Category: Tax

IRS and Treasury Department Release Initial Guidance for Labor Requirements under Inflation Reduction Act

On November 30, 2022, the IRS and the Treasury Department published Notice 2022-61 (the Notice) in the Federal Register. The Notice provides guidance regarding the prevailing wage requirements (the Prevailing Wage Requirements) and the apprenticeship requirements (the Apprenticeship Requirements and, together with the Prevailing Wage Requirements, the Labor Requirements), which a taxpayer must satisfy to be eligible for increased amounts of the following clean energy tax credits under the Internal Revenue Code of 1986 (the Code), as amended by the Inflation Reduction Act of 2022 (the “IRA”):

  • the alternative fuel vehicle refueling property credit under Section 30C of the Code (the Vehicle Refueling PC);
  • the production tax credit under section 45 of the Code (the PTC);
  • the energy efficiency home credit under section 45L of the Code;
  • the carbon sequestration tax credit under section 45Q of the Code (the Section 45Q Credit);
  • the nuclear power production tax credit under section 45U of the Code;
  • the hydrogen production tax credit under section 45V of the Code (the Hydrogen PTC);
  • the clean electricity production tax credit under section 45Y of the Code (the Clean Electricity PTC);
  • the clean fuel production tax credit under section 45Z of the Code;
  • the investment tax credit under section 48 of the Code (the ITC);
  • the advanced energy project tax credit under section 48C of the Code; and
  • the clean electricity production tax credit under section 48E of the Code (the Clean Electricity ITC).[1]

We discussed the IRA, including the Labor Requirements, in a previous update.

Start of Sixty-Day Period

The IRA provides an exemption from the Labor Requirements (the Exemption) for projects and facilities otherwise eligible for the Vehicle Refueling PC, the PTC, the Section 45Q Credit, the Hydrogen PTC, the Clean Electricity PTC, the ITC, and the Clean Electricity ITC, in each case, that begin construction before the sixtieth (60th) day after guidance is released with respect to the Labor Requirements.[2] The Notice provides that it serves as the published guidance that begins such sixty (60)-day period for purposes of the Exemption.

The version of the Notice that was published in the Federal Register on November 30, 2022, provides that the sixtieth (60th) day after the date of publication is January 30, 2023. January 30, 2023, however, is the sixty-first (61st) day after November 30, 2023; January 29, 2023 is the sixtieth (60th) day. Currently, it is unclear whether the Notice erroneously designated January 30, 2023 as the sixtieth (60th) day or whether the additional day to begin construction and qualify for the Exemption was intended, possibly because January 29, 2023 falls on a Sunday. In any event, unless and until clarification is provided, we expect conservative taxpayers planning to rely on the Exemption to start construction on creditable projects and facilities before January 29, 2023, rather than before January 30, 2023.[3]

Beginning Construction for Purposes of the Exemption

The Notice describes the requirements for a project or facility to be deemed to begin construction for purposes of the Exemption. As was widely expected, for purposes of the PTC, the ITC, and the Section 45Q Credit, the Notice adopts the requirements for beginning of construction contained in previous IRS notices (the Prior Notices).[4] Under the Prior Notices, construction of a project or facility is deemed to begin when physical work of a significant nature begins (the Physical Work Test) or, under a safe harbor, when five percent or more of the total cost of the project or facility is incurred under the principles of section 461 of the Code (the Five Percent Safe Harbor). In addition, in order for a project or facility to be deemed to begin construction in a particular year, the taxpayer must demonstrate either continuous construction or continuous efforts until the project or facility is completed (the Continuity Requirement). Under a safe harbor contained in the Prior Notices, projects and facilities that are placed in service no more than four calendar years after the calendar year during which construction of the project or facility began generally are deemed to satisfy the continuous construction or continuous efforts requirement (the Continuity Safe Harbor).[5]

In the case of a project or facility otherwise eligible for the newly-created Vehicle Refueling PC, Hydrogen PTC, Clean Electricity PTC, or Clean Electricity ITC, the Notice provides that:

  • “principles similar to those under Notice 2013-29” will apply for purposes of determining whether the project or facility satisfies the Physical Work Test or the Five Percent Safe Harbor, and a taxpayer satisfying either test will be deemed to have begun construction on the project or facility;
  • “principles similar to those under” the Prior Notices will apply for purposes of determining whether the project or facility satisfies the Continuity Requirement; and
  • “principles similar to those provided under section 3 Notice 2016-31” will apply for purposes of determining whether the project or facility satisfies the Continuity Safe Harbor, with the Notice specifying that the safe harbor period is four (4) years.

Taxpayers and commentators have observed that the existing guidance in the Prior Notices is not, in all cases, a good fit for the newly-created clean energy tax credits. Additional guidance will likely be required to ensure that the principles of the Prior Notices may be applied efficiently and seamlessly to the newly-created tax credits.

Prevailing Wage Determinations

The Notice provides that, for purposes of the Prevailing Wage Requirements, prevailing wages will vary by the geographic area of the project or facility, the type of construction to be performed, and the classifications of the labor to be performed with respect to the construction, alteration, or repair work. Taxpayers may rely on wage determinations published by the Secretary of Labor on www.sam.gov to establish the relevant prevailing wages for a project or facility. If, however, the Secretary of Labor has not published a prevailing wage determination for a particular geographic area or type of project or facility on www.sam.gov, or one or more types of labor classifications that will be performed on the project or facility is not listed, the Notice provides that the taxpayer must contact the Department of Labor (the “DOL”) Wage and Hour Division via email requesting a wage determination based on various facts and circumstances, including the location of and the type of construction and labor to be performed on the project or facility in question. After review, the DOL will notify the taxpayer as to the labor classifications and wage rates to be used for the geographic area in which the facility is located and the relevant types of work.

Taxpayers and commentators have observed that the Notice provides no insight as to the DOL’s decision-making process. For instance, the Notice does not describe the criteria that the DOL will use to make a prevailing wage determination; it does not offer any type of appeal process; and, it does not indicate the DOL’s anticipated response time to taxpayers. The lack of guidance on these topics has created significant uncertainty around the Prevailing Wage Requirements, particularly given that published wage determinations are lacking for many geographical areas.

Certain Defined Terms under the Prevailing Wage Requirements

The Notice provides definitions for certain key terms that are relevant to the Prevailing Wage Requirements, including:

  • Employ. A taxpayer, contractor, or subcontractor is considered to “employ” an individual if the individual performs services for the taxpayer, contractor, or subcontractor in exchange for remuneration. Individuals otherwise classified as independent contractors for federal income tax purposes are deemed to be employed for this purpose and therefore their compensation generally would be subject to the Prevailing Wage Requirements.
  • Wages. The term “wages” includes both hourly wages and bona fide fringe benefits.
  • Construction, Alteration, or Repair. The term “construction, alteration, or repair” means all types of work (including altering, remodeling, installing, painting, decorating, and manufacturing) done on a particular project or facility. Based on this definition, it appears that off-site work, including off-site work used to satisfy the Physical Work Test or the Five Percent Safe Harbor, should not constitute “construction, alteration, or repair” and therefore should not be subject to the Prevailing Wage Requirements. It is not clear, however, whether “construction, alteration, or repair” should be read to include routine operation and maintenance (“O&M”) work on a project or facility.

The Good Faith Exception to the Apprenticeship Requirements

The IRA provides an exception to the Apprenticeship Requirements for taxpayers that make good faith attempts to satisfy the Apprenticeship Requirements but fail to do so due to certain circumstances outside of their control (the Good Faith Exception). The Notice provides that, for purposes of the Good Faith Exception, a taxpayer will be considered to have made a good faith effort to request qualified apprentices if the taxpayer (1) requests qualified apprentices from a registered apprenticeship program in accordance with usual and customary business practices for registered apprenticeship programs in a particular industry and (2) maintains sufficient books and records establishing the taxpayer’s request of qualified apprentices from a registered apprenticeship program and the program’s denial of the request or lack of response to the request, as applicable.

Certain Defined Terms under the Apprenticeship Requirements

The Notice provides definitions for certain key terms that are relevant to the Apprenticeship Requirements, including:

  • Employ. The Notice provides the same definition for “employ” as under the Prevailing Wage Requirements.
  • Journeyworker. The term “journeyworker” means a worker who has attained a level of skill, abilities, and competencies recognized within an industry as having mastered the skills and competencies required for the relevant occupation.
  • Apprentice-to-Journeyworker Ratio. The term “apprentice-to-journeyworker ratio” means a numeric ratio of apprentices to journeyworkers consistent with proper supervision, training, safety, and continuity of employment, and applicable provisions in collective bargaining agreements, except where the ratios are expressly prohibited by the collective bargaining agreements.
  • Construction, Alteration, or Repair. The Notice provides the same definition for “construction, alteration, or repair” as under the Apprenticeship Requirements. This suggests that, like the Prevailing Wage Requirements, off-site work is not subject to the Apprenticeship Requirements. In addition, the same open question regarding O&M work under the Prevailing Wage Requirements applies for purposes of the Apprenticeship Requirements as well.

Record-Keeping Requirements

The Notice requires that taxpayers maintain and preserve sufficient records in accordance with the general recordkeeping requirements under section 6001 of the Code and the accompanying Treasury Regulations to establish that the Prevailing Wage Requirements and Apprenticeship Requirements have been satisfied. This includes books of account or records for work performed by contractors or subcontractors of the taxpayer.

Other Relevant Resources

The DOL has published a series of Frequently Asked Questions with respect to the Labor Requirements on its website. In addition, the DOL has published additional resources with respect to the Apprenticeship Requirements, including Frequently Asked Questions, on its Apprenticeship USA platform. It is generally understood that, in the case of any conflict between the information on these websites and the information in the Notice, the Notice should control.

[1] The Labor Requirements also are applicable to the energy-efficient commercial buildings deduction under section 179D of the Code.

[2] The IRA provides a separate exemption from the Labor Requirements projects or facilities otherwise eligible for the ITC or the PTC with a maximum net output of less than one megawatt.

[3] Interestingly, the DOL online resources described below observe that projects and facilities that begin construction on or after January 29, 2023 are not eligible for the Exemption, which appears to recognize that January 29, 2023, and not January 30, 2023, is the sixtieth (60th) after publication of the Notice.

[4] Notice 2013-29, 2013-20 I.R.B. 1085; Notice 2013-60, 2013-44 I.R.B. 431; Notice 2014-46, 2014-36 I.R.B. 541; Notice 2015-25, 2015-13 I.R.B. 814; Notice 2016-31, 2016-23 I.R.B. 1025; Notice 2017-04, 2017-4 I.R.B. 541; Notice 2018-59, 2018-28 I.R.B. 196; Notice 2019-43, 2019-31 I.R.B. 487; Notice 2020-41, 2020-25 I.R.B. 954; Notice 2021-5, 2021-3 I.R.B. 479; and Notice 2021-41, 2021-29 I.R.B. 17.

[5] In response to procurement, construction, and similar delays attributable to the COVID-19 pandemic, the length of the safe harbor period was extended beyond four (4) years for projects or facilities for which construction began in 2016, 2017, 2018, 2019, or 2020, which we discussed in a previous update.

Article By Elizabeth L. McGinley, Steven J. Lorch, Don J. Lonczak, and Michael A. Recchia of Bracewell LLP

For more labor and employment legal news, click here to visit the National Law Review.

© 2022 Bracewell LLP

Now is a Good Time to Confirm Your S Corporation Status

On October 11, 2022, the IRS published Revenue Procedure 2022-19 providing taxpayers with liberalized procedures for resolving common S corporation issues. Previously, taxpayers would have needed costly IRS letter rulings for certainty on their S corporation status. The new procedures are simpler and less expensive.

The IRS has separately assured taxpayers that LLCs that are classified as S corporations may also qualify for this liberalized relief.

Inadvertent loss of S corporation status can have significant tax consequences and can make your business a less attractive acquisition target. For example, an S corporation that reverts to a C corporation may be subject to a double layer of tax going back several years. As a result, potential acquirers of any S corporation invariably request representations on the validity of the S corporation status.

The new Revenue Procedure describes common situations that the IRS has historically treated as not affecting the validity of S corporation status or qualified S corporation Qsub status, such as:

  1. One class of stock requirement in the governing provisions (including the concept that commercial contractual agreements are not treated as binding agreements unless a “principal purpose” of the agreement is to circumvent the one class of stock requirement);

  2. Disproportionate distributions inadvertently creating a second class of stock;

  3. Certain inadvertent errors or omissions on Form 2553 or Form 8869;

  4. Missing administrative acceptance letters for S corporation or Qsub elections;

  5. Federal income tax return filings inconsistent with an S election; or

  6. Governing provisions that allow for non-identical treatment of shareholders, such as differing liquidation rights (allowing for retroactive corrections).

For these common situations, there are now simpler and cheaper procedures to preserve S corporation status. For example, for certain small errors such as missing officer signatures, S corporations may follow the same simplified procedures as the late election relief procedures in Revenue Ruling 2013-30. Those procedures do not require a private letter ruling request, but only the original election form with a reasonable cause statement. As another example, if the issue is non-identical governing provisions and no disproportionate distributions were made, the S corporation may simply be retroactively treated as an S Corporation if it meets certain eligibility requirements and keeps a copy of a signed statement in its files.

Shareholders of uncertain S corporations should consider taking advantage of these new relaxed and cheaper procedures for curing S corporation mistakes. Each different type of error has a different cure with specific requirements.

Article By Christie R. Galinski and Samuel L. Parks of Miller Canfield

For more corporate law legal news, click here to visit the National Law Review.

© 2022 Miller, Canfield, Paddock and Stone PLC

IRS Delays Additional Amendment Deadlines for Major Retirement Legislation

The IRS has extended additional deadlines for required retirement plan amendments, similar to the extensions we discussed last month found here. Notice 2022-45 extends the deadline for amending qualified retirement plans to comply with certain provisions of:

  • The Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”)

  • The Taxpayer Certainty and Disaster Tax Relief Act of 2020 (“Relief Act”)

Notice 2022-45 specifically extends the amendment deadlines for Section 2202 of the CARES Act and Section 302 of the Relief Act. Section 2202 of the CARES Act permitted plans to: (1) provide coronavirus-related distributions, (2) increase retirement plan loan sizes, and (3) pause retirement plan loan payments. Section 302 of the Relief Act permitted qualified disaster distributions.

Notice 2022-45 extends the amendment deadlines relating to the applicable provisions in the CARES and Relief Acts for non-governmental qualified plans and 403(b) plans to December 31, 2025. Governmental plans (including qualified plans, 403(b) plans maintained by public schools, and 457(b) plans) are granted further delays depending on the underlying circumstances of the plan sponsor.  These extended deadlines under Notice 2022-45 align with the previous deadline extensions under Notice 2022-33. Accordingly, most plan sponsors will be able to adopt a single amendment to comply with the SECURE Act, BAMA, the CARES Act, and the Relief Act.

Notably, tax-exempt 457(b) plans do not appear to be covered by the relief granted by either Notice 2022-33 or Notice 2022-45. Accordingly, these plans remain subject to a December 31, 2022, amendment deadline.

Article By Brian T. Gallagher, Samantha A. Kopacz, and Samuel L. Parks of Miller Canfield

For more tax law legal news, click here to visit the National Law Review.

© 2022 Miller, Canfield, Paddock and Stone PLC

Proposed Senate Bill Would Deny Deductions for NIL Contributions

On September 28, 2022, U.S. Senators Ben Cardin (D-Md.), a member of the Senate Finance Subcommittee on Taxation and Internal Revenue Service (IRS) Oversight, and John Thune (R-S.D.), ranking member of the Subcommittee on Taxation and IRS Oversight, introduced the Athlete Opportunity and Taxpayer Integrity Act, which seeks to deny charitable deductions for any contribution used by the donee to compensate college athletes for the use of their name, image, or likeness (“NIL”) by reason of their status as athletes.

One entity type that is impacted by the Athlete Opportunity and Taxpayer Integrity Act are “NIL collectives” that have been established as 501(c)(3) organizations.  These types of NIL collectives have been used to allow donors to make tax deductible contributions that are then used to fund NIL opportunities for college athletes, for example, by having a college athlete provide services to a separate charity in exchange for payment from the NIL collective.  A press release from Senator Cardin noted that “[s]uch activity is inconsistent with the intended purpose of the charitable tax deduction, and it forces taxpayers to subsidize the potential recruitment of – or payment to – college athletes based on their NIL status.”

Notably, the Opportunity and Taxpayer Integrity Act would only apply to charitable deductions.  A person engaged in a trade or business would still be able to deduct payments to college athletes for the use of their name, image, or likeness if such payments qualify as ordinary and necessary business expenses.

Although it is not clear at this time whether the Opportunity and Taxpayer Integrity Act will pass, it does indicate increased scrutiny over nonprofit NIL collectives and possibly other NIL arrangements.

Article By Richard T. Hewlett, Shawn A. Strand, and Jessica E. Visser of Varnum LLP

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© 2022 Varnum LLP

Tax Credits in the Inflation Reduction Act Aim to Build a More Equitable EV Market

In February of this year, it was high time for me to buy a new car. I had driven the same car since 2008, and getting this-or-that replaced was costing more and more every year. As a first-time car buyer, I had two criteria: I wanted to go fast, and I wanted the car to plug in.

Like many prospective purchasers, I started my search online and by speaking with friends and who drove electric vehicles, or EVs for short. I settled on a plug-in hybrid sedan, reasoning that a plug-in hybrid electric vehicle (PHEV) was the best of both worlds: the 20-mile electric range was perfect for my short commute and getting around Houston’s inner loop, and the 10-gallon gas tank offered freedom to roam. In the eight months since I’ve had the car, I’ve bought less than ten tanks of gas. As the price of a gallon in Texas soared to $4.69 in June, the timing of my purchase seemed miraculous.

When it was time to transact, the dealer made vague mention of rebates and tax credits, but didn’t have a comprehensive understanding of the details. Enter Texas’s Light-Duty Motor Vehicle Purchase or Lease Incentive Program (LDPLIP). Administered by the Texas Commission on Environmental Quality (TCEQ), the program grants rebates of up to $5,000 for consumers, businesses, and government entities who buy or lease new vehicles powered by compressed natural gas or liquefied petroleum gas (propane), and up to $2,500 for those who buy or lease new EVs or vehicles powered by hydrogen fuel cells.

Rebates are only available to purchasers who buy or lease from dealerships (so some of the most popular EVs in the U.S. don’t qualify). There is no vehicle price cap, nor is there an income limit for purchasers. In June of 2022, the average price for a new electric vehicle was over $66,000, according to Kelley Blue Book estimates. But the median Texan household income (in 2020 dollars) for 2016-2020 was $63,826.

According to the grant specialist to whom I initially sent my application, the TCEQ has received “a vigorous response” from applicants, however, the TCEQ is limited in the number of rebate grants that it can award: 2,000 grants for EVs or vehicles powered by hydrogen fuel cells, and 1,000 grants for vehicles powered by compressed natural gas or liquefied petroleum gas (propane).

The grant period in Texas ends on January 7, 2023, but on July 5, 2022, the TCEQ suspended acceptance of applications for EVs or vehicles powered by hydrogen fuel cells. As of the writing of this post, the total number of applications received and reservations pending on the program’s website is 2,480.

In comparison with Texas’s rebate program, the EV tax credits in the Inflation Reduction Act of 2022 demonstrate a commitment to building a more equitable EV market. While EVs may be cheaper to own than gas-powered vehicles—especially when gas prices are high—a lot of lower and middle-income families have historically been priced out of the EV market. The IRA takes several meaningful steps towards accessibility and sustainability for a more diverse swath of consumers:

  • Allows point-of-sale incentives starting in 2024. Purchasers will be able to apply the credit (up to $7,500) at the dealership, and because sticker price is such an important factor for so many purchasers, this incentive will make buying an EV more attractive up front.
  • Removes 200,000 vehicle-per-manufacturer cap. Some American manufacturers are already past the maximum. Eliminating the cap means bringing back the tax credit for many popular and affordable EVs, which should attract new buyers.
  • Creates income and purchase price limits. SUVs, vans, and pickup trucks under $80,000, and all other vehicles (e.g. sedans) under $55,000, will qualify for the EV tax credit. For new vehicles, purchaser income will be subject to an AGI cap: $150,000 for individuals and $300,000 for a joint filers.
  • Extends the tax credit to pre-owned EVs. As long as the purchase price does not exceed $25,000, purchasers of pre-owned EVs (EVs whose model year is at least two years earlier than the calendar year in which the purchase occurs) will receive a tax credit for 30% of the sale price up to $4,000. The income cap for pre-owned EVs is $75,000 for individuals and $150,000 for a joint filers.

A purchaser who qualifies under both programs can get both incentives. Comparing Texas’s state government-level incentives and those soon to be offered at the federal level reveals a few telling differences—new vs. used, income caps, purchase price caps, post-purchase rebates vs. up-front point-of-sale incentives—but the differences all fall under the same umbrella: equity. The IRA’s tax credits are designed, among other things, to make purchasing an EV more attractive to a wider audience.

Of course, the EV incentive landscape has greatly changed since the Energy Improvement and Extension Act of 2008 first granted tax credits for new, qualified EVs. The LDPLIP wasn’t approved by the TCEQ until late 2013, so the U.S. government has arguably had more time to get it right. Some might say that the fact that Texas’s program offers the purchaser of the $150,000+ PHEV the same opportunity to access grant funds as the purchaser of the $30,000 EV means that the LDPLIP is even more “equal.”

It is worth noting that the IRA also sets a handful of production and assembly requirements. For instance, to qualify for the credit, a vehicle’s final assembly must occur in North America. Further, at least 40% the value of the critical minerals contained in the vehicle’s battery must be “extracted or processed in any country with which the United States has a free trade agreement in effect” or be “recycled in North America”—and this percentage increases each year, topping out at 80% in 2027. There is also a rising requirement that 50% of the vehicle’s battery components be manufactured or assembled in North America, with the requirement set to hit 100% in 2029. It is unclear whether automotive manufacturers and the U.S. critical mineral supply chains will be able to meet these targets—and that uncertainty may cause a potential limiting effect on the options a purchaser would have for EVs that qualify for the tax credit.

Time will tell whether the intentions behind the EV tax credits in the IRA have the effect that this particular blogger and PHEV owner is hoping for. While we wait to see whether this bid at creating an equitable EV market bears fruit, we can at least admire this attempt at, as the saying goes, “giving everyone a pair of shoes that fits.”

Article By Dania Abbasi of Foley & Lardner LLP

For more energy and environment legal news, click here to visit the National Law Review.

© 2022 Foley & Lardner LLP

Your Horse May Be Subject to IRS Seizure

The Internal Revenue Service (IRS) has broad powers to seize assets in payment of outstanding taxes including income tax, excise tax, employment tax, and estate and gift tax. Assets the IRS can seize in exercise of its levy power are those that constitute “property or rights to property” of the taxpayer as defined under local law. Equine industry assets that could be subject to seizure include real estate, equipment, and the horses themselves, although horses valued below $10,090 are exempt from levy. For example, in 2012 the IRS seized hundreds of horses to collect a tax debt from a defendant convicted of stealing millions of dollars in city funds. The defendant used the funds to finance the breeding and showing of American quarter horses. The government auctioned off more than 400 of the seized horses to pay the defendant’s outstanding federal tax obligation.

But because animals require food and veterinary care and could die, the IRS has specific procedures relating to the seizure of livestock, such as horses. If the horses are considered “perishable goods,” section 6336 of the Internal Revenue Code (the Code), which provides the statutory requirements for disposing of perishable goods, will apply. Under section 6336, if it is determined that the seized property is liable to perish, the IRS must appraise the value of the property and either return it to the owner or put it up for immediate sale. The Internal Revenue Manual (IRM) provides further guidance on what constitutes perishable property. IRM 5.10.1.7 (12-20-2019) says that the property must be tangible personal property and have a short life expectancy or limited shelf life.

Prior to July 1, 2019, the definition of perishable goods included property that may “become greatly reduced in price or value by keeping, or that such property cannot be kept without great expense.” Horses would seem to fit within either or both of these categories. Now, under the revised definition of perishable goods, a collection officer would have to show that the horse had a short life expectancy.

A revenue officer seeking to seize perishable property must determine that the property cannot be kept and sold at a public sale under normal sale time frames set forth in section 6335 of the Code. Despite the change in the definition of perishable goods in 2019, the IRM suggests that examples of property likely to perish “may be food, flowers, plants or livestock [emphasis added].” Once the revenue officer determines that the property is perishable, he must secure approval of this finding. The determination is subject to high-level IRS review and planning, including an estimate of the expected net sale proceeds to be received from a forced sale. If the revenue officer concludes that the property is not perishable, sale of the seized property must proceed under normal procedures and within the time frames set forth in the Code.

A recent Bloomberg news article reported that the U.S. government had seized a 15-year-old Holsteiner that had been purchased for $750,000. The horse was a champion show jumper. As might be expected, the cost of maintaining the horse was high. IRS agents determined it would cost $45,000-$50,000 a year to feed the horse, not including the medical costs it might incur. The IRS also learned the value of the horse had dropped sharply from its $750,000 purchase price. Thus, in an unusual deal, the government sold the horse to the taxpayer’s daughter (for whom it had been purchased originally) for $25,000.

The considerations, planning, coordination, documentation, and approval of these types of sales may discourage a revenue officer from seizing perishable property like horses where other assets may be levied more easily. Nonetheless, sometimes the IRS will take action to seize a horse perceived to be valuable, like with the Holsteiner, even if it is not deemed perishable under the Code definition.

Article By Barbara T. Kaplan and Scott E. Fink of Greenberg Traurig, LLP

For more tax law legal news, click here to visit the National Law Review.

©2022 Greenberg Traurig, LLP. All rights reserved.

A Summary of Inflation Reduction Act’s Main Energy Tax Proposals

On August 7, the Senate passed the Inflation Reduction Act of 2022 (the “IRA”). The IRA contains a significant number of climate and energy tax proposals, many of which were previously proposed in substantially similar form by the House of Representatives in November 2021 (in the “Build Back Better Act”).

Extension and expansion of production tax credit

Section 45 of the Internal Revenue Code provides a tax credit for renewable electricity production. To be eligible for the credit, a taxpayer must (i) produce electricity from renewable energy resources at certain facilities during a ten-year period beginning on the date the facility was placed in service and (ii) sell that renewable electricity to an unrelated person.[1] Under current law, the credit is not available for renewable electricity produced at facilities whose construction began after December 31, 2021.

The IRA would extend the credit for renewable electricity produced at facilities whose construction begins before January 1, 2025. The credit for electricity produced by solar power –which expired in 2016—would be reinstated, as extended by the IRA.

The IRA would also increase the credit from 1.5 to 3 cents per kilowatt hour of electricity produced.

A taxpayer would be entitled to increase its production tax credit by 500% if (i) its facility’s maximum net output is less than 1 megawatt, (ii) it meets the IRA’s prevailing wage and apprenticeship requirements,[2] and (iii) the construction of its facility begins within fifty-nine days after the Secretary publishes guidance on these requirements.

In addition, the IRA would add a 10% bonus credit for a taxpayer (i) that certifies that any steel, iron, or manufactured product that is a component of its facility was produced in the United States (the “domestic content bonus credit”) or (ii) whose facility is in an energy community (the “energy community bonus credit”).[3]

Extension, expansion, and reduction of investment tax credit

Section 48(a) provides an investment tax credit for the installation of renewable energy property. The amount of the credit is equal to a certain percentage (described below) of the property’s tax basis. Under current law, the credit is limited to property whose construction began before January 1, 2024.

The IRA would extend the credit to property whose construction begins before January 1, 2025. This period would be extended to January 1, 2035 for geothermal property projects. The IRA would also allow the investment tax credit for energy storage technology, qualified biogas property, and microgrid controllers.

The IRA would reduce the base credit from 30% to 6% for qualified fuel cell property; energy property whose construction begins before January 1, 2025; qualified small wind energy property; waste energy recovery property; energy storage technology; qualified biogas property; microgrid controllers; and qualified facilities that a taxpayer elects to treat as energy property. For all other types of energy property, the base credit would be reduced from 10% to 2%.

A taxpayer would be entitled to increase this base credit by 500% (for a total investment tax credit of 30%) if (i) its facility’s maximum net output is less than 1 megawatt of electrical or thermal energy, (ii) it meets the prevailing wage and apprenticeship requirements, and (iii) its facility begins construction within fifty-nine days after the Secretary publishes guidance on these requirements.

In addition, a taxpayer would be entitled to a 10% domestic content bonus credit and 10% energy community bonus credit (subject to the same requirements as for bonus credits under section 45). The IRA would also add a (i) 10% bonus credit for projects undertaken in a facility with a maximum net output of 5 megawatts and is located in low-income communities or on Indian land, and (ii) 20% bonus credit if the facility is part of a qualified low-income building project or qualified low-income benefit project.

Section 45Q (Carbon Oxide Sequestration Credit)

Section 45Q provides a tax credit for each metric ton of qualified carbon oxide (“QCO”) captured using carbon capture equipment and either disposed of in secure geological storage or used as a tertiary injection in certain oil or natural gas recovery projects.  While eligibility for the section 45Q credit under current law requires that projects begin construction before January 1, 2026, the IRA would extend credit eligibility to those carbon sequestration projects that commence construction before January 1, 2033.

The IRA would increase the amount of tax credits for projects that meet certain wage and apprenticeship requirements. Specifically, the IRA would increase the amount of section 45Q credits for industrial facilities and power plants to $85/metric ton for QCO stored in geologic formations, $60/metric ton for the use of captured carbon emissions, and $60/metric ton for QCO stored in oil and gas fields.  With respect to direct air capture projects, the IRA would increase the credit to $180/metric ton for projects that store captured QCO in secure geologic formations, $130/metric ton for carbon utilization, and $130/metric ton for QCO stored in oil and gas fields.  The proposed changes in the amount of the credit would apply to facilities or equipment placed in service after December 31, 2022.

The IRA also would decrease the minimum annual QCO capture requirements for credit eligibility to 1,000 metric tons (from 100,000 metric tons) for direct air capture facilities, 18,750 metric tons (from 500,000 metric tons) of QCO for an electricity generating facility that has a minimum design capture capacity of 75% of “baseline carbon oxide” and 12,500 metric tons (from 100,000 metric tons) for all other facilities.  These changes to the minimum capture requirements would apply to facilities or equipment that begin construction after the date of enactment.

Introduction of zero-emission nuclear power production credit

The IRA would introduce, as new section 45U, a credit for zero-emission nuclear power production.

The credit for a taxable year would be the amount by which 3 cents multiplied by the kilowatt hours of electricity produced by a taxpayer at a qualified nuclear power facility and sold by the taxpayer to an unrelated person during the taxable year exceeds the “reduction amount” for that taxable year.[4]

In addition, a taxpayer would be entitled to increase this base credit by 500% if it meets the prevailing wage requirements.

New section 45U would not apply to taxable years beginning after December 31, 2032.

Biodiesel, Alternative Fuels, and Aviation Fuel Credit

The IRA would extend the existing tax credit for biodiesel and renewable diesel at $1.00/gallon and the existing tax credit for alternative fuels at $.50/gallon through the end of 2024.  Additionally, the IRA would create a new tax credit for sustainable aviation fuel of between $1.25/gallon and $1.75/gallon.  Eligibility for the aviation fuel credit would depend on whether the aviation fuel reduces lifecycle greenhouse gas emissions by at least 50%, which corresponds to a $1.25/gallon credit (with an additional $0.01/gallon for each percentage point above the 50% reduction, resulting in a maximum possible credit of $1.75/gallon). This credit would apply to sales or uses of qualified aviation fuel before the end of 2024.

Introduction of clean hydrogen credit

The IRA would introduce, as new section 45V, a clean hydrogen production tax credit. To be eligible, a taxpayer must produce the clean hydrogen after December 31, 2022 in facilities whose construction begins before January 1, 2033.

The credit for the taxable year would be equal to the kilograms of qualified clean hydrogen produced by the taxpayer during the taxable year at a qualified clean hydrogen production facility during the ten-year period beginning on the date the facility was originally placed in service, multiplied by the “applicable amount” with respect to such hydrogen.[5]

The “applicable amount” is equal to the “applicable percentage” of $0.60. The “applicable percentage” is equal to:

  • 20% for qualified clean hydrogen produced through a process that results in a lifecycle greenhouse gas emissions rate between 2.5 and 4 kilograms of CO₂e per kilogram of hydrogen;

  • 25% for qualified clean hydrogen produced through a process that results in a lifecycle greenhouse gas emissions rate between 1.5 and 2.5 kilograms of CO₂e per kilogram of hydrogen;

  • 4% for qualified clean hydrogen produced through a process that results in a lifecycle greenhouse gas emissions rate between 0.45 and 1.5 kilograms of CO₂e per kilogram of hydrogen; and

  • 100% for qualified clean hydrogen produced through a process that results in a lifecycle greenhouse gas emissions rate of less than 0.45 kilograms of CO₂e per kilogram of hydrogen.

A taxpayer would be entitled to increase this base credit by 500% if (i) it meets the prevailing wage and apprenticeship requirements or (ii) it meets the prevailing wage requirements, and its facility begins construction within fifty-nine days after the Secretary publishes guidance on the prevailing wage and apprenticeship requirements.

FOOTNOTES

[1] All references to section are to the Internal Revenue Code.

[2] The IRA would require new prevailing wage and apprenticeship requirements to be satisfied in order for a taxpayer to be eligible for increased credits. To satisfy the prevailing wage requirements, a taxpayer would be required to ensure that any laborers and mechanics employed by contractors or subcontractors to construct, alter or repair the taxpayer’s facility are paid at least prevailing local wages with respect to those activities. To satisfy the apprenticeship requirements, “qualified apprentices” would be required to construct a certain percentage of the taxpayer’s facilities (10% for facilities whose construction begins before January 1, 2023 and 15% for facilities whose construction begins on January 1, 2024 or after). A “qualified apprentice” is a person employed by a contractor or subcontractor to work on a taxpayer’s facilities and is participating in a registered apprenticeship program.

[3] An “energy community” is a brownfield site; an area which has (or had at any time after December 31, 1999) significant employment related to the extraction, processing, transport, or storage of coal, oil, or natural gas; and a census tract in which a coal mine closed or was retired after December 31, 1999 (or an adjoining census tract).

[4] A “qualified nuclear power facility” is any nuclear facility that is owned by the taxpayer, that uses nuclear energy to produce electricity, that is not an “advanced nuclear power facility” as described in section 45J(d)(1),  and is placed in service before the date that new section 45U is enacted.

“Reduction amount” is, for any taxable year, the amount equal to (x) the lesser of (i) the product of 3 cents multiplied by the kilowatt hours of electricity produced by a taxpayer at a qualified nuclear power facility and sold by the taxpayer to an unrelated person during the taxable year and (ii) the amount equal to 80% of the excess of the gross receipts from any electricity produced by the facility (excluding an advanced nuclear power facility) and sold to an unrelated person during the taxable year; (y) over the amount equal to the product of 2.5 cents multiplied by the kilowatt hours of electricity produced by the taxpayer at a qualified nuclear power facility and sold by the taxpayer to an unrelated person during the taxable year.

[5] “Qualified clean hydrogen” is hydrogen that is produced (i) through a process that results in a lifecycle greenhouse gas emissions rate of no more than 4 kilograms of CO₂e per kilogram of hydrogen, (ii) in the United States, (iii) in the ordinary course of the taxpayer’s trade or business, (iv) for sale or use, and (v) whose production and sale or use is verified by an unrelated party. The IRA does not explain what “verified by an unrelated party” means.

Article By David S Miller, Amanda H Nussbaum, Martin T Hamilton, J. Tyler Moser, and Rita N. Halabi of Proskauer Rose LLP

For more tax law legal news, click here to visit the National Law Review.

© 2022 Proskauer Rose LLP.

For A Limited Time Only – California Is Giving Away Corporations, LLCs And More!

As a result of the recent enactment of California’s 2022-2023 Budget Bill, the California Secretary of State’s office has announced a temporary waiver of many business entity filing fees.   This waiver will last until June 30, 2023, the end of the state’s current fiscal year.

Here is the Secretary of State’s list of filings for which no filing fee is currently being imposed:

  • Articles of Organization – CA LLC

  • Registration – Out-of-State LLC

  • Articles of Incorporation – CA Corporation – Benefit

  • Articles of Incorporation – CA Corporation – Close

  • Articles of Incorporation – CA Corporation – General Stock

  • Articles of Incorporation – CA Corporation – Insurer

  • Articles of Incorporation – CA Corporation – Professional

  • Articles of Incorporation – CA Corporation – Social Purpose

  • Registration – Out-of-State Corporation – Accountancy or Law (Professional)

  • Registration – Out-of-State Corporation – Insurer

  • Registration – Out-of-State Corporation – Stock

  • Articles of Incorporation – CA Nonprofit Corporation – Mutual Benefit

  • Articles of Incorporation – CA Nonprofit Corporation – Mutual Benefit – Common Interest Development

  • Articles of Incorporation – CA Nonprofit Corporation – Mutual Benefit – Credit Union

  • Articles of Incorporation – CA Nonprofit Corporation – Public Benefit

  • Articles of Incorporation – CA Nonprofit Corporation – Public Benefit – Common Interest Development

  • Articles of Incorporation – CA Nonprofit Corporation – Religious

  • Registration – Out-of-State Corporation – Nonprofit

  • Articles of Incorporation – CA Corporation – Agricultural Cooperative Association

  • Articles of Incorporation – CA Corporation – Cannabis Cooperative Association

  • Articles of Incorporation – CA Corporation – General Cooperative

  • Certificate of Limited Partnership – CA LP

  • Registration – Out-of-State LP

Note that the Secretary of State will continue to impose other fees not listed above.

It is unlikely that this temporary suspension of fees will have any significant impact on the number of business entities being formed under California law.  Historically, these fees have been relatively modest.  For example, the fee for filing articles of incorporation is $100.  Cal. Gov’t Code § 12186(c).  The real costs are the ongoing costs associated with the crushing tax and regulatory burdens placed on businesses by the state.  According to the Tax Foundation, California ranks 48th in business tax climate (just ahead of New York and New Jersey).

Article By Keith Paul Bishop of Allen Matkins Leck Gamble Mallory & Natsis LLP

For more corporate law legal news, click here to visit the National Law Review.

© 2010-2022 Allen Matkins Leck Gamble Mallory & Natsis LLP

Joint Trusts: A Useful Tool for Some Married Couples

Though not a silver bullet for every situation, in appropriate circumstances, a Joint Revocable Living Trust (“Joint Trust”) can provide a married couple with significant benefits and simplify the administration of assets upon death or incapacity.

The Probate and Estate Administration Process

In order to illustrate the benefits that can be achieved with a Joint Trust, it’s helpful to first understand the typical probate and estate administration process that occurs when a person dies.

When a person dies with a Will, the designated Executor in the Will typically submits the original Will for probate in the Estates Division of the Clerk of Superior Court in the county where the decedent resided at the time of death.  “Probate” is the legal process by which the court validates the submitted document as the legal Will of the decedent.  When offering the Will for probate, the designated Executor typically also files an application with the court to be appointed as Executor of the estate and granted Letters Testamentary, which is the legal document confirming the Executor’s authority to act for the decedent’s estate.

If a person dies without a Will, the decedent’s spouse or nearest relative typically files an application with the court in the county where the decedent resided at the time of death seeking to be appointed as Administrator of the estate and granted Letters of Administration which is the legal document confirming the Administrator’s authority to act for the decedent’s estate.

Once the court appoints an Executor or Administrator of the estate, as the case may be, that person is referred to as the “Personal Representative” of the estate and is charged with several duties and obligations.  Actions required of the Personal Representative include:

  • Taking control of the decedent’s assets;
  • Filing an inventory with the court identifying the value of all of the decedent’s assets to the penny;
  • Publishing a notice to creditors giving them three months to file claims with the estate;
  • Satisfying any creditors’ claims;
  • Distributing all remaining assets to the decedent’s beneficiaries; and,
  • Filing an accounting with the court to report to the penny what occurred with all of the assets.

The court supervises the process at every step along the way and must ultimately approve all actions taken in the course of the estate administration before the Personal Representative will be relieved of their appointment.

Movement Away from Probate

Over the last few decades, a trend has developed in the estate planning community to attempt to structure a person’s affairs so that no assets will pass through a probate estate supervised by the court.  That trend has developed in response to a public perception that the court supervised process is not only unnecessary but also yields additional costs.  For instance, additional fees must be paid to attorneys and other advisors to prepare the inventory, accountings, and other documentation necessary to satisfy a court that the estate was properly administered.  Also, in North Carolina, the court charges a fee of $4 per $1,000 of value that passes through the estate, excluding the value of any real estate.  Currently, there is a cap on this fee in the amount of $6,000, which is reached when the value of the estate assets equals $1,500,000.

Additionally, all reporting made to the court about the administration of an estate is public record, meaning that anyone can access the information.  The public nature of the process is why news organizations often are able to publish articles soon after a celebrity’s death detailing what assets the celebrity-owned and who received them.  Such publicity causes concern for many people because they fear that their heirs will become targets for gold-diggers.  This has further strengthened the trend away from court supervised estate administration.

Several techniques are available to avoid the court supervised estate administration process.  These include:

  • Registering financial accounts as joint with rights of survivorship;
  • Adding beneficiary designations to life insurance or retirement accounts; and,
  • Adding pay-on-death or transfer-on-death designations on financial accounts.

However, because it is rarely possible to utilize those techniques to fully exempt a person’s assets from the court supervised estate administration process, the most commonly used avoidance device is the Revocable Living Trust.

The Revocable Living Trust

A Revocable Living Trust is essentially a substitute for a Will.  To create a Revocable Living Trust, a person typically transfers the person’s assets to himself or herself as trustee and signs a written trust document that contains instructions as to what the trustee is to do with those assets while the person is alive as well as upon death.  The trust document also identifies who should take over as successor trustee when the person is no longer able to serve due to death or incapacity.

During life, the person’s assets in the trust may be used in any way the person, as trustee, directs, and the person may change the instructions in the trust document in a similar manner as one can change a Will.  If the person becomes incapacitated, the successor trustee is instructed to use the trust assets for the person’s care.

At death, the successor trustee wraps up the person’s affairs by utilizing the trust assets to satisfy all of the person’s liabilities and distributes the remaining assets to the beneficiaries identified in the trust document.  No court supervises the process, so no court fees are incurred.  Moreover, advisors’ fees related to preparing court filings are avoided.  Also, the administration of the trust is a private matter with nothing becoming public record.  This process often results in a much better outcome for the person’s beneficiaries as compared to having the assets pass through the court supervised estate administration process.

The Joint Trust

Typically, when a married couple utilizes a Revocable Living Trust-based estate plan, each spouse creates and funds his or her own separate Revocable Living Trust.  This results in two trusts.  However, in the right circumstances, a married couple may be better served by creating a single Joint Trust.

A Joint Trust tends to work best when a couple has the following characteristics:

  • The couple has a long, stable relationship;
  • Divorce is not a concern for either spouse;
  • The couple is willing to identify all assets as being owned one-half by each of them;
  • No creditors’ claims exist, whether current or contingent, for which the creditor could seek to collect from only one spouse and not the other;
  • Neither spouse has children from a prior relationship;
  • Each spouse is comfortable with the surviving spouse having full control over all of the assets after the death of one of the spouses; and,
  • The value of the couple’s assets is less than the federal estate tax exemption amount.  For deaths occurring in 2022, this amount is $12.06 million (or $24.12 million per couple) reduced by any taxable gifts made during life.

A couple who meets these criteria could establish a Joint Trust by transferring their assets to themselves as co-trustees and signing a trust document to provide instructions as to what the co-trustees are to do with the assets.  Typically, while both spouses are alive and competent, they retain full control over the trust assets and can change the trust document at any time.  If one of the spouses becomes incapacitated, the other spouse continues to control the trust and can use the trust assets for the couple’s care.

After the death of one of the spouses, the Joint Trust will continue.  The surviving spouse would continue serving as trustee and have full control over the trust assets.  No transfers of assets are required at the first death because all assets are already in the Joint Trust.

Upon the death of the surviving spouse, the designated successor trustee wraps up the surviving spouse’s affairs by utilizing the Joint Trust assets to satisfy any liabilities and distributes the remaining assets as directed in the trust document.

The following are some of the benefits afforded by a Joint Trust:

  • Throughout this entire process, there is no court involvement.  This minimizes costs and promotes privacy.
  • The couple no longer has to worry about whether a particular asset is owned by one of the spouses or by one of the spouses’ separate Revocable Living Trusts.  All assets are simply owned by the Joint Trust.
  • Since only one trust is ever created, no transfers need to be made after the death of the first spouse to die.  This simplification in the administration process minimizes advisors’ fees and other costs and is a key advantage of using a Joint Trust.

A Joint Trust can possibly yield even more benefits in certain situations.  For instance, it may be possible to characterize some or all of the assets in a Joint Trust as community property.  The benefit of having assets characterized as community property is that such property will receive a full basis adjustment for income tax purposes (commonly referred to as a “step-up” in basis) at the death of the first spouse to die as opposed to only one-half of the property receiving such a basis step-up.

Additionally, it may be possible to include asset protection features in the Joint Trust so that any real property owned by the trust would be afforded the same protection as real property owned by a married couple as tenants by the entireties.  Such protection prevents a creditor of just one spouse from enforcing the liability against the real property owned by the couple.  Though the details of these benefits are beyond the scope of this article, they demonstrate that a Joint Trust potentially can provide additional advantages beyond those listed above.

Conclusion

In the right circumstances, utilizing an estate plan that involves a Joint Trust can simplify a married couple’s affairs and, as a result, make the administration process easier after death and ultimately lower costs.  Any couple interested in a Joint Trust should contact competent counsel to assist them in evaluating whether the technique is appropriate for them.

Article By Zachary F. Lamb of Ward and Smith, P.A.

For more family, estates and trusts legal news, click here to visit the National Law Review.

© 2022 Ward and Smith, P.A.. All Rights Reserved.

Are You Ready for the UK Plastic Packaging Tax?

The plastic packaging tax (the ‘Tax’) came into force on 1 April 2022, with UK businesses that produce or import plastic packaging components in quantities of 10 or more tonnes per year affected. However, despite already being in force, research conducted by YouGov, on behalf of Veolia, has found that a high proportion of retail and manufacturing businesses (77% of those surveyed) are still not aware of the Tax.

As businesses gain increased awareness, the Tax is likely to receive a mixed reception. Whilst most would support the Government’s aim of increasing the use of recycled content in plastic packaging components, the Tax comes at a time when 92% of manufacturers and 90% of importers are reporting increased costs. With the introduction of the Tax, those businesses that have not already passed these increased costs on to customers will likely do so, meaning that the Tax may unintentionally add to the cost of living in the UK. This is compounded when one considers that the Tax came into force just five days before the controversial increase in national insurance contributions.

To manage increased costs and to ensure compliance with the law, businesses should pay close attention to the rules of the Tax.

© Copyright 2022 Squire Patton Boggs (US) LLP
For more articles on international laws, visit the NLR Global section.