The §30D Clean Vehicle Credit that was greatly modified for 2023 through 2032 by the Inflation Reduction Act of 2022 has increasingly strict qualifications each year. Per the IRS and Dept. of Energy list of qualifying vehicles, there is a drop for 2024. For clean vehicles purchased from April 18, 2023 through December 31, 2023, 27 vehicles qualified an eligible buyer for a $7,500 credit and 16 for a $3,750 credit.
As of today (1/1/24), the list for 2024 includes just 10 vehicles for the $7,500 credit and 9 for the $3,750 credit. The drop is due to a combination of no longer meeting the higher critical minerals or battery component requirement or involving parts of assembly by a “foreign entity of concern” such as China.
I suspect that more vehicles will be added during the year, but this drop will likely continue annually for the next several years. If you’re looking for a good deal on a clean vehicle, likely that happens the last week or so of the year when dealers are eager to sell eligible vehicles that won’t be eligible the next year.
And new starting in 2024 is the ability of buyers to transfer their credit to the dealer (if registered) so the customer/taxpayer can get the value up front rather than waiting to when they file their return.
There is more information at:
I received information from the National Academies on their new report, Reducing Intergenerational Poverty, Sept 2023. It defines “intergenerational poverty,” provides demographics of this poverty, describes education and health issues associated with continual poverty, and makes recommendations.
The introduction reminds us of the relevance of this topic to us all (page 1):
“Capable and responsible adults are the foundation of any well-functioning and prosperous society. Yet low-income families struggle to offer their children the same advantages and necessities that better-off families can offer. As a result, throughout their childhoods children living in families with low incomes face an array of challenges that place them at much higher risk of experiencing poverty in adulthood as compared with other children.”
“The costs of perpetuating this cycle of economic disadvantage fall not only on low-income individuals and families themselves, but also on society as a whole. Poverty reduces overall economic output and places increased burdens on the educational, criminal justice, and health care systems. Understanding the causes of intergenerational poverty and implementing programs and policies to reduce it would yield a high payoff for children and for the entire nation.”
One of the recommendations is to increase and expand the Earned Income Tax Credit (EITC). Per the researchers: “The strongest direct evidence on the likely intergenerational effects for children is found for programs that increase both family income and parental employment during childhood and adolescence.” [page 133]
In case it is of interest to you, something I started doing in 2007 (same year I started this blog) was maintaining a website of tax reform hearings of the 110th Congress and have done so through today finally getting a webpage for the 118th Congress (which started in January 2023) posted today. I use the term “tax reform” broadly here as just about any tax hearing, even the typical April ones to debrief about the filing season can lead to reforms.
The website for the 118th Congress with links back to 110th is here – https://www.sjsu.edu/people/annette.nellen/website/118th-hearings.htm
Unfortunately, some older links on some of the pages are broken because the URLs were changed perhaps due to website redesigns or change in controlling party of the committees. But if you do a web search using the name of the committee, hearing and year, you likely will find the information.
Of interest for the 118th Congress so far is one on the child tax credit which was created in 1997 and its expansion continues to be debated along with other possible tax changes, perhaps as part of appropriation bills. There are also a few on international tax reform.
I started doing this because in my teaching, research and writing on tax policy and reform, I often find interesting items and ideas in the testimony as well as just viewing the topics covered. Having the website with the tax hearings all in one place is helpful – and I’m glad to share.
What do you think? Professor Annette Nellen
Here is another suggestion from the testimony I submitted for the written record of a Senate Finance Committee and Small Business and Entrepreneurship Committee roundtable held 6/7/23 (see links at my 8/13/23 post).
This one has also been suggested by the AICPA including in letters I signed when chairing the AICPA Tax Executive Committee a few years ago, so it has been around for awhile. It would be a terrific simplification because I think that since the Tax Reform Act of 1986 stated that a tax shelter as defined under IRC Section 448 must use the accrual method regardless of gross receipts level, I think this is likely one of the most overlooked provisions in the law. The additional accounting method simplification added by the TCJA of 2017 further highlighted that a “tax shelter” can’t use the favorable methods.
The simplification recommendation:
One way an entity might be a “tax shelter” is meeting the definition of a syndicate as defined at IRC Section 1256(e). This definition pre-dates state law changes that allow the LLC business entity. A business that meets the definition of a “tax shelter” will not be allowed to use simpler accounting methods but instead will be required to use the accrual method, inventory accounting rules, and the uniform capitalization rules of IRC Section 263A.
Today, a small business might be formed as an LLC with financing provided by some owners who will not be involved in running the business. If over 35% of losses are allocated to limited entrepreneurs (inactive owners), the entity is a tax shelter even though it is running a real business (and might just have start-up losses or some bad years). The definition needs to be modernized such as to only be defined as a tax shelter per IRC Section 6662(d) (having a significant purpose of tax avoidance or evasion).
What do you think? Professor Annette Nellen, San Jose State University
Yet more from the testimony I submitted for the written record of a Senate Finance Committee and Small Business and Entrepreneurship Committee roundtable held June 7, 2023 (see my posts of 7/9/23 and 7/2/23 and 6/25/23). Another way to simplify tax rules for small businesses (such as ones operating out of the owner’s home) and modernize tax rules is to remove the exclusive use requirement for the home office deduction.
Modern life makes it unlikely that anyone uses a home office only for business activities. Most people, for example, have a smartphone in their hands and might get a personal call or text message or use a weather app while in their home office.
An alternative would be to allow a home office deduction only if the space is used over 50% for business and to reduce the deduction based on the percentage of personal use of the space, such as based on time. Offering a standard home office deduction, such as allowed by Rev. Proc. 2013-13, would be helpful, with the amount adjusted annually for inflation (and no exclusive use requirement, but adjusting the standard deduction for the percent of personal versus business use of the space based on an average week of use).
What do you think? Professor Annette Nellen, San Jose State University.
A Tax Court Summary Opinion of June 26 on the mortgage interest deduction for 2019 when the taxpayer’s aggregate mortgage debt on their principal and second homes exceeded the debt limit included a subtle reminder about the role of IRS publications to support positions taken on tax returns. [McNamara, TC Summary Opinion 2023-22 (6/26/23)]
The taxpayer’s second home was only owned for 5 months of the year but in calculating the allowable mortgage interest deduction, performed the calculation as if owned 12 months. The taxpayer said they relied on IRS Publication 936, Home Mortgage Interest Deduction. The court relied on IRC Section 163(h) and related regulations, which it found “unambiguous” in determining the deduction as the IRS determined.
In noting that reliance on the IRS publication was “misguided,” the court added: See Miller, 114 TC 184, 195 (2000) which explains “that administrative guidance is not binding on the Court when the plain meaning of a statute is clear.” But the court did not include the quote on page 195 of that case. Here is is:
When we pay taxes, we likely think they are funding government based on the spending recommendations of elected officials as informed by the government agencies, such as the Dept. of Education, that propose budgets for funding. But this is not true for all tax revenues because some are earmarked to go to certain funds. One that might come to mind are gasoline excise taxes that primarily fund the Highway Trust Fund to build and maintain roads.
States also have various taxes often earmarked for particular causes. For example, in 1998, California voters passed Prop 10 to add a 50 cent excise tax on a pack of cigarettes. This additional tobacco excise tax was earmarked for the newly created California Children and Families First Commission for various education, health and child care projects to help children.
On July 21, 2023, CalMatters, a nonpartisan, nonprofit news organization, reported: “Californians are smoking less: Why that’s a problem for these early childhood services.” They report that by 2026, First 5 Association of California expects 30% less revenue compared to 2021. The First 5 program in Kern County also notes the funding decline in its 2022-2023 report, resulting in less services for children 5 and under.
So, it’s good that fewer people are smoking, but important programs lose funding as a result. What an odd system!
Continuing my current series of posts on addressing small business tax law complexity, here is another suggestion I included in what I submitted for the written record of a June 7, 2023 SFC and Small Business and Entrepreneurship Committee roundtable.
Promote Tax Literacy
We don’t teach about tax in K-12 or at universities other than accounting majors typically taking at least one taxation course and there might be some tax included in financial literacy curriculum available at some high schools and colleges. Given everyone’s role as a taxpayer, more is needed. To help small businesses, I suggest:
When a taxpayer requests an EIN for a new business, the IRS should at that time also send (electronically and/or by the U.S. Post Office) information about tax obligations of a business in a form understandable by a layperson.
Provide funding to the IRS and SBA to run live, online workshops for new business owners on specific topics relevant to helping the taxpayer understand their tax obligations and to ask questions.
While there are numerous publications at the IRS website that can help a new business owner understand their tax obligations, they can be overwhelming and sometimes not specific enough such as to explain estimated tax payments and information reporting obligations.
I think to generate simplification ideas, we need to look at every tax rule or calculation and ask at least two questions. First, should this rule even be part of this type of tax? After all, the federal income tax has over 160 “tax expenditures” which are special rules that are not part of the basic income tax structure (see OMB FY2024 report). Next, is there a different way to draft the rule or handle the computation? We get so used to certain rules, forms, and practices that we often act as if that is the only way something can be done.
I want to offer an example of an out of the box idea that does have some basis in an existing tax rule. I recently suggested this in comments I submitted for the written record of a June 7 joint hearing of the Senate Finance Committee and Small Business and Entrepreneurship Committee, on tackling tax complexity for small businesses. Among my suggestions, I offered this:
Allow co-owners of a start-up business to elect qualified joint venture status for the first few years.
IRC Section 761(f) allows a married couple to elect to treat a business they jointly own and operate as a “qualified joint venture” rather than as a partnership. The couple files two matching Schedules C rather than a Form 1065 partnership return. This is simpler for the couple and enables both spouses to pay into the Social Security system. [see IRS information]
Filing two Schedules C is much easier than filing a partnership return including a Schedule K-1 (as well as Schedule K-3) for each partner.
Inflation adjustments to tax rules such as the individual tax brackets and standard deduction make sense to avoid “bracket creep” where inflation might put an employee into a higher bracket despite no increased earning power and ensures an appropriate amount of income is removed from taxation (the role played by the standard deduction and personal and dependent exemptions).
But some figures, such as filing thresholds for information reports such as 1099-INT and 1099-NEC, should not be adjusted for inflation as doing so will increase non-reporting otherwise known as the tax gap (amount of tax owed less what is actually collected). There are often proposals to increase the 1099-NEC filing threshold from $600 which was set in 1954 to its inflation adjusted amount of about $7,000 today. For example, see the proposed Small Business Paperwork Savings Act introduced 6/9/23 to increase the filing threshold for Form 1099-NEC from $600 to $5,000.
According to the IRS, the tax gap is about $500 billion a year. It stems from non-reporting of income and non-payment, as well as various tax errors made in filing. The GAO, IRS and others have known for many years that “compliance is higher when there is a third-party information reporting and withholding” (page 3 of Pub 5364). More specifically, the IRS reports that where income is subject to both information reporting and withholding, the compliance rate is about 99%! In contrast, where there is little to no information reporting or withholding, the compliance rate is about 45%! [page 6 of Pub 5364]
A tax gap means that compliant taxpayers are paying more to cover what non-compliant taxpayers are not paying that they actually owe. Since it has been shown for many years that information reporting reduces the tax gap, raising the filing threshold for Form 1099-NEC will mean far fewer forms will be issued and some taxpayers such as those who keep poor records or think that if they don’t get an information form, the income isn’t taxable, will not report the income – the tax gap will rise. Compliant taxpayers will have to cover more of total taxes.
Prior to the Tax Cuts and Jobs Act made some changes to the treatment of qualified transportation fringe benefits (Section 132(f)), primarily making the employer costs non-deductible (Section 274(a)(4)), “qualified bicycle commuting reimbursement” was such a fringe benefit. That benefit was repealed for 8 years for some reason. It is not clear why it was repealed. I don’t believe its temporary repeal generated lots of revenue as it was as small fringe benefit (about $20 per month and only for 15 months per employee) and likely not offered by many employers or used by many employees.
The bicycle benefit covered the reasonable expenses of an employee for purchase of a bicycle, its improvements and repair and storage if regulary used by the employee to get from home to work and back.
Riding a bike to work isn’t an option for many workers who have long distances or unsafe routes or no biking option due to the need to use freeways to get to work. But for workers who can bike to work, isn’t that a benefit to many people? It means fewer cars on the road and less pollution. If there are already bike lanes available, better yet.
If a tax break is to be provided, why not offer a refundable credit for the purchase or a bike with reasonable cost limits and an income phase-out level?