In this Edition
July 12, 2022
Using Alternative Energy for Business Can Bring Tax Benefits
PODCAST: 10% Penalty on IRAs
Selling Your Business? An Installment Sale May Yield Tax Benefits
Tax Calendar
How Do Taxes Factor Into an M&A Transaction?
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Using Alternative Energy for Business Can Bring Tax Benefits |
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If you’re a business owner, you might be wondering if using alternative energy technologies in your company can help you manage energy costs and improve your bottom line. If this sounds interesting, you should know there’s also a valuable federal income tax benefit (the business energy credit) that applies to the acquisition of many types of alternative energy property.
The credit is intended primarily for business users. But be aware that other energy tax breaks apply if you use alternative energy in your home or if you produce energy for sale.
What Property is Eligible?
The business energy credit is equal to 30% of the following types of property (with the caveat that construction must be begun before 2024):
- Equipment 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 swimming pools),
- Equipment that uses solar energy to illuminate a structure inside using fiber-optic-distributed sunlight,
- Specific fuel-cell property,
- Certain small wind energy property,
- Specific waste energy property, and
- Certain offshore wind facilities with construction beginning before 2026.
If construction of equipment that uses solar energy to generate electricity for heating and cooling structures, for hot water, or for heat used in industrial or commercial processes begins this year, the credit rate is 26% and is reduced to 22% for construction beginning in calendar year 2023; and, unless the property is placed in service before 2026, the credit rate is 10%. For the other types of property mentioned above, if construction begins this year, the credit rate is 26%, and is reduced to 22% for construction beginning in 2023; and, unless the property is placed in service before 2026, the credit rate is 0%. The only exception to this is the final type of property mentioned above —certain offshore wind facilities. This type of property isn’t subject to a phase-out.
The business energy credit is equal to 10% of the following types of property with construction beginning before 2024:
- Specific equipment that is used to produce, distribute, or use energy derived from a geothermal deposit,
- Certain cogeneration property,
- Some microturbine property, and
- Certain equipment that uses the ground, or ground water, to heat or cool a structure.
The Downside and the Upside
There are several restrictions related to the credit. For example, it isn't available for property acquired with certain non-recourse financing. Additionally, if the credit is allowable for property, the “basis” of that property is reduced by 50% of the allowable credit.
On the other hand, a favorable aspect is that, for the same property, the credit can sometimes be used in combination with other benefits. Examples include federal income tax expensing, state tax credits or utility rebates.
There are business considerations unrelated to the tax and nontax benefits that may influence your decision to use alternative energy. And even if you choose to use it, you might do so without owning the equipment, which would mean forgoing the business energy credit.
Still Wondering?
As you can see, there are many issues to consider and you may have remaining questions. We can help you work through these alternative energy tax considerations.
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Jill Wrensch, EA
D 715.384.1989
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10% Penalty on IRAs
IRAs and other retirement accounts are intended to help fund a person’s retirement. But sometimes, circumstances dictate the need for those funds. This podcast explains why taking money out of IRAs should be the last resort, since the distribution can come with a heavy tax penalty.
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Selling Your Business? An Installment Sale May Yield Tax Benefits |
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You’ve spent years building your company and now you’re ready to move on, possibly to a new business, retirement or something else. Whatever your plans, you want to get the best return from your business that you can after all the time and money you’ve put into it.
Not only do you need to get a good price, but also to minimize the tax hit on the proceeds. One option is an installment sale, which allows you to defer and possibly reduce taxes.
Giving Property Away vs. Selling It
If you have a taxable estate, it may be more advantageous to give property to your children than to sell it to them. By gifting the asset, you’ll deplete your estate and reduce your potential estate tax liability. In a sale, the proceeds generally will be included in your taxable estate.
But an installment sale may be desirable if you’ve already exhausted your $12.06 million (for 2022) lifetime gift tax exemption or if your cash flow needs preclude you from simply gifting the assets. Selling property at fair market value to your children or other loved ones rather than gifting it lets you avoid gift taxes on the transfer and freeze the property’s value for estate tax purposes as of the sale date. Future appreciation benefits the buyer and won’t be included in your taxable estate.
Of course, if the transaction is structured as a sale rather than a gift, your buyer must have the financial resources to buy the property. Using an installment note allows the buyer instead to make the payments over time. Ideally, the purchased property will generate enough income to fund these payments.
Pros vs. Cons
One advantage of an installment sale is the flexibility you have to design a payment schedule that corresponds with the property’s cash flow, your financial needs and those of your buyer. You can arrange for the payments to increase or decrease over time or start with interest-only payments and an end-of-term balloon payment of the principal.
One disadvantage of an installment sale — as opposed to gifting property — is that you’ll owe tax on any capital gains recognized from the sale. Fortunately, you can spread this tax liability over the life of the installment note. As of this writing, the long-term capital gains rates are 0%, 15% or 20%, depending on the amount of your net long-term capital gains plus your ordinary income.
Also, you’ll have to charge interest on the note according to the IRS minimum interest rate guidelines and pay ordinary income tax on those interest payments. Then again, any capital gains and ordinary income tax you pay further reduces the size of your taxable estate.
A Worthwhile Approach
An installment sale is an approach worth exploring for anyone with high-value assets. It can play a key role in your estate plan and it may help keep a family-owned business in the family.
Of course, this simple technique isn’t right for everyone. To determine whether an installment sale is the best path for you and your business — and to find out about other tax-smart options — please contact us.
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Marcus Klemm
D 715.748.1352
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If the monthly deposit rule applies, employers must deposit the tax for payments in June for Social Security, Medicare, withheld income tax and nonpayroll withholding. |
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Employers must file Form 941 for the second quarter (August 10 if all taxes are deposited in full and on time). Also, employers must deposit FUTA taxes owed through June if the liability is more than $500. |
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Third-quarter 2022 estimated tax payments are due for individuals, calendar-year corporations, estates and trusts.
- If an extension was obtained, partnerships should file their 2021 Form 1065 by this date.
- If an extension was obtained, calendar-year S corporations should file their 2021 Form 1120S by this date.
- If the monthly deposit rule applies, employers must deposit the tax for payments in August for Social Security, Medicare, withheld income tax and nonpayroll withholding.
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Calendar-year trusts and estates on extension must file their 2021 Form 1041. |
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Tax Tip Tuesday - Video Short |
Self-Employed LLC vs S Corp
This week we cover the differences between a self-employed, Single Member LLC (or sole proprietorship) versus electing to be taxed as an S-Corporation.
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How Do Taxes Factor Into an M&A Transaction? |
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Although merger and acquisition activity has been down in 2022, according to various reports, there are still companies being bought and sold. If your business is considering merging with or acquiring another business, it’s important to understand how the transaction will be taxed under current law.
Stocks vs. Assets
From a tax standpoint, a transaction can basically be structured in two ways:
1. Stock (or ownership interest). A buyer can directly purchase a seller’s ownership interest if the target business is operated as a C or S corporation, a partnership, or a limited liability company (LLC) that’s treated as a partnership for tax purposes.
The current 21% corporate federal income tax rate makes buying the stock of a C corporation somewhat more attractive. Reasons: The corporation will pay less tax and generate more after-tax income than it would have years ago. Plus, any built-in gains from appreciated corporate assets will be taxed at a lower rate when they’re eventually sold.
Under current law, individual federal tax rates are reduced from years ago and may also make ownership interests in S corporations, partnerships and LLCs more attractive. Reason: The passed-through income from these entities also will be taxed at lower rates on a buyer’s personal tax return. However, individual rate cuts are scheduled to expire at the end of 2025, and, depending on future changes in Washington, they could be eliminated earlier or extended.
2. Assets. A buyer can also purchase the assets of a business. This may happen if a buyer only wants specific assets or product lines. And it’s the only option if the target business is a sole proprietorship or a single-member LLC that’s treated as a sole proprietorship for tax purposes.
Note: In some circumstances, a corporate stock purchase can be treated as an asset purchase by making a “Section 338 election.” Ask your tax advisor for details.
What Buyers and Sellers Want
For several reasons, buyers usually prefer to purchase assets rather than ownership interests. Generally, a buyer’s main objective is to generate enough cash flow from an acquired business to pay any acquisition debt and provide an acceptable return on the investment. Therefore, buyers are concerned about limiting exposure to undisclosed and unknown liabilities and minimizing taxes after the deal closes.
A buyer can step up (increase) the tax basis of purchased assets to reflect the purchase price. Stepped-up basis lowers taxable gains when certain assets, such as receivables and inventory, are sold or converted into cash. It also increases depreciation and amortization deductions for qualifying assets.
Meanwhile, sellers generally prefer stock sales for tax and nontax reasons. One of their main objectives is to minimize the tax bill from a sale. That can usually be achieved by selling their ownership interests in a business (corporate stock or partnership or LLC interests) as opposed to selling business assets.
With a sale of stock or other ownership interest, liabilities generally transfer to the buyer and any gain on sale is generally treated as lower-taxed long-term capital gain (assuming the ownership interest has been held for more than one year).
Keep in mind that other issues, such as employee benefits, can also cause unexpected tax issues when merging with, or acquiring, a business.
Get Professional Advice
Buying or selling a business may be the most important transaction you make during your lifetime, so it’s important to seek professional tax advice as you negotiate. After a deal is done, it may be too late to get the best tax results. Contact us for the best way to proceed in your situation.
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Judy Haven, CPA
D 262.243.9610
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Business owners: Are high gas prices getting you down? The IRS is providing some relief by raising the optional standard mileage rate for the last six months of 2022.
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Is Your Corporation Eligible for the Dividends-Received Deduction?
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