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February 7, 2023

 The Inflation Reduction Act of 2022 (2022 Inflation Act) modifies and extends both the nonbusiness energy property credit and the residential energy efficient property credit available to individual homeowners.

Energy Efficient Home Improvement Credit. The 2022 Inflation Act extends the nonbusiness energy property credit to property placed in service before the end of 2032 and renames the credit the “Energy Efficient Home Improvement Credit.” The nonrefundable tax credit is available to individuals for the installation of:

• qualified energy efficiency improvements (building envelope components); and
• qualified residential energy property expenditures (furnaces and certain fans, water heaters, certain heat pumps, and for tax years beginning before 2021, biomass stoves).

The 2022 Inflation Act also modifies the credit by:

• increasing the credit from 10% of the cost of qualified energy efficiency improvements to 30% of the cost;
• replacing the lifetime credit cap with annual limits depending on the type of property;
• requiring that manufacturers and taxpayers comply with reporting the identification number of certain property placed into service after December 31, 2024;
• expanding the credit to cover the costs of home energy audits;
• updating efficiency standards; and
• expanding the definition of “qualified energy property” to include (1) electric or natural gas heat pump water heaters, (2) electric or natural gas heat pumps, (3) central air conditioners, (4) natural gas, propane, or oil water heaters, (5) certain natural gas, propane, or oil furnace or hot water boilers, (6) certain biomass stoves or boilers, and (7) electrical panel upgrades necessary for other efficiency improvements.

Residential Clean Energy Credit. The 2022 Inflation Act extends the residential energy efficient property credit to eligible property placed in service on or before December 31, 2034, and renames the credit the “Residential Clean Energy Credit.” The residential clean energy credit may be claimed for qualified residential energy efficient property installed on, or in connection with, a dwelling unit located in the United States and used as a residence by the taxpayer. Qualified residential clean energy property includes solar electric property, solar water heating property, fuel cell property, small wind energy property, geothermal heat pump property, and for expenditures incurred after 2020, biomass fuel property.

The 2022 Inflation Act allows for a 30% credit for eligible expenditures through the end of 2032, then phases down to 26% in 2033 and 22% in 2034. Qualified expenditures for battery storage technology are eligible for the credit beginning after 2022, while qualified expenditures for biomass fuel property are not eligible for the credit after 2021.

The Inflation Reduction Act of 2022 (2022 Inflation Act) modifies the energy efficient commercial buildings deduction for tax years beginning after December 31, 2022, by increasing the maximum deduction and updating the eligibility requirements for reduction of energy costs, in addition to other changes.

Energy efficient commercial buildings deduction. A deduction is allowed for all or part of the cost of energy efficient commercial building property placed in service as part of a building's:

• interior lighting systems;
• heating, cooling, ventilation, and hot water systems; or

The deduction was enacted to encourage commercial building owners or lessees to install energy efficient property. Installation of energy-efficient commercial building property occurs when constructing a new, or improving an existing, commercial building or government building. The tax deduction benefits both commercial building owners or lessees and designers of government-owned buildings.

Efficiency standard. The 2022 Inflation Act updates eligibility requirements for the deduction so that property must reduce associated energy costs by 25% or more (decreased from 50% or more) in comparison to a reference building that meets the latest efficiency standard.

Applicable amount. The applicable dollar value of the deduction is $0.50 per square foot, increased by $0.02 for each percentage point above 25% that a building’s total annual energy cost savings are increased. The amount cannot be greater than $1.00 per square foot. However, the maximum amount of the deduction in any tax year cannot exceed $1 per square foot minus the total deductions taken in the previous three tax years (or during a four-year period in cases where the deduction is allowable for someone other than the taxpayer). The applicable dollar value will be adjusted for inflation for tax years beginning after 2022.

An increased dollar value is available for projects that satisfy prevailing wage and apprenticeship requirements for the duration of the construction.

Alternative deduction for energy-efficient retrofit property. Under the 2022 Inflation Act, taxpayers may elect to take an alternative deduction for a qualified retrofit of any qualified property. However, instead of a reduction in total annual energy power costs, the deduction is based on the reduction of energy usage intensity.

Eligibility rules to claim a tax credit for clean vehicles has changed.

The passing of the Inflation Reduction Act of 2022 (IRA) has shaken up electric/clean vehicles with multiple – and detailed – changes. Tax credits available under section 30D (EV credit) for purchasing a new electric vehicle after August 16, 2022 (when the Inflation Reduction Act of 2022 was enacted) are generally available only for qualifying electric vehicles for which final assembly occurred in North America. 

The Department of Energy has provided a list of Model Year 2022 and early Model Year 2023 electric vehicles that may meet the final assembly requirement.  The basic burning hoops to qualify:

Does the taxpayer's modified adjusted gross income for the current tax year or, if less, for the preceding year exceed:

• $300,000 if married filing jointly or surviving spouse;
• $225,000 if filing as head of household; or
• $150,000 if single or married filing separately?

Does the manufacturer's suggested retail price (MSRP) for the vehicle exceed:

• $80,000 for a van, a sport utility vehicle (SUV), or pick-truck; or
• $55,000 for other vehicles?

If you qualify above, next refer to further questions to qualify for federal tax credit here: 

https://www.irs.gov/credits-deductions/credits-for-new-clean-vehicles-purchased-in-2023-or-after

January 31, 2023

 Information to provide by our 2022 Individual Tax Return clients: 

Please provide copies of below (originals will not be returned)  we will shred all client provided source documentation received by our office.

1. 1099-Ks for merchant charges. Reconcile amounts on 1099s to amounts reported by the client for Schedules C or E (or business entity return).
2. 1099-Bs for sales of stock or securities. Reconcile amounts on 1099s to amounts shown on client reports, if any.
3. Property tax statements: Look at property tax bills and estimate of value of real property in California to verify that the county has properly computed tax based on reduced property values.
4. Property tax statements: Look for items that are not deductible as property taxes, such as HERO or PACE payments.
5. Review government documents (W-2s, 1099s) for federal/California differences. Also be sure to review government documents for accurate taxpayer identification numbers.
6. Paycheck stubs to review withholding and to provide to the FTB if withholding amount is reduced.
7. Statements and instructions from mutual fund companies breaking down U.S. government and state tax-exempt income information.
8. All tax information broken out separately for both members of a registered domestic partnership. 11. Notices, bills, etc., from the IRS or California.
9. New clients should bring the past two years’ returns. May request prior years at our discretion
10. For the Child and Dependent Care Expenses Credit: • Nontaxable funds received, including child support and public assistance; • Percentage of time the qualifying dependent lives in the California home of the taxpayer; • Address, telephone number, and Social Security number or Employer Identification Number of the care providers; • Expenses paid to California providers; and • Nonresident military spouse’s military income.
11. California K-1 and accompanying correspondence (check for California differences and possible state tax paid by S corporation, partnership, trust, or LLC).
12. Withholding paid through escrow on sales of property reported on FTB Form 593-B and closing statements. Keep a copy of the escrow closing statement and Form 593-B.
13. Withholding for residents and nonresidents reported on FTB Form 592-B.
14. Invoices from purchases made over the Internet, by mail, or by phone order where no California sales or use tax was paid (or, if the use tax table amount is used, only individual purchases of more than $1,000.
15. Any activity pertaining to a Health Savings Account, including contributions to, earnings or losses from, distributions from, and rollovers to that account.
16. Rollover or distribution amounts from Medical Savings Accounts, FSAs, HRAs, and Roth IRA conversions.
17. Did the taxpayer form a business entity this year, does the taxpayer own an inactive business, or does he or she plan to terminate a business this year?
18. Change of ownership of business entity.
19. Title change information for property that changed hands due to gift or death of an owner. 2022 / 2023
20. For employers with no more than 25 full-time equivalent employees, review for possible federal Health Insurance Credit. If credit is taken, there will be a federal/California difference in the expense amount for employee health insurance.
21. For Schedule C and other business returns, alert the taxpayer of the requirement for a city business license.
22. Identity Protection PIN (IP PIN): If you received a CP101A Notice from the IRS in January, your IP PIN is located in the left column. Please provide a copy of this letter.
23. For all documents, please provide a scan, photocopy, or fax. Do not send photos taken with a cell phone.
24. Foreign bank accounts and investments,  - provide highest balance valued in US dollarrs during year in foreign bank account(s).  Foreign Investments - provide highest value during year.  Your information share will determine if it is relevant to request for more information.
25. Crypto and Virtual Currency is considered property for federal tax purposes.  More on tax recognition and treatment of Crypto currency transactions found here:    https://www.irs.gov/newsroom/virtual-currency-irs-issues-additional-guidance-on-tax-treatment-and-reminds-taxpayers-of-reporting-obligations. 
26. Estimated taxes paid, amount modified and paid, and estimate NOT paid.
27. Direct Deposit of refunds - taxpayers who desire direct deposit of refund should provide a sample check or name of the bank, type of account, routing number & account number.  If you’ve change banks, recently provide most current bank information.

28. Qualified Disaster Area: 

    You may have suffered loss in a qualified disaster area, website below.

    A qualified disaster area is any geographic area designated as a presidentially declared disaster area.

         Website:

    www.fema.gov/disasters/disaster-declarations

Encourage communication to our office via phone, email, fax, and written correspondence.

Our office is receiving mail, 3rd party delivery services, and clients may drop off packages at our socially distanced table within our reception area.

We do expect masks to be worn by all visitors to our office.

While browsing through our Website, please feel free to contact us with any questions or comments you may have - we'd love to hear from you. We pride ourselves on being proactive and responsive to our clients' inquiries and suggestions.

Tong & Fong CPAs