providing some major assistance to certain homeowners struggling to make their mortgage payments. The centerpiece of the new law is a three-year exception to the long-standing rule under the Tax Code that mortgage debt forgiven by a lender constitutes taxable income to the borrower. However, the new law does not alleviate all the pain of all troubled homeowners but, in conjunction with a mortgage relief plan recently announced by the Treasury Department, the Act provides assistance to many subprime borrowers.

Cancellation of debt income

When a lender forecloses on property, sells the home for less than the borrower's outstanding mortgage debt and forgives all, or part, of the unpaid debt, the Tax Code generally treats the forgiven portion of the mortgage debt as taxable income to the homeowner. This is regarded as "cancellation of debt income" (reported on a Form 1099) and taxed to the borrower at ordinary income tax rates.

Example. Mary's principal residence is subject to a $250,000 mortgage debt. Her lender forecloses on the property in 2008. Her home is sold for $200,000 due to declining real estate values. The lender forgives the $50,000 difference leaving Mary with $50,000 in discharge of indebtedness income. Without the new exclusion in the Mortgage Debt Relief Act, Mary would have to pay income taxes on the $50,000 cancelled debt income.

The Mortgage Debt Relief Act

The Mortgage Debt Relief Act excludes from taxation discharges of up to $2 million of indebtedness that is secured by a principal residence and was incurred to acquire, build or make substantial improvements to the taxpayer's principal residence. While the determination of a taxpayer's principal residence is to be based on consideration of "all the facts and circumstances," it is generally the one in which the taxpayer lives most of the time. Therefore, vacation homes and second homes are generally excluded.

Moreover, the debt must be secured by, and used for, the principal residence. Home equity indebtedness is not covered by the new law unless it was used to make improvements to the home. "Cash out" refinancing, popular during the recent real estate boom, in which the funds were not put back into the home but were instead used to pay off credit card debt, tuition, medical expenses, or make other expenditures, is not covered by the new law. Such debt is fully taxable income unless other exceptions apply, such as bankruptcy or insolvency. Additionally, "acquisition indebtedness" includes refinancing debt to the extent the amount of the refinancing does not exceed the amount of the refinanced debt.

The Mortgage Debt Relief Act is effective for debt that has been discharged on or after January 1, 2007, and before January 1, 2010.

Mortgage workouts

In addition to foreclosure situations, some taxpayers renegotiating the terms of their mortgage with their lender are also covered by the new law. A typical foreclosure nets a lender only about 60 cents on the dollar. When the lender determines that foreclosure is not in its best interests, it may offer a mortgage workout. Generally, in a mortgage workout the terms of the mortgage are modified to result in a lower monthly payment and thus make the loan more affordable.

More help

Recently, Treasury Department officials brokered a plan that brings together private sector mortgage lenders, banks, and the Bush Administration to help homeowners. The plan is called HOPE NOW.

Here's how it works: The HOPE NOW plan is aimed at helping borrowers who were able to afford the introductory "teaser" rates on their adjustable rate mortgage (ARM), but will not be able to afford the loan once the rate resets between 2008 and 2010 (approximately 1.3 million ARMs are expected to reset during this period). The plan will "freeze" these borrowers' interest rates for a period of five years. The plan, however, has some limitations that exclude many borrowers. Only borrowers who are current on their mortgage payments will benefit. Borrowers already in default or who have not remained current on their mortgage payments are excluded.

Under the HOPE NOW plan, borrowers may be able t

- Refinance to a new mortgage;

- Switch to a loan insured by the Federal Housing Authority (FHA);

- Freeze their "teaser" introductory rate for five years.

Without the Mortgage Debt Relief Act, a homeowner who modifies the terms of their mortgage loan, or has their interest rate frozen for a period of time, could be subject to debt forgiveness income under the Tax Code. This is why the provision of the Mortgage Debt Relief Act excluding debt forgiveness income from a borrower's income is a critical component necessary to make the HOPE NOW plan effective.

If you would like to know more about relief under the Mortgage Forgiveness Debt Relief Act of 2007 and the Treasury Department's plan, please call our office. We are happy to help you navigate these complicated issues.

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With the holidays quickly approaching, you as an employer may not only be wondering what type of gift to give your employees this season, but the tax consequences of the particular gift you choose. The form of gift that you give this holiday season not only has tax consequences for your employees, but for your business as well. If you plan on giving your employees a gift that can be basted or baked this holiday season, such as a traditional turkey or ham, you should understand how that gift will be treated by the IRS for tax purposes.

De minimis fringe benefit

Gifts of holiday turkeys and hams given to employees are considered non-taxable de minimis employee fringe benefits. They are excluded from employees' income and are fully deductible as a non-wage business expense by the employer. Moreover, the value of the turkey and ham is 100 percent deductible; that is, it is not subject to the 50 percent deductible limitation that generally applies to meals.

Generally, gifts provided to employees are treated as supplemental wages subject to income and payroll taxes unless the benefit is specifically excluded from tax by law. However, gifts considered to be a "de minimis" fringe benefit are not taxable to the employee. Code Sec. 132(a)(4) provides that gross income does not include a fringe benefit that qualifies as a "de minimis" fringe benefit. A de minimis fringe benefit is defined in Code Sec. 132(e)(1) as any property or service the value of which is so small as to make accounting for it unreasonable or administratively impracticable after taking into account the frequency with which similar fringe benefits are provided by the employer to the employer's employees.

Generally, de minimis fringe benefits must satisfy the following requirements:

The value of the gift must be nominal;
Accounting for the gift would be administratively impractical;
The gift is provided only occasionally; and
The gift is given to promote the good will or health of employees.

In Treasury Reg. Sec. 1.132-6(e)(1), the IRS has specifically included traditional holiday gifts (not cash) with a low fair market value as a de minimis fringe benefit excludable from tax. The gift to employees of a holiday turkey or ham has long been recognized as falling within the rules for de minimis employee fringe benefits, and is not taxable to employees.

Gift certificates are taxable

If you give your employees a gift certificate or gift card (or similar item that can readily be converted into cash) for a turkey or ham in lieu of the actual food item itself, the value of the gift certificate or gift card is considered to be additional salary or wages and subject to income and payroll taxes. Gift certificates and gift cards are "cash equivalents" and taxable to employees even though the turkey itself, if provided in kind directly to the employee, is excludable from tax as a de minimis fringe benefit.

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