Business energy credit

Business energy credit

You may be exploring whether alternative energy technologies can help you in managing the cost of the energy used in your business.

If so, you should be aware of a federal income tax benefit (the business energy credit) that is substantial and that applies to the acquisition of a wide variety of alternative energy property. The credit is intended primarily for business users of alternative energy (other energy credits apply to taxpayers that use alternative energy in their homes and to taxpayers that produce energy for sale).

The business energy credit equals 30% of the basis of the following types of property:

        (1) equipment, the construction of which begins before calendar year 2022, that uses solar energy to generate electricity for heating and cooling structures, for hot water, or for heat used in industrial or commercial processes (except for heating swimming pools). If construction begins in calendar year 2020 the credit rate is 26%, further reduced to 22% for construction beginning in calendar year 2021; and, unless the property is placed in service before calendar year 2024, the credit rate is 10%.

        (2) equipment, the construction of which begins before calendar year 2022, using solar energy to illuminate the inside of a structure using fiber-optic distributed sunlight. If construction begins in calendar year 2020 the credit rate is 26%, further reduced to 22% for construction beginning in calendar year 2021; and, unless the property is placed in service before calendar year 2024, the credit rate is 0%.

        (3) certain fuel-cell property the construction of which begins before calendar year 2022. If construction begins in calendar year 2020 the credit rate is 26%, further reduced to 22% for construction beginning in calendar year 2021; and, unless the property is placed in service before calendar year 2024, the credit rate is 0%.

        (4) certain small wind energy property the construction of which begins before calendar year 2022. If construction begins in calendar year 2020 the credit rate is 26%, further reduced to 22% for construction beginning in calendar year 2021; and, unless the property is placed in service before calendar year 2024, the credit rate is 0%.

The credit equals 10% of the basis of the following types of property:

        (1) certain equipment used to produce, distribute, or use energy derived from a geothermal deposit.

        (2) certain cogeneration property the construction of which begins before calendar year 2022.

        (3) certain microturbine property the construction of which begins before calendar year 2022.

        (4) certain equipment, the construction of which begins before calendar year 2022, that uses the ground or ground water to heat or cool a structure.

However, there are several restrictions on the credit. For example, the credit isn't available for property acquired with certain types of non-recourse financing. Additionally, for property for which the credit is allowable, the "basis" (that is, the "tax cost" for computing depreciation deductions and gain or loss on disposition) is reduced by 50% of the allowable credit.

On the other hand, a favorable aspect of the credit is the possibility that, for the same property, the credit can sometimes be used in combination with other subsidies-for example, federal income tax expensing, state tax credits or utility rebates.

Be aware that there are business considerations, unrelated to the availability of tax and non-tax subsidies, which can influence your decision whether to use alternative energy. For example, you will want to be satisfied that you have a plan for managing the costs, in time and money, of maintenance and operation of the alternative property.

Also, be aware that even if you choose to use alternative energy, you might choose to do so without owning the equipment, even though that would mean forgoing the business energy credit. For example, some contractors provide installation of solar equipment for free, keep ownership of the equipment and charge you for energy use in an arrangement that might work better for you than an acquisition subsidized by the tax credit (and, possibly, other benefits).

There are many issues, both tax and non-tax, to consider in deciding whether to use alternative energy and the terms on which you might choose to use it. Please contactus to assist you in making such decisions.

Employee benefit changes proposed for those impacted by Covid-19

As employers and employees are dealing with mass layoffs and business closures, the government is actively working on putting together new plans to assist in dealing with the impact of Covid-19.  While the bigger stimulus package is being kicked around and debated, the House did pass a bill that is designed to help those that miss work under the Family and Medical Leave Act.  It is now up to the Senate to finalize it.  We have summarized the main sections of the bill.

Section 3102. Amendments to the Family and Medical Leave Act of 1993. This section provides employees of employers with fewer than 500 employees and government employers, who have been on the job for at least 30 days, with the right take up to 12 weeks of job-protected leave under the Family and Medical Leave Act to be used for any of the following reasons:

• To adhere to a requirement or recommendation to quarantine due to exposure to or

symptoms of coronavirus;

• To care for an at-risk family member who is adhering to a requirement or recommendation to quarantine due to exposure to or symptoms of coronavirus; and

• To care for a child of an employee if the child’s school or place of care has been closed, or the child-care provider is unavailable, due to a coronavirus.

After the two weeks of paid leave, employees will receive a benefit from their employers that will be no less than two-thirds of the employee’s usual pay.

Section 3104. Effective Date. This Act takes effect not later than 15 days after the date of bill’s enactment.

Section 5102. The Emergency Paid Sick Leave Act. This section requires employers with fewer than 500 employees and government employers to provide employees two weeks of paid sick leave, paid at the employee’s regular rate, to quarantine or seek a diagnosis or preventive care for coronavirus; or paid at two-thirds the employee’s regular rate to care for a family member for such purposes or to care for a child whose school has closed, or child care provider is unavailable, due to the coronavirus.

• Full-time employees are entitled to 2 weeks (80 hours) and part-time employees are entitled to the typical number of hours that they work in a typical two-week period.

• The bill ensures employees who work under a multiemployer collective agreement and

whose employers pay into a multiemployer plan are provided with leave.

The Act, and the requirements under the Act, expire on December 31, 2020.

Section 7001. Payroll Credit for Required Paid Sick Leave. This section provides a

refundable tax credit equal to 100 percent of qualified paid sick leave wages paid by an employer

for each calendar quarter.  The tax credit is allowed against the tax imposed by section 3111(a) (the employer portion of Social Security taxes). Qualified sick leave wages are wages required to be paid by the Emergency Paid Sick Leave Act.

The section makes a distinction between qualified sick leave wages paid with respect to

employees who must self-isolate, obtain a diagnosis, or comply with a self-isolation

recommendation with respect to coronavirus. For amounts paid to those employees, the amount of qualified sick leave wages taken into account for each employee is capped at $511 per day. For amounts paid to employees caring for a family member or for a child whose school or place of care has been closed, the amount of qualified sick leave wages taken into account for each employee is capped at $200 per day. The aggregate number of days taken into account per employee may not exceed the excess of 10 over the aggregate number of days taken into account for all preceding calendar quarters.

If the credit exceeds the employer’s total liability under section 3111(a) for all employees for any calendar quarter, the excess credit is refundable to the employer. Employers may elect to not have the credit apply. To prevent a double benefit, no deduction is allowed for the amount of the credit. In addition, no credit is allowed with respect to wages for which a credit is allowed under section 45S.

Section 7002. Credit for Sick Leave for Certain Self-Employed Individuals. This section provides a refundable tax credit equal to 100 percent of a qualified sick leave equivalent amount for eligible self-employed individuals who must self-isolate, obtain a diagnosis, or comply with a self-isolation recommendation with respect to coronavirus. For eligible self-employed individuals caring for a family member or for a child whose school or place of care has been closed due to coronavirus, the section provides a refundable tax credit equal to 67 percent of a qualified sick leave equivalent amount.

The credit is allowed against income taxes and is refundable. Eligible self-employed individuals are individuals who would be entitled to receive paid leave pursuant to the Emergency Paid Sick Leave Act if the individual was an employee of an employer (other than himself or herself). For eligible self-employed individuals who must self-isolate, obtain a diagnosis, or comply with a self-isolation recommendation, the qualified sick leave equivalent amount is capped at the lesser of $511 per day or the average daily self-employment income for the taxable year per day. For eligible self-employed individuals caring for a family member or for a child whose school or place of care has been closed due to coronavirus, the qualified sick leave equivalent amount is capped at the lesser of $200 per day or the average daily self-employment income for the taxable year per day.

In calculating the qualified sick leave equivalent amount, an eligible self-employed individual may only take into account those days that the individual is unable to work for reasons that would entitle the individual to receive paid leave pursuant to the Emergency Paid Sick Leave Act.

A self-employed individual must maintain documentation prescribed by the Secretary of the Treasury to establish his or her eligibility for the credit. To prevent a double benefit, the qualified sick leave equivalent amount is proportionately reduced for any days that the individual also receives qualified sick leave wages from an employer. The section contains rules to ensure that self-employed individuals in U.S. territories may claim the credit.

Section 7003. Payroll Credit for Required Paid Family Leave. This section provides a refundable tax credit equal to 100 percent of qualified family leave wages paid by an employer for each calendar quarter. The tax credit is allowed against the tax imposed by section 3111(a) (the employer portion of Social Security taxes). Qualified family leave wages are wages required to be paid by the Emergency Family and Medical Leave Expansion Act.

The amount of qualified family leave wages taken into account for each employee is capped at $200 per day and $10,000 for all calendar quarters. If the credit exceeds the employer’s total liability under section 3111(a) for all employees for any calendar quarter, the excess credit is refundable to the employer. Employers may elect to not have the credit apply. To prevent a double benefit, no deduction is allowed for the amount of the credit. In addition, no credit is allowed with respect to wages for which a credit is allowed under section 45S.

Section 7004. Credit for Family Leave for Certain Self-Employed Individuals. This section provides a refundable tax credit equal to 100 percent of a qualified family leave equivalent amount for eligible self-employed individuals.

The credit is allowed against income taxes and is refundable. Eligible self-employed individuals are individuals who would be entitled to receive paid leave pursuant to the Emergency Family and Medical Leave Expansion Act if the individual was an employee of an employer (other than himself or herself). The qualified family leave equivalent amount is capped at the lesser $200 per day or the average daily self-employment income for the taxable year per day. In calculating the qualified family leave equivalent amount, an eligible self-employed individual may only take into account those days that the individual is unable to work for reasons that would entitle the individual to receive paid leave pursuant to the Emergency Family and Medical Leave Expansion Act.

A self-employed individual must maintain documentation prescribed by the Secretary of the Treasury to establish his or her eligibility for the credit. To prevent a double benefit, the qualified sick leave equivalent amount is proportionately reduced for any days that the individual also receives qualified sick leave wages from an employer. The section contains rules to ensure that self-employed individuals in U.S. territories may claim the credit.

Section 7005. Special Rule Related to Tax on Employers. This section ensures that any wages required to be paid by reason of the Emergency Paid Sick Leave Act and the Emergency Family and Medical Leave Expansion Act will not be considered wages for purposes of section 3111(a). The Social Security OASDI trust funds are held harmless by transferring funds from the General Fund.

Charitable Planning for Retirement Benefits

 There are numerous tax advantages of giving qualified retirement plan and individual retirement account (IRA) benefits to a charity.

When funds are drawn out of retirement plans and IRAs by noncharitable beneficiaries, federal income tax of up to 37% (in 2019) will have to be paid. State income taxes also may be owed. Furthermore, retirement funds possessed at death may be subject to substantial federal estate tax and state death tax.

Retirement benefits are to be contrasted with other assets that can be passed to noncharitable beneficiaries free of income tax. For example, an individual inheriting stock worth $300,000 from his parent (that was purchased by the parent for $100,000) won't have to pay income tax on the $200,000 appreciation. That's not the case for retirement benefits. They are subject to both income tax and estate tax. A special income tax deduction for the estate tax helps noncharitable beneficiaries but the combined income and estate tax can still be quite substantial. Because of this double tax bite, someone who plans to make charitable gifts should consider naming a charity as beneficiary of his IRA or retirement plan to gain these advantages:

•       The retirement benefits going to the charity won't be subject to federal estate tax and generally won't be subject to state death taxes.

•       The estate won't be considered to receive taxable income when the benefits are paid to the charity.

•       The retirement account owner's surviving spouse, children and others who may be beneficiaries of the estate won't be considered to receive taxable income when the retirement benefits are paid to the charity.

•       The charity won't have to pay federal income tax on distributions from the qualified plan or IRA and generally won't have to pay state income taxes.

For one who is not in a position to leave his/her entire retirement benefits to a charity, there are these options:

•       An individual with two or more retirement plans (e.g., an IRA and a profit-sharing plan, or two IRAs) can leave one to a charity and the other(s) to family members.

•       An individual with a single IRA can split it into two IRAs and leave one to a charity. This can be achieved tax-free through a rollover or a trustee-to-trustee transfer.

•       A married individual can have his/her benefits paid to a QTIP trust for his/her spouse with a charity to receive the benefits that remain at the death of the surviving spouse. The marital deduction will shield the benefits from estate tax when the individual dies. When the surviving spouse dies, the remaining benefits will go to the charity free of estate and income tax.

•       An individual can have his/her will establish a charitable remainder trust at his/her death to provide a noncharitable beneficiary with a fixed annuity for a set number of years (not to exceed 20) or for life, with the remainder going to charity.

Another popular way to transfer IRA assets to charity is via a tax provision which allows IRA owners who are 70 ¹/₂ or older to direct up to $100,000 per year of their IRA distributions to charity. These distributions are known as qualified charitable distributions, or QCDs. The money given to charity counts toward the donor's required minimum distribution (RMD), but doesn't increase the donor's adjusted gross income or generate a tax bill.

Keeping the donation out of the donor's AGI is important because doing so can (1) help the donor qualify for other tax breaks (for example, having a lower AGI can reduce the threshold for deducting medical expenses, which are only deductible to the extent they exceed 10% of AGI (for 2018 and thereafter)); (2) reduce taxes on the donor's Social Security benefits; and/or (3) help the donor avoid a high-income surcharge for Medicare Part B and Part D premiums (which kick in if AGI is over certain levels).

Further, because charitable contributions will not yield a tax benefit for those taxpayers who no longer itemize their deductions (thanks to the larger standard deduction for 2018 and thereafter), those who are age 70 ¹/₂ or older and are receiving RMDs from IRAs may gain a tax advantage by making annual charitable contributions by way of a QCD from an IRA. This charitable contribution will reduce RMDs by a commensurate amount, and the amount of the reduction will be tax-free.

If you would like to discuss any of these techniques, please contact us.