Credits

<p>As July 4, 2025, the IRS is prohibited from allowing or issuing refunds related to ERC claims filed after January 31, 2024 that are related to the third and fourth quarters of 2021.&nbsp; The FAQ confirms that taxpayers who have already received ERC-related refunds will not be required to repay those amounts even if their claim was filed after January 31, 2024 (however, additional IRS compliance-related activities could result in an adjustment).&nbsp; Amended returns with non-ERC related&nbsp;issues will continue to be processed to resolve those non-ERC issues even if the amended return also claims the ERC for the third or fourth quarter of 2021, and the amended return was filed after the deadline.&nbsp; The same is true for amended returns that originally included now-prohibited ERC claims if the taxpayer later withdrew the prohibited ERC claim.&nbsp; For purposes of determining the deadline, a return is considered "filed" on or before January 31, 2024 if the claim was postmarked and properly mailed or submitted by that date. &nbsp;</p><p>The IRS has also reminded taxpayers that an appeals process exists via the IRS Independent Office of Appeals and taxpayers will receive Letter 105-C, Claim Disallowed,&nbsp;if their ERC claim is denied.Because many taxpayers do not realize the statute of limitations for filing a lawsuit is not paused during the administrative appeals process, the IRS announced a new streamlined online process for requesting deadline extensions.The IRS has now developed an online portal to allow taxpayers to submit Form 907 (the form used to request an extension).The online procedure is available only to taxpayers who have less than six months to file a lawsuit challenging a disallowed ERC claim.Qualifying taxpayers can request the extension using the IRS Document Upload Tool, by going to IRS.gov/DUTReply and selecting notice 'CP320B' from the drop-down menu.&nbsp; </p><p>By way of background, in September 2023, the IRS stopped processing new ERC claims. The IRS began processing ERC claims again on August 8, 2024. The IRS also announced a voluntary disclosure and repayment program (<em><em>see</em></em> heading below for details). </p><p> The IRS has repeatedly issued warnings about false or overstated ERC claims. The statute of limitations for IRS challenges to Forms 941 is three years. However, the three-year period does not start to run until April 15 of the calendar year following the year in which the form is filed (i.e., the statute of limitations for 2020 Forms 941 started to run on April 15, 2021 and expired April 15, 2024). However, there is a special limitations period for the third quarter of 2021. That statute of limitations does not expire until April 15, 2027. Further, proposals would apply the special, longer statute of limitations to any period in which the ERC was available. Taxpayers who received ERC refunds should also be aware that the IRS can challenge the payment in court within two years of the date the refund was paid (five years if the taxpayer obtained the refund based on fraud or misrepresentation). The IRS has also released proposed regulations providing that the IRS plans to assess and collect overpayment interest paid to taxpayers on erroneous COVID-related tax credit refunds. </p><p><hr></hr></p><p><strong>Planning Point:</strong> The IRS has provided new details about a withdrawal process for taxpayers who filed employee retention tax credit (ERC) claims that they now believe to be erroneous. Employers can use the withdrawal process if (1) they made the claim on an adjusted employment return (Forms 941-X, 943-X, 944-X, CT-1X), (2) they withdraw the entire amount of the claim, and (3) the IRS has not paid their claim or they have not cashed/deposited the IRS' refund check. Taxpayers who are not eligible to withdraw a claim can still file an amended return to reduce or eliminate the ERC claim. Taxpayers who filed their ERC claims themselves, have not received, cashed or deposited a refund check and have not been notified their claim is under audit can fax withdrawal requests to the IRS (a special fax line has been set up and details are available at IRS.gov/withdrawmyERC). Taxpayers who are under audit can send the withdrawal request to their examiner or in response to their audit notice. Claims that are properly withdrawn will be treated as though they were never filed, and no interest or penalties will apply. However, taxpayers who willfully filed fraudulent claims or assisted in fraudulent claims need to know that withdrawing the claim will not exempt them from criminal investigations. </p><p> Additionally, the agency is working on a program that will allow employers to repay improperly received ERC claims (it is unclear whether these repayments can be made without the threat of criminal investigation). </p><p><hr></hr></p><p> Under IRS final regulations released in 2023, erroneous refunds of COVID-19-related credits are treated as underpayments of tax under IRC Sections 3111(a) or (b). Both assessment and administrative collection procedures may apply. The regulations also clarify that if third-party payers claimed tax credits on behalf of common law employer clients, employers against which erroneous refunds of credits can be assessed include anyone treated as an employer under IRC Sections 3401(d), 3405 and 3511. The common law employer client of the third-party payor remains liable for the erroneous refunds of these tax credits. <br/><strong>Voluntary Repayment Program.</strong></p><p> The IRS created a voluntary disclosure program that allowed employers with erroneous employee retention credit claims to avoid potential penalties, interest and civil litigation. The deadline for participation in a second-round VDP was November 22, 2024 (December 31, 2024, for certain third-party payers who filed ERC claims on behalf of clients). </p><p> The program first settled the ERC claim for purposes of the employer's employment tax obligations via eliminating their ERC eligibility while allowing the employer to retain 20% of the claimed ERC amount. The disclosure also resolved the corresponding adjustment for income tax expense. Individuals were entitled to participate in the program if (1) they were not under criminal investigation and had not been notified by the IRS of a forthcoming criminal investigation, (2) the IRS had not received information from a third party about the employer's noncompliance, (3) the individual was not under employment tax examination for any tax period for which the individual was applying for the program and (4) the individual had not already received a notice and demand for repayment for all or a part of the claimed ERC. If the terms were satisfied, the employer was required to repay 80% of the amount claimed (including refundable and non-refundable portions) and was not be responsible for repaying overpayment interest received and was not charged underpayment interest. The individual was not deemed to receive taxable income by way of repaying only 80% of the claimed amount.<a href="#_ftn1">¹</a></p><p><i>Editor's Note:</i> The Infrastructure Investment and Jobs Act of 2021 retroactively ended the employee retention tax credit, so that wages paid after September 30, 2021, were not eligible for the credit. The law did exempt recovery startup businesses from the early termination. Originally, the credit was set to expire after 2021. </p><p>The IRS released guidance on the early termination of the employee retention tax credit, which expired after the third quarter of 2021. Employers who received advance payment of the ERC for fourth quarter wages could avoid penalties for failure-to-pay if they repaid the amount by the due date of their employment tax returns. Employers who reduced employment tax deposits on or before December 20, 2021 for fourth-quarter wages in reliance on the ERC were not subject to penalties for failure-to-deposit if (1) the employer reduced deposits in anticipation of receiving the ERC under the rules in Notice 2021-24, (2) the employer deposited the amounts retained on or before the due date for wages paid on December 31, 2021 (regardless of whether the employer actually paid the wages on that date), and (3) the employer reported tax liability resulting from the end of the ERC on the employment tax return or schedule including the period from October 1, 2021 through December 31, 2021. Failure to deposit penalties were not waived if the employer reduced deposits after December 20, 2021. Employers who did not qualify for relief under these rules can reply to any notice of a penalty with an explanation, and the IRS will consider whether to grant reasonable cause relief. </p><p>Early in 2022, the IRS provided penalty relief for taxpayers who owed additional income tax because their deduction for qualified wages was reduced by a retroactively-claimed ERTC if the taxpayer was unable to pay the additional tax because the ERTC refund had yet to be received. The IRS acknowledged that this often occurred because of its own backlog in processing Forms 941-X. Taxpayers in this situation were eligible for penalty relief for inability to pay their tax liability if they could show reasonable cause, rather than willful neglect, under Notice 2021-49 provisions.<a href="#_ftn3">³</a><br/><strong>ERTC Rules for 2020 and 2021</strong></p><p> IRS regulations allow the IRS to recapture any of the tax credits credited to an employer in excess of the amount that the employer was actually entitled to receive. That includes the ERTC, credits for qualified leave wages and credits for qualified health plan expenses under Sections 3131(d) and 3132(d). Those incorrect tax credits are treated as underpayments of taxes and may be administratively assessed and collected in the same manner as the taxes. The temporary regulations also provided that the calculation of any credits erroneously claimed must account for any amounts that were advanced to the employer under the processes established in 2020. </p><p> The Consolidated Appropriations Act of 2021 expanded the employee retention tax credit (ERTC), discussed below. Under the CAA, the applicable credit percentage increased from 50 percent to 70 percent of qualified wages. The limit on qualified wages per-employee increased from $10,000 per year to $10,000 per quarter. The "decline in gross receipts" threshold decreased from 50 percent to 20 percent, and a safe harbor rule allowed business owners to use the calendar quarter immediately preceding the current quarter to determine eligibility. </p><p><hr></hr></p><p><strong>Planning Point:</strong> IRS Revenue Procedure 2021-33 offered a safe harbor that allowed employers to exclude certain amounts from gross receipts for the sole purpose of determining eligibility for the ERTC. </p><p> Amounts that could be excluded include: (1) the amount of forgiveness for a PPP loan, (2) Shuttered Venue Operators Grants under the Economic Aid to Hard-Hit Small Businesses, Non-Profits, and Venues Act, and (3) Restaurant Revitalization Grants under the ARPA. </p><p> Employers elected to apply this safe harbor by excluding the amounts for purposes of determining whether it was an ERTC-eligible employer on an employment tax return. Employers were required to apply the safe harbor consistently in determining ERTC eligibility (meaning the employer had to exclude the amounts from gross receipts for each calendar quarter when gross receipts were relevant to determining ERTC eligibility). If the employer applied the safe harbor, it was also required to apply the safe harbor to all employers treated as a single employer under aggregation rules. </p><p><hr></hr></p><p> The rules discussed below that applied to "large employers" only applied to employers with more than 500 employees under the CAA (as opposed to 100 under the CARES Act). Further, employers that were not in existence for all or part of 2019 became eligible to claim the credit. Businesses with 500 or fewer employees had the option of advancing the credit at any point during the quarter, and the amount of the credit was estimated based on 70 percent of the average quarterly wages the employer paid in 2019. </p><p> As long as the wages were not paid with forgiven PPP loan proceeds, PPP loan recipients were entitled to claim the ERTC retroactive to the date of the CARES Act. </p><p><em>Editor's Note:</em> The ARPA made further changes the ERTC, which remained fixed at 70 percent of qualified wages (up to a $10,000 per-quarter cap) for employers who had experienced a 20 percent year-over-year decline in per-quarter gross receipts (or a qualifying suspension of business). Starting June 30, 2021, certain small businesses that began operations after February 15, 2020 became eligible for a maximum $50,000 per-quarter credit. </p><p> Qualifying "recovery startup businesses" were required to have average annual gross receipts for the three-taxable-year period ending with the taxable year that precedes the quarter that did not exceed $1 million. These businesses could qualify to claim the expanded ERTC even if they did not otherwise meet the eligibility requirements for claiming the credit. Beginning in the third quarter of 2021, employers who had suffered a decline of 90 percent or more in gross receipts compared to the same quarter in 2019 could treat all wages paid as qualified wages (up to the $10,000 cap) regardless of the number of employees the business had and regardless of whether the employees provided services (in other words, even employers with more than 500 employees qualified if they were under severe financial distress). Employers could continue to claim the credit even if they had received a PPP loan, but could not claim the credit with respect to wages paid with forgiven PPP funds. </p><p> The ERTC was allowed against the Medicare tax only in the third and fourth quarters of 2021. While this procedural shift did not impact the available value of the ERTC, it was often important for business owners who had relied upon taking the credit in advance. Because the Medicare tax is only 1.45 percent, more clients were required to file Form 7200 to receive advance payment of the credit. ARPA also extended the statute of limitations on assessments under the law to five years from the date the return claiming the credit was filed. <br/><strong>CARES Act ERTC</strong></p><p> The CARES Act created a refundable tax credit designed to help employers who retained employees during the COVID-19 health crisis. The credit was taken against employment taxes and was equal to 70 percent (originally 50 percent) of the first $10,000 of qualified wages paid to the employee. Wages paid between March 12, 2020 and September 30, 2021 counted in calculating the credit.<a href="#_ftn4">⁴</a> Wages included both cash payments and employer health care payments (<em><em>see</em></em> below for allocation rules). Because the credit was refundable, employers were eligible for a refund if the credit amount exceeded the employment taxes due. </p><p> Employers were eligible regardless of size if they were in business during 2020. </p><p> The credit was available for calendar quarters where either: <br/><blockquote> (1)&nbsp; operations were either fully or partially suspended because of a government-issued order relating to COVID-19 (<em><em>see</em></em> below), or </blockquote><br/> Eligible government issued orders included restrictions on travel, group gatherings or limitations on commerce (such as orders requiring certain businesses to close or limit operations). </p><p><hr></hr></p><p><strong>Planning Point:</strong> The IRS released a generic legal advice memorandum (GLAM) to clarify when and whether a business owner could have properly qualified for the employee retention tax credit (ERC) based on supply chain disruptions. The GLAM contained five different scenarios where supply chain disruptions did not qualify the business for the ERC. Under the guidance, some type of governmental order must have caused the supplier to suspend its operations during the pandemic. That suspension, in turn, must have caused the business claiming the ERC to suspend its own business operations. It is up to the business to provide documentation to prove that the governmental order applied, and to substantiate the link between that governmental order and the business owner's own suspension of operations. If the business cannot substantiate the governmental order, the business will also not be treated as having a partial suspension of operations. Importantly, business owners should be aware that even dramatic price increases or inability to offer some (but not all) of the business' goods and services does not equate to a partial suspension. Business owners who justified ERC claims based on supply chain disruptions should maintain careful documentation in anticipation of a future IRS challenge.<a href="#_ftn5">⁵</a></p><p><hr></hr></p><p> Qualification was calculated every quarter.<a href="#_ftn6">⁶</a><em> If the employer had no more than</em> 500 (originally 100) employees, the amount of qualified wages included wages paid during a quarter where COVID-19 impacted the business, including when the employees continued to provide services for payment during the relevant period and when employees were paid, but not working. </p><p> If the employer had more than 500 full-time employees, the wages counted toward the credit included only those paid while the employee was not working for the employer because of a government order or decline in gross receipts. In counting the number of employees, the employer used average employees during 2019. </p><p><hr></hr></p><p><strong>Planning Point:</strong> For purposes of determining whether a credit-eligible employer is a large eligible employer or a small eligible employer, employers were not required to include full-time equivalents when determining the average number of full-time employees. However, for purposes of identifying qualified wages, an employee's status as a full-time employee was irrelevant because wages paid to a part-time employee could be treated as qualified wages if all other requirements are satisfied.<a href="#_ftn7">⁷</a></p><p><hr></hr></p><p> Employers who paid wages with PPP loans that were forgiven could not claim the tax credit for the same wages. Further, the credit did not apply with respect to wages paid under the FFCRA paid sick leave laws (in other words, the employer could not "double dip"). </p><p><hr></hr></p><p><strong>Planning Point:</strong> Any cash tips treated as wages within the definition of IRC Section 3121(a) or compensation within the definition of IRC Section 3231(e)(3) were treated as qualified wages if all other requirements were satisfied. According to IRS reasoning, eligible employers were not prevented from receiving both the employee retention credit and the Section 45B credit (the FICA tip credit) for the same wages because the CARES Act and subsequent legislation did not reference Section 45B in areas where a "no double dipping" rule applied.<a href="#_ftn8">⁸</a></p><p><hr></hr></p><p> The amount of wages considered for purposes of the credit could not exceed the wages the employee would have received for working an equal amount of time in the 30-days preceding the applicable period when the credit was available. </p><p> Qualified wages also included the employer's health plan expenses allocated to the wages taken into account for the credit. The health plan expenses must be amounts paid or incurred by the employer to provide and maintain a group health plan, but only if the amounts were excluded from employees' income under IRC Section 106(a).<a href="#_ftn9">⁹</a></p><p><hr></hr></p><p><strong>Planning Point:</strong> IRS Notice 2021-49 addressed the issue of whether wages paid to majority owners and spouses of majority owners could be treated as "qualified wages." "Majority ownership," for these purposes, means more than 50% of the value in a corporation. According to the IRS, if the majority owner of a corporation had no brother or sister (whether by whole or half-blood), ancestor, or lineal descendant as defined in IRC Section 267(c)(4), then neither the majority owner nor the spouse was a related individual within the meaning of Section 51(i)(1) and the wages paid to the majority owner and the spouse were qualified wages for ERTC purposes, assuming the other requirements for qualified wages were satisfied. The notice contains multiple examples that provide guidance on various scenarios and various types of relationships. </p><p><hr></hr></p><p> Unless otherwise provided, allocating health expenses pro rata among employees and pro rata based on the periods of coverage (i.e., lining the payments up with the periods to which the wages relate) was sufficient. </p><p><hr align="left" size="1" width="33%"></hr></p><p><a href="#_ftnref1">1</a>. A-2024-03. </p><p><a href="#_ftnref2">2</a>. Notice 2021-65. </p><p><a href="#_ftnref3">3</a>. IR-2022-89. </p><p><a href="#_ftnref4">4</a>. IR-2020-62, Notice 2020-22. </p><p><a href="#_ftnref5">5</a>. GLAM 2023-005. </p><p><a href="#_ftnref6">6</a>. IR-2020-62. </p><p><a href="#_ftnref7">7</a>. Notice 2021-49. </p><p><a href="#_ftnref8">8</a>. Notice 2021-49. </p><p><a href="#_ftnref9">9</a>. <em><em>See generally</em></em> Pub. Law No. 116-136, § 2301. </p>

<div class="Section1">Under the Inflation Reduction Act of 2022, the tax credit for new energy efficient homes under IRC Section 45L was extended through 2032 (and retroactively through 2022, although the pre-existing rules will continue to apply for 2022). The tax credit is designed to provide an incentive for builders of both residential homes and multi-family dwellings to use materials designed to reduce energy consumption.</div><br /> <div class="Section1"><br /> <br /> Beginning in 2023, the credit is also modified by increasing the maximum amount of the credit to either $2,500 or $5,000 (the prior maximum was $2,000 per unit). The new programs also eliminate the height restrictions, so that the previously-existing three-story or less requirement no longer applies beginning in 2023.<br /> <br /> Builders must satisfy certain energy-efficient criteria qualify for the $2,500 credit. Beginning in 2023, single-family homes must satisfy the requirements of the Department of Energy's "Energy Star Single Family New Homes Program," Version 3.1 for homes constructed before January 1, 2025 and Version 3.2 for later years. It is expected that additional details will be provided. Manufactured homes are required to satisfy the latest Energy Star Manufactured Home National Program requirements that are in effect on the later of (1) January 1, 2023 or January 1 of the year that is two calendar years prior to the date the dwelling is acquired.<br /> <br /> If the single-family or manufactured home is certified as a DOE Zero Energy Ready Home (ZERH) (or meets the requirements of a successor program implemented by the Department of Energy), a higher $5,000 credit is available.<br /> <br /> For multi-family dwellings, a $500 credit is available if the home satisfies the criteria of the Energy Star Single Family New Homes Program and a $1,000 credit is available if the building is ZERH certified.<a href="#_ftn1" name="_ftnref1">¹</a><br /> <br /> Builders must also satisfy prevailing wage standards beginning in 2023. To qualify, workers must be paid wages at rates not less than the prevailing rates for construction, alteration, or repair of a similar character in the locality in which such residence is located as most recently determined by the Secretary of Labor.<br /> <br /> To qualify for the tax credit, the taxpayer must obtain an audit that provides an estimate of the energy and cost savings of each energy-efficient home improvement. Beginning in 2024, that audit must be conducted by a Qualified Home Energy Auditor, which is an auditor who has been certified by one of the certification programs listed by the Department of Energy on its certification programs page for the energy efficient home improvement credit. For 2023, a transition rule applies so that the auditor need not be a Qualified Home Energy Auditor.<a href="#_ftn2" name="_ftnref2">²</a><br /> <br /> The IRS has also appropriated funds and authorized the Department of Energy to distribute funds to establish rebate programs for owners and occupants of residential property who engage in qualifying transactions under the law.  For tax purposes, a rebate paid to or on behalf of a purchaser pursuant to the DOE Home Energy Rebate Programs will be treated as a purchase price adjustment for the purchaser and is not taxable income.  For rebates provided at the time of sale, the amount of the rebate provided in connection with the DOE Home Energy Rebate Programs is not included in a purchaser's cost basis under IRC Section 1012.  For rebates provided at a later time, the amount of the rebate constitutes an adjustment to basis under IRC Section 1016.  Payments of rebate amounts to the purchaser that are treated as a purchase price adjustment are not subject to information reporting under IRC Section 6041.<a href="#_ftn3" name="_ftnref3">³</a><br /> <br /> </div><br /> <div class="refs"><br /> <br /> <hr align="left" size="1" width="33%" /><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>.  IRC § 45L(c), as modified by Inflation Reduction Act § 13304.<br /> <br /> <a href="#_ftnref2" name="_ftn2">2</a>.  Notice 2023-59.<br /> <br /> <a href="#_ftnref3" name="_ftn3">3</a>. A-24-19.<br /> <br /> </div>

<div class="Section1">The tax credit for the elderly and the permanently and totally disabled is a nonrefundable credit, meaning that it is available only to the extent that it does not exceed the taxpayer&rsquo;s tax liability (<em><em>see</em></em> Q <a href="javascript:void(0)" class="accordion-cross-reference" id="8563">8563</a>).&nbsp;The credit is available to (1) taxpayers age 65 or older, or (2) those who are under age 65, retired on disability, and were considered permanently and totally disabled when they retired.<a href="#_ftn1" name="_ftnref1">¹</a><div class="Section1"><br /> <blockquote>&ldquo;An individual is permanently and totally disabled if he is unable to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment which can be expected to result in death or which has lasted or can be expected to last for a continuous period of not less than 12 months. An individual shall not be considered to be permanently and totally disabled unless he furnishes proof of the existence thereof in such form and manner, and at such times, as the Secretary may require.&rdquo;<a href="#_ftn2" name="_ftnref2">²</a></blockquote><br /> The credit equals 15&nbsp;percent of an individual&rsquo;s IRC Section&nbsp;22 amount for the taxable year, but may not exceed the amount of tax.&nbsp;This IRC Section&nbsp;22 base amount is $5,000 for a single taxpayer or married taxpayers filing jointly if only one spouse qualifies for the credit; $7,500 for married taxpayers filing jointly if both qualify; and $3,750 for a married taxpayer filing separately.<a href="#_ftn3" name="_ftnref3">³</a> Married taxpayers must file a joint return to claim the credit, unless they lived apart for the entire taxable year.<a href="#_ftn4" name="_ftnref4">⁴</a><br /> <br /> For individuals under age 65, this base figure is limited to the amount of the disability income (taxable amount an individual receives under an employer plan as wages or payments in lieu of wages for the period the individual is absent from work on account of permanent and total disability) received during the taxable year.<a href="#_ftn5" name="_ftnref5">⁵</a> (The taxpayer may be required to provide proof of continuing permanent and total disability.)<a href="#_ftn6" name="_ftnref6">⁶</a> For married taxpayers who are both qualified and who file jointly, the base figure cannot exceed the total of both spouses&rsquo; disability income if both are under age 65. If only one spouse is under age 65, the base figure cannot exceed the sum of $5,000 plus the disability income of the spouse who is under 65.<a href="#_ftn7" name="_ftnref7">⁷</a><br /> <br /> The base figure (or the amount of disability income in the case of individuals under age 65, if lower) is reduced dollar-for-dollar by one-half of adjusted gross income in excess of $7,500 (single taxpayers), $10,000 (joint return), or $5,000 (married filing separately).<a href="#_ftn8" name="_ftnref8">⁸</a> A reduction is also made for Social Security and railroad retirement benefits that are excluded from gross income, and certain other tax-exempt income.<a href="#_ftn9" name="_ftnref9">⁹</a><br /> <br /> </div><div class="refs"><br /> <br /> <hr align="left" size="1" width="33%"><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>.&nbsp; IRC &sect;&nbsp;22(b).<br /> <br /> <a href="#_ftnref2" name="_ftn2">2</a>.&nbsp; IRC &sect;&nbsp;22(e)(3).<br /> <br /> <a href="#_ftnref3" name="_ftn3">3</a>.&nbsp; IRC &sect;&nbsp;22(c).<br /> <br /> <a href="#_ftnref4" name="_ftn4">4</a>.&nbsp; IRC &sect;&nbsp;22(e)(1).<br /> <br /> <a href="#_ftnref5" name="_ftn5">5</a>.&nbsp; IRC &sect;&nbsp;22(c)(2)(B)(i).<br /> <br /> <a href="#_ftnref6" name="_ftn6">6</a>.&nbsp; GCM 39269 (8-2-84).<br /> <br /> <a href="#_ftnref7" name="_ftn7">7</a>.&nbsp; IRC &sect;&nbsp;22(c)(2)(B)(ii).<br /> <br /> <a href="#_ftnref8" name="_ftn8">8</a>.&nbsp; IRC &sect;&nbsp;22(d).<br /> <br /> <a href="#_ftnref9" name="_ftn9">9</a>.&nbsp; IRC &sect;&nbsp;22(c)(3).<br /> <br /> </div></div><br />

<div class="Section1">The child and dependent care tax credit provides a tax credit to offset the cost of qualifying work-related dependent care expenses (a dependent who is a child must be under age 13 to qualify). Those expenses can include the cost of physically caring for the dependent—and also include household expenses, such as hiring someone to help with cooking and cleaning for a dependent, as long as the expenses are primarily for the benefit of the dependent.  The IRS noted that summer day camp expenses can also qualify, but expenses related to overnight camp cannot be used to figure the credit.</div><br /> <div class="Section1"><br /> <br /> For 2024, the maximum eligible work-related childcare expense used to figure the credit is $3,000 for one qualifying child and $6,000 for two or more children.  The taxpayer multiplies the amount of childcare expenses incurred by a percentage.  The percentage varies depending on the taxpayer's income.  Depending on their income levels, taxpayers can receive a credit worth up to 35% of their qualifying childcare expenses. Once the taxpayer's income equals or exceeds $43,000, 20% of the expenses qualify.  The maximum amount of the credit cannot be more than the taxpayer's earned income for the year, or the smaller of the taxpayer or their spouse's earned income if the taxpayer is married.<br /> <br /> To claim the credit, the taxpayer must complete and attach Form 2441 to Form 1040, 1040-SR, or 1040-NR.   The credit is entered on Schedule 3 (Form 1040), line 2.  The credit is typically nonrefundable.<br /> <br /> The taxpayer claiming the credit must subtract employer-provided dependent care benefits, including those provided through a flexible spending account, from total work-related expenses when calculating the credit. The more a taxpayer earns, the lower the percentage of work-related expenses that are taken into account in determining the credit.<br /> <br /> Taxpayers must provide a valid taxpayer identification number (TIN) for each qualifying person. Usually, this is the qualifying person's Social Security number.  Taxpayers without a Social Security number must obtain an individual taxpayer identification number.<br /> <br /> <em><em>Editor's Note: </em></em>For 2021 only, the dependent care tax credit was fully refundable under the American Rescue Plan Act (ARPA). The maximum credit percentage was increased from 35 percent to 50 percent of qualifying dependent care expenses (the credit phases down to 20 percent for taxpayers with income between $125,000 and $183,000). The level of qualifying dependent care expenses also increased for 2021—from $3,000 to $8,000 for a single qualifying dependent and from $6,000 to $16,000 for two or more qualifying dependents.  The IRS released FAQ to help taxpayers understand the expanded child and dependent care tax credit in 2021. As always, to claim the credit, taxpayers were required to have earnings. The FAQ was clear that the amount of qualifying work-related expenses claimed could not exceed the taxpayer's earnings.<br /> <br /> However, the credit was fully refundable for the first time in 2021 (the refundable nature of the credit was not extended beyond 2021). That allowed an eligible taxpayer to receive the credit even if they owed no federal income tax. To be eligible for the refundable credit In 2021, a taxpayer (or the taxpayer's spouse on a joint return) had to reside in the United States for more than half of the year.<br /> <br /> </div>

Many of the credits listed below contain sunset provisions so that they apply only so long as Congress chooses to renew them from year to year. Recently, Congress has extended various credits through the Protecting Americans from Tax Hikes Act of 2015 (PATH), the Bipartisan Budget Act of 2018 (BBA 2018) and the Tax Certainty and Disaster Relief Act of 2020. See below for more details. As of the date of this revision and with respect to provisions that were not made permanent, Congress has not indicated whether it will extend this treatment for future years.

<p><em>Editor's Note:</em> The SECURE Act expanded the retirement plan start-up credit for small businesses who are eligible. The credit available under IRC Section 45E, available for three tax years, is increased to the greater of (a) $500 or (b) the lesser of (i) $250 per employee of the eligible employer who is not a highly-compensated employee and who is eligible to participate in the eligible employer plan maintained by the employer or (ii) $5,000. </p><p> Eligible small employers (under IRC Section 408(p)(2)(C)(1)) who provide an eligible auto-enrollment feature are eligible for an additional $500 per year credit (for the first three years the auto-enrollment feature is offered). </p><p><hr></hr></p><p> <strong>Planning Point:</strong> The credit for auto-enrollment can be claimed even if a new auto-enrollment feature is added to an existing plan. </p><p> <strong>Planning Point: </strong>Starting with the 2025 tax year, the SECURE Act 2.0 will require employers that establish new 401(k) or 403(b) plans to auto-enroll employees in the savings plans. The minimum auto-enrollment contribution rate will range from 3% to 10%. Each year, the minimum contribution rate will then increase by 1% until the rate reaches 15%. Under the law, small business employers with 10 or fewer employees and new businesses will be exempt from the auto-enrollment requirement.</p><p><hr></hr></p><p> A tax credit for qualified retirement plan start-up costs is available to small business owners. A small business employer is eligible if, during the preceding tax year, it employed 100 or fewer employees who received at least $5,000 in annual compensation from the employer (the same definition that generally applies for SIMPLE retirement plans).<a href="#_ftn1">¹</a> The plan must be available to at least one employee who is a non-highly compensated employee (a highly compensated employee is one who owns 5 percent of the business or who has earned more than $160,000 in 2026).<a href="#_ftn2">²</a></p><p> Importantly, the small business employer is only eligible for the credit if its employees were not able to participate in another retirement plan sponsored by the employer, a member of a controlled group or a predecessor of either within three years of establishing the new plan (essentially, this requirement ensures that the plan truly is a newly-established retirement plan).<a href="#_ftn3">³</a></p><p> The credit is equal to 50 percent of the ordinary and necessary costs of starting up the retirement plan, including both the costs of setting up and administering the plan and costs related to educating employees about the plan, up to a maximum credit of $500 per year.<a href="#_ftn4">⁴</a> The credit is available for three years, with the option of first claiming the credit in the year before the year in which the plan becomes effective.<a href="#_ftn5">⁵</a></p><p> Beginning in 2023, the 50 percent limit was increased to 100 percent under the SECURE Act 2.0 for small employers with 50 or fewer employees. The law also creates an additional tax credit for a percentage of the employer's contributions made to employees with compensation that does not exceed $100,000 for the year. The additional credit cannot exceed $1,000 per employee and will phase out over a five-year period. The additional credit also phases out for employers with between 51 and 100 employees, and the credit is reduced by 2 percent for each employee that exceeds the 50-employee limit in the prior year. </p><p> Employers who join an existing multiple employer plan (MEP) will also now be eligible to receive the tax credit for small employers even if the MEP has been in existence for several years (this provision is effective retroactively, for 2020 and all later tax years). <br/> If the entire value of the plan cannot be maximized in a single year, the small business employer has the option of carrying it back or forward to another tax year, so long as that tax year does not begin prior to January 1, 2002. To claim the credit, the taxpayer must file Form 8881 with the IRS.<a href="#_ftn6">⁶</a></p><p><hr align="left" size="1" width="33%"></hr></p><p> <a href="#_ftnref1">[1]</a>. IRS Pub. 560 (2019). </p><p> <a href="#_ftnref2">[2]</a>. IRC §45E(d)(1), IR014-99 (Oct.23, 2014), Notice 2022-38. </p><p> <a href="#_ftnref3">[3]</a>. IRC § 45E(c). </p><p> <a href="#_ftnref4">[4]</a>. IRC §§ 38, 45E (a), 45E(b). </p><p> <a href="#_ftnref5">[5]</a>. IRC § 45E(b). </p><p> <a href="#_ftnref6">[6]</a>. IRS Pub. 560 (2019). </p>

<p><i>Editor's No</i>te:&nbsp;The Families First Coronavirus Response Act, signed into law in March&nbsp;2020, created a refundable tax credit for employers who provided required paid and FMLA leave to employees impacted by the virus. <i>See</i> Q&nbsp;8502 for information about extension of the 2020 tax filing and payment deadlines. <i>See</i> Q&nbsp;8555 for more information on the CARES Act employee retention tax credit.</p><p>On Form&nbsp;1040, after the amount of tax owed is computed, the taxpayer is entitled to subtract certain payments and credits from the tax to arrive at the amount of tax that is actually payable.</p><p>A refundable credit is a tax credit that can result in a refund or credit even if the taxpayer owes no tax or the credit exceeds the amount of tax owing.&nbsp;The refundable credits include:<br/><blockquote>…Taxes withheld from salaries and wages.<a href="#_ftn1">¹</a> …Overpayments of tax. <a href="#_ftn1">²</a> …The excess of Social Security withheld (which could occur, for exam-ple, if an individual has two or more employers). <a href="#_ftn1">³</a> …The earned income credit.<a href="#_ftn1">⁴</a> …The 72.5 percent health care tax credit for uninsured workers dis-placed by trade competition.<a href="#_ftn1">⁵</a> …The unused long-term minimum tax credit. …A portion of the child tax credit and the adoption tax credit (under the 2025 OBBB). Example: Ashley, a single mother, is entitled to an earned income tax credit of $3,500 for the tax year. Her income tax liability before the application of the credit is $1,000. Other than the earned income tax credit, Ashley has no other credits. Because the earned income credit is a refundable credit, Ashley is entitled to a refund of $2,500 ($3,500 credit minus $1,000 tax liability). </blockquote></p><p><hr align="left" size="1" width="33%"></hr></p><p> <a href="#_ftnref1">1</a>. IRC § 31(a). </p><p> <a href="#_ftnref2">2</a>. IRC § 37. </p><p> <a href="#_ftnref3">3</a>. Treas. Reg. § 1.31-2. </p><p> <a href="#_ftnref4">4</a>. IRC § 32. </p><p> <a href="#_ftnref5">5</a>. IRC § 35. </p>

<p><em>Editor's Note:</em> The SECURE Act expanded the retirement plan start-up credit for small businesses who are eligible. The credit available under IRC Section 45E, available for three tax years, is increased to the greater of (a) $500 or (b) the lesser of (i) $250 per employee of the eligible employer who is not a highly-compensated employee and who is eligible to participate in the eligible employer plan maintained by the employer or (ii) $5,000. </p><p> Eligible small employers (under IRC Section 408(p)(2)(C)(1)) who provide an eligible auto-enrollment feature are eligible for an additional $500 per year credit (for the first three years the auto-enrollment feature is offered). </p><p><hr></hr></p><p> <strong>Planning Point:</strong> The credit for auto-enrollment can be claimed even if a new auto-enrollment feature is added to an existing plan. </p><p><hr></hr></p><p> A tax credit for qualified retirement plan start-up costs is available to small business owners. A small business employer is eligible if, during the preceding tax year, it employed 100 or fewer employees who received at least $5,000 in annual compensation from the employer (the same definition that generally applies for SIMPLE retirement plans).<a href="#_ftn1">¹</a> The plan must be available to at least one employee who is a non-highly compensated employee (a highly compensated employee is one who owns 5 percent of the business or who has earned more than $160,000 in 2026).<a href="#_ftn2">²</a></p><p> Importantly, the small business employer is only eligible for the credit if its employees were not able to participate in another retirement plan sponsored by the employer, a member of a controlled group or a predecessor of either within three years of establishing the new plan (essentially, this requirement ensures that the plan truly is a newly-established retirement plan).<a href="#_ftn3">³</a></p><p> The credit is equal to 50 percent of the ordinary and necessary costs of starting up the retirement plan, including both the costs of setting up and administering the plan and costs related to educating employees about the plan, up to a maximum credit of $500 per year.<a href="#_ftn4">⁴</a> The credit is available for three years, with the option of first claiming the credit in the year before the year in which the plan becomes effective.<a href="#_ftn5">⁵</a></p><p> Beginning in 2023, the 50 percent limit was increased to 100 percent under the SECURE Act 2.0 for small employers with 50 or fewer employees. The law also creates an additional tax credit for a percentage of the employer's contributions made to employees with compensation that does not exceed $100,000 for the year. The additional credit cannot exceed $1,000 per employee and will phase out over a five-year period. The additional credit also phases out for employers with between 51 and 100 employees, and the credit is reduced by 2 percent for each employee that exceeds the 50-employee limit in the prior year. </p><p> Employers who join an existing multiple employer plan (MEP) will also now be eligible to receive the tax credit for small employers even if the MEP has been in existence for several years (this provision is effective retroactively, for 2020 and all later tax years). </p><p> If the entire value of the plan cannot be maximized in a single year, the small business employer has the option of carrying it back or forward to another tax year, so long as that tax year does not begin prior to January 1, 2002. To claim the credit, the taxpayer must file Form 8881 with the IRS.<a href="#_ftn6">⁶</a></p><p><hr align="left" size="1" width="33%"></hr></p><p> <a href="#_ftnref1">1</a>. IRS Pub. 560 (2019). </p><p> <a href="#_ftnref2">2</a>. IRC § 45E(d)(1), IR-2014-99 (Oct. 23, 2014), Notice 2022-38. </p><p> <a href="#_ftnref3">3</a>. IRC § 45E(c). </p><p> <a href="#_ftnref4">4</a>. IRC §§ 38, 45E (a), 45E(b). </p><p> <a href="#_ftnref5">5</a>. IRC § 45E(b). </p><p> <a href="#_ftnref6">6</a>. IRS Pub. 560 (2019). </p>

<div class="Section1"><br /> <br /> <em>Editor&rsquo;s Note</em>: The Inflation Reduction Act expanded and extended the clean vehicle tax credit for tax years beginning after 2022. See heading below for details. The rules discussed immediately below applied for vehicles placed in service during 2022.<br /> <br /> The ARRA modified the credit for qualified plug-in electric drive vehicles purchased after December 31, 2009. To qualify, vehicles must be newly purchased, have four or more wheels, have a gross vehicle weight rating of less than 14,000 pounds, and draw propulsion using a battery with at least four kilowatt hours that can be recharged from an external source of electricity. The minimum amount of the credit for qualified plug-in electric drive vehicles is $2,500 and the credit tops out at $7,500, depending on the battery capacity. The full amount of the credit will be reduced with respect to a manufacturer&rsquo;s vehicles after the manufacturer has sold at least 200,000 vehicles.<a href="#_ftn1" name="_ftnref1">¹</a><br /> <br /> ARRA also creates a special tax credit for two types of plug-in vehicles&mdash;certain low-speed electric vehicles and two- or three-wheeled vehicles. The amount of the credit is 10 percent of the cost of the vehicle, up to a maximum credit of $2,500 for purchases made after February 17, 2009, and before January 1, 2014. The Protecting Americans from Tax Hikes Act extended this credit for two-wheeled vehicles through 2016, and BBA 2018 extended the credit through 2017. To qualify, a vehicle must be either a low speed vehicle propelled by an electric motor that draws electricity from a battery with a capacity of 4 kilowatt hours or more or be a two- or three-wheeled vehicle propelled by an electric motor that draws electricity from a battery with the capacity of 2.5 kilowatt hours. A taxpayer may not claim this credit if the plug-in electric drive vehicle credit is allowable.<br /> <p style="text-align: center"><strong>Inflation Reduction Act</strong></p><br /> The Inflation Reduction Act expands the electric vehicle tax credit for electric vehicles placed into service after December 31, 2022 for ten years, through 2032. Taxpayers who buy qualifying vehicles will qualify for a tax credit of up to $7,500 for new vehicles.<br /> <br /> For used electric vehicles, the maximum credit will equal $4,000 or 30% of the vehicle&rsquo;s cost, whichever is less. Used electric vehicles only qualify if they&rsquo;re purchased for personal use, rather than for resale.<br /> <br /> <hr><br /> <br /> <b>Planning Point: </b><span style="font-weight: 400">Not every electric vehicle will qualify for the clean vehicle credits&mdash;meaning that it might be confusing when clients attempt to purchase a clean vehicle. However, the Department of Transportation has provided an online tool so that consumers can enter the vehicle identification number (VIN) to determine whether they would be eligible to claim the credit after purchase. Sellers of clean vehicles will also furnish seller reports that provide information necessary to claim the credit and verify that the vehicle in question qualifies. </span><br /> The exact amount of the available credit will depend on various factors, including whether minerals in the vehicle&rsquo;s battery are sourced from qualifying countries and where the vehicle is assembled. Taxpayers who purchase a vehicle where 40% of the critical minerals used in the battery are sourced from a qualifying country could be eligible for a $3,750 tax credit. Beginning in 2023, 50% of the battery&rsquo;s components must be assembled or manufactured in North America to qualify for the remaining $3,750 credit.<br /> <br /> <hr><br /> <br /> <strong>Planning Point:</strong> The percentage limitations will increase over time, which could make it more difficult to find a qualifying vehicle unless manufacturers modify their processes.<br /> <br /> <hr><br /> <br /> The clean vehicle tax credit itself was also expanded so that it covers more types of vehicles, to include any new qualified fuel cell motor vehicle. The term &ldquo;qualifying plug-in electric driver motor&rdquo; in IRC Section 30D was replaced with the term &ldquo;clean&rdquo;. That means qualifying vehicles are expanded to include more than qualified plug-in electric drive vehicles, so that, for example, hydrogen cell fuel cars will qualify.<br /> <br /> To claim the tax credit, the taxpayer must include the vehicle&rsquo;s VIN number on their tax return for the year. The expanded tax credit applies to vehicles placed into service after 2022 (note that clients who have written binding contracts in 2022 will qualify if the vehicle is placed into service in 2023). If the vehicle was purchased in 2022, the old rules for claiming the credit applied.<br /> <br /> <span style="font-weight: 400">Taxpayers must ensure that the vehicle was assembled by a qualified manufacturer. Qualified manufacturers are those that enter into approved agreements with the IRS and supply the IRS with VIN numbers that can be matched to the VIN reported on a taxpayer's return.</span><br /> <br /> <em>Income Limits and Restrictions</em>. The newly expanded electric vehicle tax credits are intended to provide benefits for lower- and middle-income clients. As such, they come with income restrictions and limitations. The credit is unavailable for single taxpayers who earn more than $150,000 per year, joint filers who earn more than $300,000 per year and heads-of-households who earn $225,000 per year or more.<br /> <br /> Certain luxury electric vehicles are also excluded. If the manufacturer&rsquo;s suggested retail price (MSRP) on an SUV, van or truck is over $80,000, the purchaser is not entitled to the credit. The credit is unavailable if the MSRP on a car is over $55,000. If the vehicle was used (defined as at least two years old), the cost of the pre-owned vehicle cannot exceed $25,000.<br /> <br /> There are also restrictions on where the vehicle was manufactured. To qualify, final assembly of the clean vehicle must have occurred in North America. That requirement is effective as of August 16, 2022 (the date the Inflation Reduction Act was signed into law). Further, a certain amount of the minerals used in the vehicle&rsquo;s battery must be sourced from North America or certain other countries that have free trade agreements with the U.S.<br /> <br /> The term &ldquo;final assembly&rdquo; is defined to mean the process by which a manufacturer produces a new clean vehicle at, or through the use of, a plant, factory, or other place from which the vehicle is delivered to a dealer or importer with all component parts necessary for the mechanical operation of the vehicle included with the vehicle, whether or not the component parts are permanently installed in or on the vehicle.<br /> <br /> Starting in 2023, however, existing sales caps will be removed so that automakers who currently offer electric vehicles can produce more electric vehicles. Prior to the Inflation Reduction Act, manufacturers that produced more than 200,000 electric vehicles did not qualify for the credit.<br /> <p style="text-align: center"><b>Transfer of Clean Energy Tax Credits</b></p><br /> <span style="font-weight: 400">Beginning in 2024, IRS proposed regulations</span><span style="font-weight: 400"> would allow buyers of eligible green energy vehicles to transfer their tax credits under IRC Sections 30D or 25E to the dealer in return for either (1) cash or (2) for use as a down payment on the vehicle.</span><span style="font-weight: 400"></span><br /> <br /> <span style="font-weight: 400">Taxpayers will be permitted to transfer up to two clean vehicle tax credits per year, either in the form of two clean vehicle credits or one clean vehicle credit and one previously owned clean vehicle credit (taxpayers cannot transfer two previously owned clean vehicle credits in the same tax year). The buyer must also transfer the full amount of the credit.</span><br /> <br /> <span style="font-weight: 400">The buyer will be able to transfer the credit (for both new and previously owned clean vehicles) regardless of their individual tax liability. However, if the taxpayer is later found to be ineligible for the credit because their income exceeds the income restrictions, the amounts received must be paid to the IRS when the buyer files their federal income tax return (buyers must file a return to claim or transfer their clean vehicle credits).</span><br /> <br /> <span style="font-weight: 400">The amounts received by the buyer (whether in cash or in the form of a down payment) are not included in the buyer&rsquo;s income. The amounts are simply treated as an advance payment of the allowable tax credit. However, the basis of the vehicle must be reduced by the amount of the advance credit.</span><br /> <br /> <span style="font-weight: 400">Buyers can transfer their clean energy credits if the attest that they believe they&rsquo;re eligible, based on their income falling below the threshold levels in the prior year or the fact that they believe their income will fall below the threshold in the year of purchase.</span><br /> <br /> <span style="font-weight: 400">According to a news release related to the proposed regulations, the IRS will issue advance payments to the recipient dealer for the transferred credit within 72 hours of the date of purchase if the dealer submits information about the sale to the IRS (a "time of sale report").</span><br /> <br /> <span style="font-weight: 400">The advance payment is not included in income, but the dealer also cannot deduct the amount transferred to the buyer. The amounts are treated as though the buyer paid the amounts to the dealer as part of the purchase price of the vehicle (so will be realized by the dealer in the same way as any other method of purchase).</span><br /> <br /> <span style="font-weight: 400">To allow these transfers, dealers will be required to register with the IRS Energy Credits Online Portal, through which they will submit required information to claim the advance credits (the website is expected to be available late in October). Dealers will not be able to claim these credits on their tax returns and must instead use the IRS&rsquo; advance payment procedures via the IRS Energy Credits Online system.</span><br /> <br /> <span style="font-weight: 400">At the time of sale, the dealer must submit a seller report containing the seller&rsquo;s identifying information, taxpayer identification number and other valid identification information for the dealer. The dealer must also have submitted the vehicle identification number for the qualifying vehicle. These time of sale reports will be required regardless of whether the buyer decides to transfer the credit to the car dealer. Dealers must also provide copies of the report to the buyer, along with written confirmation that the vehicle qualifies for the credit.</span><br /> <br /> <span style="font-weight: 400">IRS ECO is a free electronic service and requires no special software. The tool is available to any sized business and allows dealers and sellers of clean vehicles to complete the entire process online and receive advance payments within 72 hours. The tool will generate "time of sale reports" that taxpayers will use when filing federal tax returns to claim or report the credit. Beginning in 2024, clean vehicle sellers and licensed dealers must use the tool for customers to claim or transfer the new or previously owned clean vehicle credit for vehicles placed in service January 1, 2024 or later.</span><br /> <br /> <span style="font-weight: 400">According to the IRS&lt; the benefits of IRS ECO include: (1) advance payments to dealers will typically occur within 72 hours of an accepted clean vehicle credit transfer time of sale report, (2) the IRS acknowledges receipt and confirmation in real time that a qualified manufacturer has provided the VIN being sold as eligible when a time of sale report is submitted, (3) users can make corrections to information submitted through the tool and (4) the tool keeps issuer information from year to year.</span><br /> <br /> <span style="font-weight: 400">Initially, only one individual representative of the dealer or seller who is authorized to legally bind the dealer or seller can complete the initial registration through IRS Energy Credits Online. Starting in December 2023, dealers and sellers will be able to authorize more than one employee to submit time of sale reports and advance payment requests.</span><br /> <br /> <span style="font-weight: 400">To participate in the advance payment program, the dealer must also be in compliance with all federal tax laws and must filed all required returns and paid all federal taxes, interest and penalties due at the time of sale.</span><br /> <br /> <strong>1. </strong>IRC <span style="font-weight: 400">&sect; 30D<br /> <strong>2.</strong> REG-1130643<strong><br /> </strong></span><strong>3.</strong> <span style="font-weight: 400">Rev. Proc. 2023-33</span><br /> <br /> <div class="Section1"><br /> <br /> <hr><br /> <br /> </div></div><br />

<div class="Section1"><br /> <br /> <em>Editor's Note:</em> The Inflation Reduction Act expanded and extended the clean vehicle tax credit for tax years beginning after 2022. The rules discussed immediately below applied for vehicles placed in service during 2022.<br /> <br /> The ARRA modified the credit for qualified plug-in electric drive vehicles purchased after December 31, 2009. To qualify, vehicles must be newly purchased, have four or more wheels, have a gross vehicle weight rating of less than 14,000 pounds, and draw propulsion using a battery with at least four kilowatt hours that can be recharged from an external source of electricity. The minimum amount of the credit for qualified plug-in electric drive vehicles is $2,500 and the credit tops out at $7,500, depending on the battery capacity. The full amount of the credit will be reduced with respect to a manufacturer's vehicles after the manufacturer has sold at least 200,000 vehicles.<a href="#_ftn1" name="_ftnref1">¹</a><br /> <br /> ARRA also creates a special tax credit for two types of plug-in vehicles—certain low-speed electric vehicles and two- or three-wheeled vehicles. The amount of the credit is 10 percent of the cost of the vehicle, up to a maximum credit of $2,500 for purchases made after February 17, 2009, and before January 1, 2014. The Protecting Americans from Tax Hikes Act extended this credit for two-wheeled vehicles through 2016, and BBA 2018 extended the credit through 2017. To qualify, a vehicle must be either a low speed vehicle propelled by an electric motor that draws electricity from a battery with a capacity of 4 kilowatt hours or more or be a two- or three-wheeled vehicle propelled by an electric motor that draws electricity from a battery with the capacity of 2.5 kilowatt hours. A taxpayer may not claim this credit if the plug-in electric drive vehicle credit is allowable.<br /> <p style="text-align: center;"><strong>Inflation Reduction Act</strong></p><br /> The Inflation Reduction Act expands the electric vehicle tax credit for electric vehicles placed into service after December 31, 2022 for ten years, through 2032. Taxpayers who buy qualifying vehicles will qualify for a tax credit of up to $7,500 for new vehicles.<br /> <br /> For used electric vehicles, the maximum credit will equal $4,000 or 30% of the vehicle's cost, whichever is less. Used electric vehicles only qualify if they're purchased for personal use, rather than for resale.<br /> <br /> <hr /><br /> <br /> <strong>Planning Point</strong>: Not every electric vehicle will qualify for the clean vehicle credits—meaning that it might be confusing when clients attempt to purchase a clean vehicle. However, the Department of Transportation has provided an online tool so that consumers can enter the vehicle identification number (VIN) to determine whether they would be eligible to claim the credit after purchase.  Sellers of clean vehicles will also furnish seller reports that provide information necessary to claim the credit and verify that the vehicle in question qualifies.<br /> <br /> <hr /><br /> <br /> The exact amount of the available credit will depend on various factors, including whether minerals in the vehicle's battery are sourced from qualifying countries and where the vehicle is assembled. Taxpayers who purchase a vehicle where 40% of the critical minerals used in the battery are sourced from a qualifying country could be eligible for a $3,750 tax credit. Beginning in 2023, 50% of the battery's components must be assembled or manufactured in North America to qualify for the remaining $3,750 credit.<br /> <br /> <hr /><br /> <br /> <strong><strong>Planning Point:</strong></strong> The percentage limitations will increase over time, which could make it more difficult to find a qualifying vehicle unless manufacturers modify their processes.<br /> <br /> <hr /><br /> <br /> The clean vehicle tax credit itself was also expanded so that it covers more types of vehicles, to include any new qualified fuel cell motor vehicle. The term "qualifying plug-in electric driver motor" in IRC Section 30D was replaced with the term "clean". That means qualifying vehicles are expanded to include more than qualified plug-in electric drive vehicles, so that, for example, hydrogen cell fuel cars will qualify.<br /> <br /> To claim the tax credit, the taxpayer must include the vehicle's VIN number on their tax return for the year. The expanded tax credit applies to vehicles placed into service after 2022 (note that clients who have written binding contracts in 2022 will qualify if the vehicle is placed into service in 2023). If the vehicle was purchased in 2022, the old rules for claiming the credit applied.<br /> <br /> Taxpayers must ensure that the vehicle was assembled by a qualified manufacturer. Qualified manufacturers are those that enter into approved agreements with the IRS and supply the IRS with VIN numbers that can be matched to the VIN reported on a taxpayer's return.<br /> <br /> <em>Income Limits and Restrictions</em>. The newly expanded electric vehicle tax credits are intended to provide benefits for lower- and middle-income clients. As such, they come with income restrictions and limitations. The credit is unavailable for single taxpayers who earn more than $150,000 per year, joint filers who earn more than $300,000 per year and heads-of-households who earn $225,000 per year or more.<br /> <br /> Certain luxury electric vehicles are also excluded. If the manufacturer's suggested retail price (MSRP) on an SUV, van or truck is over $80,000, the purchaser is not entitled to the credit. The credit is unavailable if the MSRP on a car is over $55,000. If the vehicle was used (defined as at least two years old), the cost of the pre-owned vehicle cannot exceed $25,000.<br /> <br /> There are also restrictions on where the vehicle was manufactured. To qualify, final assembly of the clean vehicle must have occurred in North America. That requirement is effective as of August 16, 2022 (the date the Inflation Reduction Act was signed into law). Further, a certain amount of the minerals used in the vehicle's battery must be sourced from North America or certain other countries that have free trade agreements with the U.S.<br /> <br /> The term "final assembly" is defined to mean the process by which a manufacturer produces a new clean vehicle at, or through the use of, a plant, factory, or other place from which the vehicle is delivered to a dealer or importer with all component parts necessary for the mechanical operation of the vehicle included with the vehicle, whether or not the component parts are permanently installed in or on the vehicle.<br /> <br /> Starting in 2023, however, existing sales caps will be removed so that automakers who currently offer electric vehicles can produce more electric vehicles. Prior to the Inflation Reduction Act, manufacturers that produced more than 200,000 electric vehicles did not qualify for the credit.<br /> <br /> <hr /><br /> <br /> <strong><strong>Planning Point:</strong></strong> Not every electric vehicle will qualify for the clean vehicle credits—meaning that it might be confusing when clients attempt to purchase a clean vehicle. However, the Department of Transportation has provided an online tool so that consumers can enter the vehicle identification number (VIN) to determine whether they would be eligible to claim the credit after purchase. Sellers of clean vehicles will also furnish seller reports that provide information necessary to claim the credit and verify that the vehicle in question qualifies.<br /> <br /> <hr /><br /> <br /> </div><br /> <div class="refs"><br /> <br /> <hr align="left" size="1" width="33%" /><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>.  IRC § 30D.<br /> <br /> </div>