Paper with sign Depreciation and a pen. Business concept.

Tax Break for Businesses: 100% Bonus Depreciation is Back Plus New Expensing of Qualified Production Property

The reinstatement of bonus depreciation is a critical component of recent U.S. tax legislation aimed at fostering economic growth. The 2017 Tax Cuts and Jobs Act (TCJA) had already put significant emphasis on bonus depreciation, but its permanent reinstatement under the “One Big Beautiful Bill Act” at 100% further emphasizes its importance, especially after considering the economic ramifications of the pandemic. This article explores the tax benefits, historical context, applicability, and specific rules surrounding bonus depreciation, ultimately outlining the recent changes in its reinstatement.

Historical Context: Originally Enacted to Stimulate the Economy – Bonus depreciation was first introduced as part of the Job Creation and Worker Assistance Act in 2002, allowing businesses to immediately deduct a substantial amount of the cost of qualifying property, rather than having to recover the cost as depreciation over a number of years. Initially, the deduction was set at 30% but was later increased to 50% and eventually to 100% during specific economic downturns.

The TCJA significantly altered bonus depreciation by allowing a 100% first-year deduction for qualified property, which was a substantial incentive for businesses. This provision was aimed at encouraging capital procurement and economic growth. However, the TCJA also included a sunset provision that began phasing out the bonus depreciation rate starting in 2023, and by 2027 no bonus depreciation would have been allowed.

Tax Benefits of Bonus Depreciation – Bonus depreciation allows businesses to fully deduct the cost of assets in the year they are placed into service, providing immediate tax relief and encouraging investment. This benefit enhances a company’s cash flow by reducing taxable income, making it a powerful incentive for purchasing new assets. However, utilizing bonus depreciation effectively requires careful planning. For example, the Section 199A deduction is based on qualified business income (QBI), and writing off large capital purchases can reduce an entity’s profit, consequently decreasing the Sec 199A deduction. Conversely, reducing taxable income might help avoid certain phase-outs and limitations associated with 199A.

Qualification Criteria for Bonus Depreciation – Qualifying property generally includes tangible property with a recovery period of 20 years or less, computer software, water utility property, and qualified improvements and productions. Recovery periods are set by the IRS. For example, most business vehicles have a recovery period of 5 years, while it is 7 years for most office equipment. No bonus depreciation is allowed for real property since the recovery period is either 27.5 or 39 years, depending on how the real property is used.

The TCJA expanded the scope of eligible property to include both new and used qualifying property, enhancing the attractiveness of investing in second-hand equipment. Public utility properties and dealer properties related to vehicles are specifically excluded, adding a layer of complexity.

Qualified Improvement and Property Issues – Qualified improvement property initially experienced legislative challenges. The intent under the TCJA was to combine properties such as leasehold, restaurant, and retail improvements into a category eligible for bonus depreciation under a 15-year MACRS recovery period. However, an oversight initially excluded these properties, later corrected by the CARES Act.

Revoking Bonus Depreciation and AMT Implications – Typically, opting out of bonus depreciation can only be revoked with IRS consent unless made on a timely filed return, allowing revocation within six months on an amended return. One noteworthy benefit is that property with claimed bonus depreciation is exempt from alternative minimum tax (AMT) adjustments, aligning AMT depreciation relief with regular tax purposes.

Business Automobiles and Other Depreciation Rules – Special rules and deduction limitations apply to business automobiles categorized as “luxury autos.” The depreciation limit is augmented by $8,000 in years when bonus depreciation is permitted, as established by the TCJA. It is not addressed in OBBBA so it is assumed the extra amount will continue.

Related party rules, and the application of Section 179, which requires pre-bonus depreciation adjustments, add further complexity. (Section 179 provides another way to write off purchase of some business property without having to depreciate the asset’s cost, but the deduction will need to be recaptured if business use drops to 50% or less in a year after the year placed in service.)

Issues Addressed by the Recent Legislation – The OBBBA reinstatement extends the 100% deduction for qualified property purchased and placed in service after January 19, 2025. OBBBA has made bonus depreciation permanent. For qualifying property placed in service between January 1, 2025, and January 19, 2025, the bonus depreciation remains at 40%.

This continuity provides businesses with long-term planning capabilities and aligns investments with broader economic policies intended to spur growth.

Qualified Production Property – The “One Big Beautiful Bill Act” also introduced a provision to promote manufacturing in the U.S. Under pre-OBBBA law, taxpayers were generally required to deduct (depreciate) the cost of business-related nonresidential real property over a 39-year period. And bonus depreciation was generally limited to tangible personal property, not real estate.

Effective for property placed in service after July 4, 2025, OBBBA generally, allows taxpayers to immediately deduct 100% of the cost of certain new factories, certain improvements to existing factories, and certain other structures. Specifically, this provision allows taxpayers to deduct 100% of the adjusted basis of qualified production property in the year such property is placed in service.

Qualified Production Property refers to specific portions of nonresidential real property that meet a set of criteria:

  • The property must be used by the taxpayer as an integral part of a qualified production activity.

  • It must be placed in service within the United States or any possession of the United States.

  • The original use of the property must commence with the taxpayer.

  • Construction of the property must begin after January 19, 2025, and before January 1, 2029.

  • The property must be designated by the taxpayer in an election on the taxpayer’s tax return.

  • The IRS will issue instructions on how to make this election.

  • The property must be placed in service before January 1, 2031.

  • Any portion of a property that is used for offices, administrative services, lodging, parking, sales activities, research activities, software engineering activities, or certain other functions is ineligible for this benefit

Production Machinery: Even though manufacturing machinery that does not qualify as qualified production property is not expensed under this provision, it will generally qualify for 100% bonus depreciation that is reinstated by OBBBA.

Qualified Production Activity: Generally, a “Qualified Production Activity” is defined as follows:

  • Activities Involved: It refers to the manufacturing, production (limited to agricultural and chemical production), or refining of a qualified product. These activities should result in a substantial transformation of the property comprising the product.

Qualified Product: A qualified product refers to any tangible personal property that is not a food or beverage prepared in the same building as a retail establishment in which such property is sold.In summary, for an activity to qualify under this section, it must involve significant production or transformation processes, excluding certain types of agricultural and chemical productions.

Recapture rules apply in certain cases where, during the 10-year period after qualified production property is placed in service, the use of the property changes. When the property is sold, to the extent of the bonus depreciation taken, any gain will be ordinary income rather than capital gain,

The reinstatement of bonus depreciation is a vital tool for economic rejuvenation, providing businesses with immediate tax incentives to make capital investments. While it offers substantial benefits, understanding the complexities and planning strategically around QBI deductions, AMT implications, and specific qualifications is essential. Amid legislative nuances and phased-out provisions, bonus depreciation remains a keystone in strategic business planning for enduring economic development. The addition of the qualified production property provides a huge incentive for building production facilities in the U.S. While thought of as a deduction for big business, it can also apply to small manufacturing facilities.

If you are in business and have questions about how the Bonus Depreciation can benefit your business, please contact our office.

Student success scholarships aimed at alleviating education costs. A glass jar full of coins and a graduation cap symbolize both investment in education and saving for college.

Unravelling Education Savings: Mastering 529 Plans to Maximize Tax Benefits

Section 529 plans are tax-advantaged savings plans designed to encourage saving for future education costs. They are legally known as “qualified tuition plans” and are sponsored by states, state agencies, or educational institutions. With rising education expenses, these plans offer a valuable option for families to invest in the future of a child’s education. Let’s delve into the specifics of who can contribute, the contribution limits, and the various uses of these funds, including recent updates under the “One Big Beautiful Bill” Act (OBBBA).

Who Can Contribute? A 529 plan can be funded by anyone — parents, grandparents, relatives, or friends. There is no restriction on who can make contributions, or what the contributor’s income is, as long as the total contributions for the beneficiary do not exceed the plan’s limits. This flexibility makes 529 plans a popular gift option for birthdays, holidays, or special occasions.

Maximum Contribution Without Gift Tax: Contributions to a 529 plan are considered gifts under the federal tax code. As of 2025, individuals can contribute up to the annual gift tax exclusion limit of $19,000 per beneficiary without triggering the requirement to file a gift tax return. This amount is adjusted annually for inflation, allowing for potential increases in future years.

For example, a married couple could contribute a total of $38,000 to their grandchild’s 529 plan in 2025, provided they hadn’t made other gifts to the grandchild that reduced the available gift tax exclusion.

The 5-Year Advance Contribution Rule: One of the unique features of 529 plans is the ability to “superfund” an account by front-loading contributions. This rule allows individuals to contribute up to five times the annual gift tax exclusion amount in a single year without incurring gift taxes, provided they do not make additional gifts to the same beneficiary over the subsequent four years.

For 2025, this means contributing a lump sum of up to $95,000. Superfunding a 529 plan while the intended beneficiary is young will allow the funds to grow tax free for a longer time.  

Additional Contributions During the 5-Year Period: If the annual gift tax exclusion limit increases during the five-year period after a lump-sum contribution has been made, it is possible to make an additional contribution up to the new limit without incurring gift taxes. For instance, if the limit increases due to inflation adjustments, contributors can take advantage of the increased exclusion amount.

State Limitation on Sec 529 Contributions: The maximum contribution limit for Section 529 plans can vary significantly by state, as each state sets its own limit based on its estimates of the future costs of education. However, the typical range for maximum account balances across most states is from $235,000 to over $550,000 per beneficiary. It’s crucial to check the specific limit for the state plan you are interested in, as these caps are intended to cover qualified education expenses and are periodically adjusted to account for rising education costs.

Also, of note: individuals are not limited to plans from their home state.

Paying Tuition Directly and Avoiding Gift Tax Issues: Grandparents often play a pivotal role in supporting a child’s educational journey, and many might contemplate utilizing their personal investment strategies to fund a family member’s education, believing they can achieve better returns than a 529 plan offers. However, for those who prioritize giving substantial financial support without impacting gift tax implications, it’s important to understand the benefits of direct tuition payments. The gift tax rules provide a strategic advantage by not considering the direct payment of tuition to an educational institution as a taxable gift. This allows grandparents to pay tuition bills directly without incurring gift tax consequences, enabling them to simultaneously maintain their investment portfolios while contributing significantly to a grandchild’s education in a tax-efficient manner. This approach not only aids in reducing estate value but also maximizes support for education without impinging upon annual gift tax exclusion limits.

Qualified Uses of 529 Plan Funds: 529 plan funds can be used for a vast range of educational expenses. These include:

  • Tuition and fees for college, university, or eligible postsecondary institutions.
  • Books, supplies, and equipment required for courses.
  • Computers, peripheral equipment and internet access.
  • Special needs services for a beneficiary with special needs, necessary for enrollment or attendance.
  • Room and board for students enrolled at least half-time.
  • K-12 Education: The OBBBA has expanded the use of 529 plans to cover more K-12 education expenses, permitting tax-free distributions of up to $20,000 annually per beneficiary for tuition and related expenses at public, private, or religious schools, starting January 1, 2026. From 2018 through 2025 only tuition of up to $10,000 per year was allowed as a tax-free distribution for K-12 expense. Among the newly eligible expenses are books or other instructional materials, online educational materials, tuition for tutoring or educational classes outside of the home, fees for achievement tests and advanced placement tests, and fees related to enrolling in colleges and universities.
  • Apprenticeships and Additional Education Expenses: New provisions under the OBBBA and other recent legislation have expanded the types of qualified expenses to include costs associated with registered apprenticeship programs and “qualified postsecondary credentialing expenses.”

Taxation and Penalties on Non-Qualified Distributions: While 529 plans offer tax-free growth and withdrawals for qualified expenses, distributions not used for qualified education expenses are subject to income tax and a 10% penalty on the earnings portion. The contributions, which were made with after-tax dollars (i.e., they weren’t tax deductible), are not taxable, but the appreciation of those contributions is.

The IRS does offer exemptions from the 10% penalty in certain situations, such as if the beneficiary receives a scholarship. In these scenarios, the penalty is waived, although the earnings would still be subject to income tax.

Rollover Options:

  • Rollover to an ABLE Account – Under the ABLE Act, funds in a 529 plan can be rolled over into an Achieving a Better Life Experience (ABLE) account for the same beneficiary or a qualifying family member without incurring income taxes or penalties. This option allows for flexibility if the original beneficiary needs support for disability-related expenses rather than educational costs.
  • IRA Rollover for Unused Funds – The SECURE Act 2.0 introduced a provision allowing up to $35,000 in leftover 529 plan funds to be rolled over into a Roth IRA for the designated beneficiary. This provides a way to utilize any excess funds that were originally earmarked for education by rolling the excess amount into a tax-advantaged retirement account. However, eligibility for a Roth IRA and contribution limits remain applicable, and the $35,000 rollover limit is a lifetime limit.

In conclusion, Section 529 plans offer a multifaceted and flexible approach to saving for education. They provide tax advantages while allowing contributors to offer significant support for a beneficiary’s educational journey. With recent legislative updates, such as those under the OBBBA, the scope and utility of 529 plans have expanded, encompassing a wider array of educational uses and offering additional financial planning options through rollovers to ABLE accounts and IRAs. As education costs continue to rise, these plans remain an essential tool for families planning for the future.

Consulting with a tax professional can provide invaluable assistance in providing personalized advice tailored to individual circumstances, helping to optimize educational savings strategies and ensure compliance with gift tax rules. If you’re considering a strategy involving 529 plans, reaching out to our office is a prudent step to ensure your plan aligns with current tax laws and best practices.

Businesswoman Doing Stock Paperwork

Qualified Small Business Stock (QSBS): A Huge Tax Benefit

Qualified Small Business Stock (QSBS) offers a compelling tax advantage for investors aiming to support small business ventures. Introduced as a part of the Revenue Reconciliation Act of 1993, QSBS enables investors to exclude a considerable portion of their capital gains from taxable income under Section 1202 of the Internal Revenue Code or to elect to roll over the gain into other QSBS. This article explores important facets of QSBS—from its definition to its complex tax treatments.

What is Qualified Small Business Stock (QSBS)? QSBS refers to shares held in a C corporation that qualify for tax benefits outlined in Section 1202. Not every C corporation stock meets the criteria; specific conditions around issuing corporations, holding periods, and more must be satisfied.

What Stock Qualifies as QSBS? To qualify as QSBS, stock must be issued by a domestic C corporation that actively conducts a qualified trade or business. Key qualifications include:

  • Small Business Status: At the time of stock issuance, the corporation’s gross assets must not exceed $50 million ($75 million after July 4, 2025) before and after the issuance.
  • Active Business Requirement: At least 80% of the corporation’s assets must be actively used in the conduct of the qualified trade or business.
  • Qualified Trade or Business: Most service-oriented businesses, such as health, law, and financial services, as well as farming and operating hotels, restaurants or similar businesses, are excluded. The business should engage primarily in qualifying activities.

The Tax Benefits of QSBS: One of the most attractive features of QSBS is the potential to exclude up to 100% of the capital gains from the sale of such stock. Here’s how the exclusions have evolved for stock acquired:

  • Before 2009 amendments: 50% exclusion on capital gains.
  • Post-2009 amendments and before the 2010 Small Business Jobs Act: 75% exclusion.
  • After the 2010 Small Business Jobs Act and before the OBBBA change: 100% exclusion for stock acquired between September 28, 2010, and before July 5, 2025.

Maximum Exclusions and Updated Legislation under OBBBA: The One Big Beautiful Bill Act (OBBBA), effective for stock acquired after July 4, 2025, introduced new exclusions:

  • 50% for three-year holds
  • 75% for four-year holds
  • 100% for five-year holds

For stocks acquired prior to July 5, 2025, the investor’s excludable gain is limited to $10 million or ten times the taxpayer’s adjusted basis in the QSBS, whichever is greater. For stock acquired post-July 4, 2025, the limit increases to $15 million with inflation adjustments in future years.

Disqualifications and Special Cases: Certain conditions render stock ineligible for QSBS benefits:

  • Disqualified Stock: Stock acquired via repurchase from the same corporation within two years.
  • S Corporation Stock: Entity status disqualifies S corporation stock from qualifying unless converted to C corporation status.

Transfers, Passthroughs, and Rollover Opportunities

  • Gift Transfers: QSBS can be transferred as a gift; the recipient inherits the holding period, maintaining potential eligibility for tax benefits.
  • Passthrough Entities: Partnerships and S corporations may hold QSBS, with each partner potentially benefiting from QSBS exclusions, assuming specific conditions are met.
  • Gain Rollover Election under Section 1045: Allows deferral of gains from sale of QSBS held for more than 6 months. When this option is elected, the gain not taxed reduces the basis of the acquired stock. The QSBS gain exclusion can be used later when the replacement stock is sold and after it has been held the required number of years.

Understanding Tax Rates and Exclusions

Not all gains are excludable under Section 1202. Additionally:

  • Non-excludable QSBS gains do not qualify for the 0%, 15%, or 20% capital gains rates, instead subjecting the gains to a maximum tax rate of 28%.

Alternative Minimum Tax (AMT) and Electivity – Exclusions under QSBS were once considered a preference item for AMT, but recent amendments remove its consideration as AMT preference. The treatment under Section 1202 is generally automatic given eligibility is met, without an explicit elective procedure.

QSBS offers significant tax savings and encourages investments in domestic small businesses. By understanding the qualifications, benefits, and limitations, investors can more effectively strategize their portfolios to harness QSBS provisions.

Remaining informed and consulting with our office can ensure compliance and optimization of tax benefits.

RBG - CORE Awards Posts 2024

Celebrating the 2025 RBG Core Awards and This Year’s Honorees

At RBG, our Core Values are more than just guiding principles — they define how we work, how we support one another, and how we continue to grow as a firm. The Core Awards were established to celebrate individuals who not only embody our core values but also inspire others through their actions and leadership.

Now in its third year, the RBG Core Awards continue to highlight those who lead by example, making a meaningful difference for our people, our clients, and our community. These awards also recognize team members who are committed to finding balance and purpose through our Live Well, Work Well initiative.

We’re proud to announce the 2025 Core Award winners — eight exceptional individuals whose contributions truly reflect the spirit of RBG.

Passion Award: Matt Day

“We spent almost four years trying to find the right person to lead CAAS, and in November 2023, we finally got it right.”

Since joining RBG, Matt Day has brought an unmistakable passion to his role. Whether he’s leading his team or exploring a new opportunity, Matt’s energy and enthusiasm elevate everyone around him. His ability to stay deeply engaged helps foster positive experiences for both our clients and our people. Matt’s arrival has been a major win for the firm, and his dedication is a shining example of what passion looks like in action.

Respect Award: Rebecca Jacobs

“Respect is a cornerstone of Rebecca’s DNA.”

Rebecca Jacobs embodies respect in every interaction. She listens with empathy, offers sound and thoughtful counsel, and consistently earns the trust of those around her. Her colleagues admire her for the calm, inclusive, and honest way she engages with others, and for building the kind of relationships that strengthen our culture. Rebecca reminds us that respect is the foundation for everything we do well together.

Ownership Award: Lauren Erickson

“Lauren takes care of all of us.”

From planning firm events to stepping up wherever help is needed, Lauren Erickson leads with ownership. She approaches every task with enthusiasm and reliability, always going above and beyond to create positive experiences. Her contributions help shape the strong and connected culture that makes RBG a great place to work. Lauren’s initiative and care are models of what it means to take full ownership of your role.

Stewardship Award: Catherine Duncan

“Catherine is one of the first people I go to when facing a difficult decision.”

Catherine Duncan’s commitment to the long-term health of the firm is unwavering. She brings thoughtful insight, balanced judgment, and an ability to focus on what’s best for both today and tomorrow. Her dedication to the firm’s ongoing success has earned her the trust of peers and leadership alike. Catherine exemplifies stewardship through her consistent focus on sustainable impact.

Teamwork Award: Morgan Ocker

“She has become an integral part of our Tax department.”

Though relatively new to RBG, Morgan Ocker has already made a lasting impact on her team. She actively mentors staff, takes the time to explain the “why” behind processes, and creates space for learning and collaboration. Whether in-person or remote, Morgan is approachable, dependable, and invested in helping others succeed. Her efforts embody the spirit of true teamwork.

Elevation Award: Akshita Purohit

“She transformed our data accuracy and reporting process.”

In just 18 months, Akshita Purohit has dramatically improved how we manage and report data. Her technical expertise in Excel and her innovative thinking have brought new levels of efficiency and accuracy to our workflows. Beyond her skills, Akshita brings patience, humor, and a generous spirit to every interaction. She’s raised the bar for what’s possible and made the journey enjoyable along the way.

Community Award: Thames Kennedy

“She helps define who we are at RBG.”

Thames Kennedy is a huge advocate for building community, both within the firm and beyond. As chair of the Service and Social Committee, she plays a key role in planning events that bring our people together and strengthen our culture. Outside of RBG, she serves on the TSCPA local board, participates in professional advocacy efforts, and encourages others to get involved. Thames’ commitment to service creates opportunities for all of us to connect and give back.

Live Well, Work Well Award: Hunter Wooley

“He’s made for exercise — and for encouraging others to join him.”

Hunter Wooley leads by example when it comes to wellness. Whether it’s working with a personal trainer, taking a cycling class, or simply walking around the office with coffee in hand, he’s always in motion. More importantly, he always encourages his coworkers to join him in his wellness activities, inspiring a firm culture of movement and balance. Hunter lives the Live Well, Work Well value daily with both authenticity and enthusiasm.

About the Core Awards

The RBG Core Awards were created to recognize individuals who embody our firm’s values in a meaningful and consistent way. The awards include:

  • Passion – Invested. Enthusiastic. Beyond expectations.
  • Respect – Valuing each other, our work, and those we serve.
  • Ownership – Taking responsibility for outcomes and results.
  • Stewardship – Acting today to ensure tomorrow’s success.
  • Teamwork – Communicating and collaborating for better results.
  • Elevation – Raising the bar, innovating, and enabling success.
  • Community – Giving back and helping others grow.
  • Live Well, Work Well – Achieving balance and well-being in life and work.

Each year, team members from across the firm come together to nominate colleagues who inspire, lead, and uplift through their actions. A representative committee thoughtfully reviews all submissions, and winners are announced at our fall firm-wide meeting. These honorees are not only celebrated at the event, they are recognized and appreciated throughout the following year for the meaningful impact they make at RBG.

Congratulations again to all of this year’s honorees. Your actions, commitment, and character set the standard for excellence at RBG, and we’re proud to celebrate your impact.

To learn more about this year’s winners, be sure to check out our Core Values page.

Picture1

Making Home Improvements? You May Qualify for a Substantial Tax Credit

The Internal Revenue Code Section 25C credit, also known as the Energy Efficient Home Improvement Credit, is a valuable tax incentive for homeowners who make qualifying energy-saving improvements to their existing homes. This credit has undergone several modifications since its inception in 2006, with significant changes introduced by the Inflation Reduction Act (IR Act). Don’t confuse this credit with the one for installing home solar systems, which is in Sec 25D of the tax code. This article delves into the details of the Sec 25C credit, including credit percentages, qualified items, annual limits, home energy audits, qualifying homes, basis adjustments, and more. 

Credit Percentage – For years 2022 through 2032 the credit is 30% of the sum of the amount paid or incurred by the taxpayer for qualified energy efficiency improvements installed during that year in a home used by the taxpayer as their principal residence.  

Specific Qualified Items and Per Item Annual Limits – The following energy-efficient home improvements are eligible for the Energy Efficient Home Improvement Credit:

Components Subject to an Annual $1,200 Aggregate Credit Limit:

Windows and Skylights: $600 annual limit.

Exterior Doors: $250 per door, up to a total of $500 for all exterior doors.

Central Air Conditioners, Natural Gas, Propane, or Oil Water Heaters, and Furnaces: $600

Components Subject to an Annual $2,000 Aggregate Credit Limit:

Heat Pumps and Biomass Stoves and Boilers. 

Home Energy Audits – 30% of costs, up to a $150 annual limit.

Annual Credit Limits, $1,200 vs. $2,000 – The Sec 25C credit has two primary annual limits:

  • $1,200 Annual Limit: This limit applies to most energy-efficient home improvements, including windows, skylights, exterior doors, and residential energy property expenditures. The $1,200 limit can be increased by up to $150 for a home energy audit, making the maximum potential credit $1,350 in a year when an audit is conducted.
  • $2,000 Annual Limit: This higher limit applies specifically to heat pumps, heat pump water heaters, and biomass stoves and boilers.

Home Energy Audits – A home energy audit is an inspection and written report that identifies the most significant and cost-effective energy efficiency improvements for a dwelling unit. The audit must be conducted by a certified home energy auditor. The credit for a home energy audit is 30% of the cost, up to $150. Taxpayers can claim this credit once per year.  

Qualifying Homes – Credit is only allowed for components installed in or on a dwelling unit located in the United States, and for energy-efficient building envelope components such as insulation and exterior windows and doors, the taxpayer must own and use the home as the heir principal residence. In addition, the energy-efficient property must reasonably be expected to be in use for at least 5 years.  

For home energy audits, the taxpayer must own the home oruse it as a principal residence. 

To claim a credit for the costs of certain types of water heaters, heat pumps, central air conditioners, furnaces, hot water boilers, stoves, boilers, and electric system improvements and replacements (collectively termed residential energy property), the taxpayer must use the home as a residence, but does not have to own the home or use it as a principal residence.

  • Manufactured Homes – The term “dwelling unit” includes a manufactured home which conforms to Federal Manufactured Home Construction and Safety Standards (part 3280 of title 24, Code of Federal Regulations) (Sec 25C(c)(4))
  • Original Use -The original use of such component commences with the taxpayer.

Basis Adjustment Requirements – The basis of the property is increased by the amount of the expenditure and reduced by the amount of the credit. This creates a different basis for federal and state purposes where the state does not provide a credit or if it differs from the federal credit amount.

Nonrefundable Credit, AMT, and Carryover – The Sec 25C credit is a nonrefundable personal credit, meaning it can only reduce the taxpayer’s tax liability to zero but cannot result in a refund. The credit can offset the Alternative Minimum Tax (AMT). However, there is no carryover provision for unused credits; they must be used in the year they are claimed.

Manufacturer’s Certification and Qualified Product ID Number – Taxpayers can rely on a manufacturer’s certification that a component is eligible for the credit, provided the IRS has not withdrawn the certification. 

Starting after 2024, taxpayers must include the qualified product ID number of the item on their tax return for the year the credit is claimed. Omission of a correct product identification number is treated by the IRS as a mathematical or clerical error.

Differences Between Sec 25C Credit and Rebates – The Sec 25C credit is a federal tax credit claimed on the taxpayer’s tax return for the year the installation is made, while rebates are typically cash incentives provided by manufacturers, utilities, or government programs. Rebates reduce the out-of-pocket cost of the improvement, which in turn reduces the amount eligible for the credit. 

For example, if a taxpayer receives a rebate for purchasing an energy-efficient window, the cost of the window is reduced by the rebate amount before calculating the credit.

Installation Costs – For certain items qualified for the Section 25C credit, the cost of both installation labor and materials can count towards the credit. Specifically, the credit covers:

  • Residential Energy Property – This includes items such as heat pumps, biomass stoves, and biomass boilers. For these items, the credit is 30% of the costs, including labor, up to $600 for each item, provided they meet the energy efficiency requirements specified.
  • Building Envelope Components – This includes items like insulation, exterior windows, skylights and doors. However, for these components, the cost of installation labor is not included in the credit calculation—only the cost of the materials themselves is eligible.

Planning Modifications to Maximize Credits – Taxpayers can strategically plan their energy-efficient home improvements over several years to maximize the credits. By spreading out the improvements, taxpayers can take advantage of the annual limits each year.  

The Sec 25C credit for energy-efficient home modifications offers significant tax savings for homeowners who invest in energy-saving improvements. By understanding the credit percentages, qualified items, annual limits, and other requirements, taxpayers can make informed decisions and maximize their benefits. Whether it’s through home energy audits, upgrading heating systems, or installing new windows, the Sec 25C credit provides a valuable incentive for making homes more energy-efficient and reducing overall energy costs.

Please contact our office to see if and how you might benefit from this credit.

Adult senior 60s woman working at home at laptop. Serious middle aged woman at table holding document calculating bank loan payments, taxes, fees, retirement finances online with computer technologies

Essential Tax and Financial Planning Strategies for Boomers and Gen Xers Approaching Retirement

As Boomers and Gen Xers approach retirement, effective financial planning becomes crucial to ensure a comfortable and secure future. This article outlines essential tax and financial planning strategies tailored to the unique needs of individuals nearing retirement. By understanding and implementing these strategies, you can navigate the complexities of retirement planning with confidence.

Understanding Retirement Goals

Before diving into specific strategies, it’s important to clearly define your retirement goals. Imagine Jane, a 58-year-old marketing executive, who dreams of traveling the world and spending more time with her grandchildren. To achieve this, Jane needs to assess her retirement lifestyle expectations and estimate her retirement expenses. This foundational step helps in creating a realistic financial plan that aligns with her aspirations.

Maximizing Retirement Contributions

One of the most effective ways to prepare for retirement is to maximize contributions to retirement accounts. For those over 50, catch-up contributions allow you to contribute more to your 401(k) and IRA, helping to boost your retirement savings. Take the example of Tom, a 52-year-old engineer, who increased his 401(k) contributions by taking advantage of catch-up provisions. This strategic move significantly enhanced his retirement nest egg, providing him with greater financial security.

Tax-Efficient Withdrawal Strategies

Understanding the tax implications of your retirement accounts is essential. Required minimum distributions (RMDs) must be taken from traditional IRAs and 401(k)s starting at age 73 for years 2023 through 2032. Planning your withdrawals strategically can help minimize your tax burden. Consider the benefits of Roth IRAs, which offer tax-free withdrawals. For instance, Sarah, a 65-year-old business owner, diversified her retirement accounts by converting a portion of her traditional IRA to a Roth IRA. This allowed her to manage her tax liabilities more effectively during retirement.

Social Security Optimization

Maximizing Social Security benefits requires careful planning. Delaying benefits until age 70 can result in higher monthly payments. Evaluate your financial situation to determine the optimal time to claim Social Security. John, a 67-year-old teacher, decided to delay his Social Security benefits until age 70. This decision increased his monthly benefits, providing him with a more substantial income stream during retirement.

Healthcare and Long-Term Care Planning

Healthcare costs can be a significant expense in retirement. Ensure you understand Medicare options and consider supplemental insurance to cover additional costs. Planning for long-term care is also crucial, as these expenses can quickly deplete your savings. Mary, a 60-year-old nurse, invested in a long-term care insurance policy. This proactive step ensured that she would have the necessary resources to cover potential long-term care expenses, protecting her retirement savings.

Estate Planning Essentials

Estate planning is not just for the wealthy. Having a will and, if necessary, a trust, ensures your assets are distributed according to your wishes. Be aware of the tax implications of your estate plan to minimize the tax burden on your heirs. Consider the story of Robert, a 62-year-old entrepreneur, who established a trust to manage his estate. This not only provided clarity on asset distribution but also minimized estate taxes, ensuring a smoother transition for his heirs.

Investment Strategies for Retirement

As you approach retirement, your investment strategy should balance risk and return. Diversification and proper asset allocation can help protect your savings while still providing growth potential. Consider shifting to more conservative investments as you near retirement. Lisa, a 59-year-old financial analyst, rebalanced her investment portfolio to include more bonds and dividend-paying stocks. This strategy reduced her exposure to market volatility while still generating a steady income stream.

Managing Debt Before Retirement

Carrying debt into retirement can be risky. Develop a plan to pay down high-interest debt before you retire. Reducing your debt load can improve your financial security and provide peace of mind. Mark, a 55-year-old architect, focused on paying off his mortgage and credit card debt before retiring. This decision significantly reduced his monthly expenses, allowing him to enjoy a more financially stable retirement.

Selling a Company

For those who own a business, selling the company can be a significant part of retirement planning. Properly valuing the business, understanding the tax implications, and planning the sale can ensure you maximize the financial benefits. Consider the example of Susan, a 60-year-old small business owner, who sought professional advice to prepare her company for sale. By optimizing her business operations and understanding the tax consequences, Susan was able to sell her company at a premium, providing her with a substantial retirement fund.

It’s Not Too Late To Plan

Effective tax and financial planning is essential for Boomers and Gen Xers approaching retirement. By understanding your goals, maximizing contributions, planning tax-efficient withdrawals, optimizing Social Security, preparing for healthcare costs, managing debt, and considering the sale of a business, you can ensure a secure and comfortable retirement.

To navigate these complexities and tailor these strategies to your unique situation, seek professional advice from our office. Our experts can help you analyze best practices and develop a personalized financial plan that aligns with your retirement goals.

Photo of social security card with one hundred dollar bills. High quality photo

A Retiree’s Guide to Reducing Taxes on Social Security Benefits

Social Security benefits serve as a crucial financial backbone for millions of retirees, disabled individuals, and families of deceased workers in the United States. However, the taxation of these benefits often presents a complex landscape for beneficiaries. This article delves into the intricacies of how Social Security benefits are taxed, the conditions under which these benefits become taxable, and strategies to minimize tax liabilities.

These benefits are part of a social insurance program that provides retirement income, disability income, and survivor benefits. Funded through payroll taxes collected under the Federal Insurance Contributions Act (FICA) and the Self-Employment Contributions Act (SECA), the Social Security Administration administers these benefits. The retirement benefits an individual receives is based on their lifetime earnings in work in which they paid Social Security taxes, modified by other factors, especially the age at which benefits are claimed. Benefits are adjusted annually for inflation.

Taxation Thresholds and Conditions – The taxation of Social Security benefits is contingent upon the beneficiary’s “combined income,” which includes adjusted gross income, nontaxable interest, and half of the Social Security benefits. The Internal Revenue Service (IRS) uses this combined income to determine the portion of benefits subject to taxation.

For individuals, if the combined income falls between $25,000 and $34,000, up to 50% of the benefits may be taxable. Should the combined income exceed $34,000, up to 85% of the benefits could be taxable. For married couples filing jointly, these thresholds are set between $32,000 and $44,000 for up to 50% taxation, and above $44,000 for up to 85% taxation. When the combined income is less than $25,000 ($44,000 for married joint filers), none of the Social Security benefits are taxable, with an exception for some married taxpayers filing separate returns as noted below.

Railroad Retirement – The taxation rules that apply to Social Security benefits also apply to Railroad Retirement benefits. Railroad Retirement benefits are reported on Form RRB-1099 whereas Social Security benefits are reported on Form SSA-1099. 

Married Taxpayers Filing Separate – Some married taxpayers for one reason or another may choose not to file jointly and instead each spouse files a return using the status Married Taxpayer Filing Separately.  Married individuals filing separately generally face taxation on up to 85% of benefits, regardless of combined income, if they lived with their spouse at any point during the tax year.

Survivor Benefits – Social Security survivor benefits are payments made by the Social Security Administration (SSA) to the family members of a deceased person who earned enough Social Security credits during their lifetime. Eligible family members include widows, widowers, divorced spouses, children, and dependent parents.

These benefits are a crucial financial support for families who have lost a wage earner. However, many beneficiaries are unaware that these benefits may be subject to federal income tax, depending on various factors.

Survivor benefits can be taxable and the amount that is taxable is determined in the same manner as for a retiree as discussed previously based on the beneficiary’s total income and filing status. 

Children and Social Security Survivor Benefits – A child’s taxable Social Security benefits are treated as unearned income and subject to the Kiddie Tax rules and thus will generally be taxed at their parent’s top marginal tax rate.The Kiddie Tax is designed to prevent parents from shifting large amounts of investment income to their children to take advantage of the child’s lower tax rate.

  • If the child only receives Social Security benefits and has no other income, the benefits are typically not taxable, and the child may not need to file a tax return.
  • If the child has other income, the taxability of Social Security benefits depends on their “combined income.” Combined income includes the child’s adjusted gross income (AGI), nontaxable interest, and one-half of the Social Security benefits. Basically, the same way a retiree’s benefits are taxed. 

Strategies to Minimize Taxation – Beneficiaries can adopt several strategies to minimize the taxation of their Social Security benefits.

  • Income Planning – Adjusting the timing and sources of income can help keep combined income below the taxable thresholds. For example, delaying withdrawals from retirement accounts or strategically timing the sale of investments can reduce AGI. If required to take distributions from a traditional IRA or 401(k) account, only take the minimum amount required if possible.
  • Tax-Deferred Savings – Contributing to tax-deferred savings accounts, such as traditional IRAs or 401(k)s, can lower AGI, potentially reducing the taxable portion of Social Security benefits. Of course, this suggestion only applies to those who have earned income (wages, self-employment income).
  • Tax-Efficient Investments – Investing in tax-efficient vehicles, such as Roth IRAs or growth stocks that aren’t currently paying dividends, can generate income that doesn’t count toward combined income, thus reducing the taxability of Social Security benefits.  
  • Deductions and Credits – Taking advantage of all eligible tax deductions can lower AGI, which in turn can reduce the taxable portion of Social Security benefits.

Other Issues

  • Tax Withholding on SS BenefitsTaxpayers can elect tohave federal income tax withheld from their Social Security benefits and/or the SSEB portion of Tier 1 Railroad Retirement benefits. Use Form W–4V to choose one of the following withholding rates: 7%, 10%, 12%, or 22% of the total benefit payment (flat dollar amounts aren’t permitted).  Once completed, the W-4V form can either be mailed or faxed to the Social Security Administration.  
  • Same-Sex Married CouplesThe Supreme Court determined that same-sex couples have a constitutional right to marry in all states.  As a result, the Social Security Administration says that same-sex couples will be recognized as married for purposes of determining entitlement of Social Security benefits.  Therefore, their Social Security benefits are taxed the same way as for married taxpayers. 
  • Gambling & Social Security Taxation – For tax purposes gambling winnings are added to a taxpayer’s income while gambling losses are deducted as an itemized deduction. Thus, even if the gambling resulted in a net loss, the full amount of the gambling winnings is added to the combined income which can make more of the Social Security benefits be taxable or cause some of the benefits to be taxable at the higher 85% rate. 

Example: Suppose the combined income, without considering gambling income, for a married couple filing a joint return is $30,000. That is below the combined income Social Security taxable income threshold of $32,000. Thus, none of the couple’s Social Security benefits are taxable. However, suppose the couple are recreational gamblers and for the year had winnings of $20,000 and losses of $21,000 for a net gambling loss of $1,000. Because the gains and losses are not netted, the $20,000 of gambling winnings is added to the combined income, bringing it to $50,000, which makes nearly all the Social Security benefits taxable.     

To make matters even worse, if a taxpayer is covered by Medicare, the Medicare premiums are based on the taxpayer’s income two years prior, so the gambling winnings might very well also cause an increase in future Medicare premiums. If married taxpayers are both covered by Medicare, the increase would apply to each spouse.

  • Lump-Sum Payments – Some SS beneficiaries may receive a lump-sum payment that includes benefits for previous years. Special rules apply for reporting and taxing these payments, allowing beneficiaries to potentially reduce their tax liability.
  • State Taxes – While this article focuses on federal taxation, it’s important to note that some states also tax some or all Social Security benefits, which as of 2023 included Colorado, Connecticut, Kansas, Minnesota, Missouri, Montana, Nebraska, New Mexico, Rhode Island, Utah, and Vermont.
  • International Aspects and Treaties – The taxation of Social Security benefits also has international dimensions. The U.S. has entered tax treaties with several countries, which can affect how benefits are taxed for residents and nationals of those countries. For instance, benefits paid to individuals who are both residents and nationals of treaty countries may be exempt from U.S. tax.   

The taxation of Social Security benefits has evolved since its inception nearly 90 years ago, and future legislative changes could further impact how these benefits are taxed. Beneficiaries and financial planners must stay informed about these changes to effectively manage tax implications. This article includes issues in effect as of April 1, 2024.

If you have questions related to taxation of Social Security benefits, please contact our office.

Forms and application for health insurance

A Secret to Lower Taxes: Special Deduction for Self-Employed Health Insurance

In the labyrinth of tax regulations, the self-employed health insurance deduction stands out as a beacon of relief for self-employed individuals, partners in partnerships, and shareholders in S corporations. This deduction allows eligible taxpayers to deduct 100% of their health insurance premiums from their gross income, providing a significant tax benefit. This article looks at who qualifies for this deduction, the nature of qualifying insurance, and the process of claiming it.

Who Qualifies for the Self-Employed Health Insurance Deduction?

  • Self-Employed Individuals – Self-employed individuals who report a net profit on Schedule C (Form 1040) or Schedule F (Form 1040) are eligible for the self-employed health insurance deduction. This includes freelancers, independent contractors, and small business owners who are not considered employees of another company. The deduction is limited to the net earnings from self-employment, after accounting for the 50% of self-employment tax deduction and contributions to certain retirement plans (but not traditional IRAs).
  • Partners in Partnerships – Partners with net earnings from self-employment, as reported on Schedule K-1 (Form 1065), box 14, code A, can also take advantage of this deduction. The health insurance policy can be in the name of the partnership or the partner.  
  • If the partnership pays the premiums, the premium amounts must be reported on Schedule K-1, Form 1065, as guaranteed payments included in the partner’s gross income.
  • If a taxpayer/partner pays the premiums, and the policy is in the taxpayer/partner’s name, the partnership must reimburse the taxpayer and the premium amounts will be included in gross income as guaranteed payments on Schedule K-1. Otherwise, the insurance plan won’t be considered established under the business. 
  • S Corporation Shareholders – Shareholders who own more than 2% of an S corporation are eligible if the corporation pays their health insurance premiums, which are then reported as wages on Form W-2. The policy can be in the name of the S corporation or the shareholder. If the shareholder pays the premiums and the policy is in their name, the S corporation must reimburse the shareholder, and the premium amounts must be reported on Form W-2 as wages
    • If the S corporation pays the premiums, the premium amounts are included on Form W-2 as wages.
    • If the shareholder pays the premiums, and the policy is in the shareholder’s name, the S corporation must reimburse the shareholder and report the premium amounts on the W-2 as wages. Otherwise, the insurance plan won’t be considered established under the business.

Where is the Deduction Claimed? – The self-employed health insurance deduction is an above-the-line deduction, meaning it reduces the taxpayer’s gross income directly. This advantageous positioning allows taxpayers to benefit from the deduction regardless of whether they itemize deductions or take the standard deduction. The deduction is figured on IRS Form 7206, Self-Employed Health Insurance Deduction, that is attached to the individual’s Form 1040 return. Form 7206 made its debut as part of 2023 returns. Previously, a worksheet in the IRS instructions to the 1040 was used to compute the deduction.

The Tax Benefit – Besides allowing it to be deducted above the line and avoiding the 7½% of AGI medical limitation as an itemized deduction, the SE health insurance deduction also reduces the taxpayer’s AGI. The AGI is frequently used to reduce other tax benefits for higher income taxpayers. This can result in substantial tax savings, making health insurance more affordable for those who are self-employed or small business owners.

What Insurance Qualifies? – To qualify for the deduction, the insurance plan must be established under the name of business, but for self-employed individuals, this means the policy can be in either the individual’s name or the name of the business. For partners and S corporation shareholders, certain conditions regarding the payment and reporting of premiums must be met, as outlined above.

The deduction covers medical, dental, and long-term care insurance premiums for the taxpayer, their spouse, dependents, and children under 27 years of age, even if they are not dependents. Medicare premiums voluntarily paid to obtain insurance in the individual’s name that is like qualifying private health insurance can be used to figure the deduction. I.   

Limitations and Restrictions – While the self-employed health insurance deduction offers significant tax relief, there are limitations.  

  • The deduction cannot exceed the earned income from the business under which the insurance plan is established.
  • The long-term care (LTC) insurance premium part of the deduction is limited based on the age of the person covered by the LTC plan.
  • No deduction is allowed for any month in which the taxpayer was eligible to participate in a health plan “subsidized” by their or their spouse’s employer. The term “subsidized” means at least 50% of the cost of the coverage is paid by the employer.

If you have questions related to this often-overlooked tax benefit, please contact our office.

Protect personal identity concept of privacy theft

Reclaim Your Life: Essential Steps to Overcome Identity Theft and Secure Your Future

In an era where digital transactions and online interactions have become the norm, the specter of identity theft looms large, posing significant challenges and potential financial hazards for individuals. Among the various forms of identity theft, tax-related identity theft is particularly insidious. It occurs when someone uses your stolen personal information, including your Social Security Number (SSN), to file a tax return in your name and claim a fraudulent refund. This not only jeopardizes your financial health but also complicates your tax obligations with the Internal Revenue Service (IRS). Understanding the steps to take in the aftermath of identity theft and recognizing the measures the IRS employs to protect taxpayers can mitigate the impact and help restore your financial integrity.

Signs of Tax-Related ID Theft

According to the IRS, any of the following tax-related issues could indicate that your ID has been compromised:

  • You get a letter from the IRS inquiring about a suspicious tax return that you did not file.
  • You can’t e-file your tax return because of a duplicate Social Security number. In this case you should file a paper tax return along with a Form 14039, Identity Theft Affidavit.
  • You get a tax transcript in the mail that you did not request.
  • You get an IRS notice that an online account has been created in your name.
  • You get an IRS notice that your existing online account has been accessed or disabled when you took no action.
  • You get an IRS notice that you owe additional tax or refund offset, or that you have had collection actions taken against you for a year you did not file a tax return.
  • IRS records indicate you received wages or other income from an employer you didn’t work for.
  • You’ve been assigned an Employer Identification Number, but you did not request an EIN.

Immediate Steps for Taxpayers

Report the Incident – If you suspect or know that your identity has been stolen, report the incident to the IRS immediately. You can do this by filing a Form 14039, Identity Theft Affidavit, which informs the IRS of the potential fraud. This step is crucial, as it alerts the IRS to scrutinize any tax return filed under your SSN more carefully. Form 14039 can be completed and submitted online at  f14039.pdf (irs.gov), faxed or mailed to the IRS.

Contact Other Agencies – Beyond the IRS, you should also report the identity theft to the Federal Trade Commission (FTC) at IdentityTheft.gov, which acts as a central reporting point for identity theft and offers a recovery plan. Additionally, alerting the Social Security Administration and the major credit bureaus (Equifax, Experian, and TransUnion) can help prevent further misuse of your personal information.

Secure Your Personal Information – Change passwords for your online accounts, especially those related to financial institutions and email. Ensure your computer has up-to-date antivirus software and consider a credit freeze or fraud alert on your credit reports to prevent new accounts from being opened in your name.

Stay Vigilant – Monitor your financial accounts and credit reports regularly for any unauthorized transactions or changes. This proactive approach can help you catch any further attempts at identity theft early.

How the IRS Protects Taxpayers

The IRS has ramped up its efforts to combat tax-related identity theft with a multi-faceted approach focusing on prevention, detection, and victim assistance.  The IRS continuously enhances its security measures to prevent identity thieves from filing fraudulent tax returns. This includes employing advanced data analytics to flag suspicious returns and improving authentication procedures for online services.

The IRS has dedicated over 3,000 employees to work on identity theft cases, with more than 35,000 employees trained to recognize and assist victims of identity theft. The agency uses sophisticated return-processing filters to identify returns that may be fraudulent, stopping the issuance of fraudulent refunds.

For individuals affected by tax-related identity theft, the IRS offers specialized assistance through its Identity Protection Specialized Unit (IPSU). It can issue an Identity Protection PIN (IP PIN) – a six-digit number that must be included on tax returns to verify the taxpayer’s identity in addition to their Social Security Number.

Initially, the IP PIN was available only to victims of identity theft or those who were deemed at significant risk of it. However, recognizing the escalating threat of identity theft, the IRS expanded the program, making it available to all taxpayers who wished to participate and could verify their identity.

The process of obtaining an IP PIN begins with the taxpayer verifying their identity with the IRS. This can be done online through the IRS’s Get an Identity Protection PIN (IP PIN) tool, a secure platform designed for this purpose. However, the process is rigorous, reflecting the seriousness with which the IRS treats the security of taxpayer information. For those unable to validate their identity online, alternative methods include submitting IRS Form 15227 for those with an adjusted gross income of $72,000 or less or requesting an in-person appointment at an IRS Taxpayer Assistance Center.

Once a taxpayer is issued an IP PIN, it becomes an essential part of their tax filing process. The IP PIN must be included on their federal tax returns, serving as a unique identifier that helps the IRS verify the taxpayer’s identity. By doing so, it prevents identity thieves from filing fraudulent tax returns using the taxpayer’s Social Security number. It’s important to note that the IP PIN is valid only for one calendar year and must be renewed annually. Each year, the IRS generates a new IP PIN for individuals in the program, which they can retrieve through the same secure IRS online tool or wait for a postal notification.

The significance of the IP PIN cannot be overstated for victims of identity theft. For those who have experienced the misuse of their Social Security number for tax fraud, the IP PIN acts as a safeguard for future tax filings. It ensures that even if their personal information is compromised again, the presence of the IP PIN will prevent fraudulent returns from being processed in their name. This not only protects the taxpayer’s refund but also aids in the broader fight against tax-related identity theft.

The journey to recovery after experiencing identity theft can be daunting, but taking decisive action and leveraging available resources can significantly ease the process. By promptly reporting the theft to the IRS and other relevant agencies, securing personal information, and staying vigilant, taxpayers can mitigate the impact of identity theft.

Please contact this office for assistance in dealing with the IRS in case of identity theft.

Gavel On a Legal Text

Tennessee Tax Legislative Update

As previously shared through an earlier update, in January Governor Bill Lee announced plans to amend the Tennessee franchise tax to simplify the calculation. Under existing law, the franchise tax base is the greater of 1) the taxpayer’s net worth or 2) the net book value of the property owned, and the rental value (using a defined multiple) of property used in Tennessee. Once calculated, the franchise tax base is subjected to a tax rate which is $0.25 per $100 of the tax base. Under Governor Lee’s simplification, the franchise tax would be determined based solely on net worth, with the alternative method using net book value of assets being repealed.

Since its announcement, this planned overhaul to the state’s franchise tax law has been subject to significant debate and negotiation among lawmakers; however, in the final hours of Tennessee’s legislative session last week, both chambers approved a compromise plan. The plan is projected to send approximately $1.5 billion back to taxpayers and reduce the state’s franchise tax revenue by approximately $400 million annually. Additionally, the compromise plan provides for three years of tax refunds desired by the Senate while also providing transparency provisions desired by the House. Tax refunds will be available for returns filed after January 1, 2021, covering a tax period that ended on or after March 31, 2020. Generally speaking, for calendar year taxpayers the applicable periods are tax years 2020 through 2023.  The refund claims will be required to be filed between May 15th and November 30th of this year and taxpayers claiming refunds will be required to waive all rights to sue the state over franchise tax obligations during the affected period. Specific to transparency, the compromise plan will require refunds paid to taxpayers to be disclosed in ranges – $750 or less; $751 to $10,000; greater than $10,000; or “pending” if a final payment has not been determined. 

Governor Lee is expected to sign the legislation.

Within the next few weeks, RBG tax advisors will be contacting our impacted Tennessee taxpayers to discuss the details of anticipated refund claims and expected timing of filings. Should you have any immediate questions, feel free to contact your RBG advisor.