Debates abound on whether the recently passed Inflation Reduction Act of 2022 will have any real influence on inflation, but what we do know is that the funding, credits, and changes included in the Act have the potential to impact many of the individuals and small businesses that we work with.

Highlights from the Inflation Reduction Act

The signing of the Inflation Reduction Action (IRA) into law includes changes that address environmental objectives and healthcare costs with funding for it coming from an expected increase in Internal Revenue Service (IRS) collections and an excise tax on stock buybacks.

• Credits for residential homeowners and commercial businesses to implement clean air initiatives
• An expansion of alternative-fueled vehicle credits that will include pre-owned and commercial vehicles beginning in 2023
• A cap on insulin prices and the ability for Medicare to negotiate drug pricing with pharmaceutical companies
• An extension to the Affordable Care Act’s premium subsidies for individuals
• Extended deadlines and threshold changes to existing legislation
• $80 billion in funding to the IRS to aid in tax collection and compliance

Healthcare Updates

Beginning in 2023, the $35 cap on insulin costs is a welcome change for the 37 million Americans who live with diabetes. The cost-sharing formula has the potential to drive the cost even lower beginning in 2026 when insurance companies must also consider the maximum fair price and negotiated price of insulin when determining their co-pay amounts.

While the introduction of the Drug Price Negotiation Program is a welcome step for those not in the pharmaceutical industry, it isn’t set to reach individuals before 2026, and even then, currently is restricted to 10 drugs that will be chosen for the program.

The Affordable Care Act’s premium subsidies for individuals is extended through 2025 for those with income that exceeds 400% of the federal poverty level. Non-subsidized small businesses, however, will likely face inflation-impacted premiums in 2023.

Tax Filing and Enforcement

Substantial funding will be available to the IRS and related tax enforcement bodies (Treasury inspector, U.S. Tax Court, etc.) beginning September 20, 2022. For the IRS, the funds are to be utilized for specific areas:

• Taxpayer Services – such as education and taxpayer advocacy services
• Enforcement – including digital asset monitoring
• Operations Support
• Business Systems Modernization

Whether individuals and businesses are in compliance or not, it’s natural to have concerns about the potential for audit and whether you interpreted the tax laws in the same way that the IRS would. Consult with your tax professional about any concerns you have or to receive guidance on managing your digital assets.

Clean Air Initiatives

Several welcome changes that affect both individuals and small businesses were packaged in the clean air initiatives within the Inflation Reduction Act with incentives added for automakers to produce more vehicles in a lower price range. The calculation of the vehicle tax credit has also changed so take care to ensure that the updated regulation is followed.

Residences

• The energy-efficient property credit placed in service date has been extended to January 1, 2023 and it’s amount increased to 30% for qualified energy efficiency improvements. The credit available for a home energy audit was increased to $150.
• The lifetime limitation was removed and was replaced by an annual allowable credit of $1,200 per taxpayer. Other limits apply to specific items such as exterior doors and heat pumps.
• The Act extended a personal tax credit—known as residential energy efficient property or REEP— for items installed to 2035. This includes items such as solar hot water and geothermal heat pumps and now includes qualified batter storage technology expenditures.
• The New Energy Efficient Home Credit (NEEHC) was extended to 2033. It offers eligible contractors credits based on the energy efficiency requirements the home satisfies and whether the construction of the home meets wage requirements. In place of the $1,000 and $2,000 credits, the amount available can range from $500 to $5,000.

Personal Vehicles

• The limit on the number of vehicles eligible for the credit was removed.
• Final assembly of the vehicle must take place in North America.
• The credit is limited by adjusted gross income (AGI) thresholds of $300,000/$225,000/$150,000 for joint filers, heads of households, and individuals.
• The manufacturer’s suggested retail price (MSRP) is capped at $55,000 or $80,000 for pickups, vans, and SUVs.
• Starting in 2023, pre-owned vehicle purchases will also be allowed an income tax credit equal to the lesser of $4,000 or 30% of the vehicle’s sale price, with a maximum eligible sales price of $25,000.
• Qualified AGI limitations for preowned vehicles are $150,000/$112,500/$75,000.

Businesses

• Beginning in 2023, commercial vehicles will be eligible for clean air tax credits.
• There is a maximum credit of $7,500 for vehicles rated under 14,000 pounds or $40,000 for heavier vehicles. The credit requires that other criteria are considered in its calculation.
• Starting in 2023, research credits (up to $250,000) can be taken against both their portion of Medicare as well as Social Security tax. Unused credit being carried forward.
• Credits for sales and use of biodiesel, renewable diesel and alternative fuels have been extended through December 31, 2024. Refunds of excise taxes, when used for purposes other than for which they were sold or for resale, can also be taken when utilized before December 31, 2024.

Planning and Preparation

The broad range of issues addressed in the Inflation Reduction Act may feel intimidating, but with resourceful planning with the tax professionals at BKM Sowan Horan, businesses and individuals can minimize their tax liability while reducing the risk of errors and missed opportunities.

An integral part of managing the operations of a business is making decisions of whether to lease or buy equipment, buildings, and vehicles. While you may have found those decisions easy to make, additional business practices must now be implemented to conform with current accounting standards.

In 2016, the Financial Accounting Standards Board (FASB) issued its Lease Accounting Standard, ASC 842 (Accounting Standards Codification). Public companies were required to adopt the standard beginning in late 2019 and while the initial implementation date was deferred due to the pandemic for others, non-profits and privately held businesses who have fiscal years beginning after December 15, 2021, must now follow the guidance of the ASU (accounting standards update) for annual reporting. Beginning December 15, 2022, all organizations must follow the standard for interim reporting as well.

What Is the New Lease Accounting Standard?

The new lease accounting standard requires that businesses transition from recording operating leases as direct expenses to creating journal entries that record the obligation of the business to the lessor as a liability on the balance sheet and then documenting the reduction of the obligation as lease payments are made over the duration of the lease term. An asset will also be recorded as a Right of Use Asset to show the business has contracts in place to utilize the assets to support their business.

The process of including operating leases on the balance sheet is intended to promote greater transparency to financial statement readers so they have the additional knowledge to make better decisions regarding the organization.

What Qualifies as a Lease?

Businesses must conduct a thorough review of their contracts and other records to ensure that all leases are captured and properly recorded. The FASB identified three primary criteria in the new standard for what would be considered a lease.

• It must be a physical asset
• You must have the right to control or use the asset
• The asset must be explicitly or implicitly defined

While the criteria may seem clear, there are several situations where judgment is required to properly account for all leases. Leases are often embedded in contracts that include service components or there are there is a portion of the costs that are variable, such as a retail site that includes a base amount plus a percentage of sales.

Implementation Complications

Business owners and managers should anticipate spending a considerable amount of time identifying potential leases, capturing all the data elements of each lease (start and end dates, amounts due at what intervals, etc.), and in recording and maintaining the accounting transactions needed for ASC 842 compliance.

Debt Covenants

As with other accounting method changes, adopting ASC842 will affect your financial results as you integrate your operating leases into your balance sheet. The degree of the change will vary by company but those with significant lease liabilities should be aware that it could impact your compliance with debt covenants. If that is your situation or you believe it could be, you should begin conversations with your bank as soon as possible to address the situation.

Policy Elections

The new lease standard requires organizations to make policy decisions about how leases are handled. This will include deciding whether or to not adjust comparative periods retroactively, the handling of short-term leases, and whether to adopt a portfolio approach, among other items.

You and your team will need to determine the implicit rate for leases, prepare required disclosures and identify and manage asset impairments that could occur under the new lease standard.

Taking Action: Your Next Steps

The sooner you begin working on adopting the lease accounting standard, the better the process will be.

• Assign a team responsibility for completing the ASU implementation. This isn’t a process that you can let fall through the cracks.
• Determine the scope and complexity of your lease portfolio. This is particularly relevant if you have multiple locations or decentralized management of leases currently.
• Develop a work methodology to process and assess existing leases and integrate new leases that are contracted.
• Review and understand what policy decisions need to be made, model their impact on your organization, and make the selections.
• Track this implementation as a project with assignments and deadlines to ensure that it is completed in a timely manner to stay in compliance.

And the final step—ask for help if you need it. BKM Sowan Horan, LLP has the knowledge and resources to assist you with your implementation of ASC 842. We can help you conduct the review process, evaluate the policy decision options for your organization, and offer a technology solution to make the implementation and ongoing lease accounting work accurate and efficient. Our goal is to simplify and streamline the lease accounting implementation process for your organization and we welcome the opportunity to discuss it with you and your accounting team.

For years, you’ve trusted BKM Sowan Horan to provide tax and accounting services and expert guidance. As in previous years, we are providing you with a software solution that simplifies tax time and reduces your tax season stress. The solution is called TaxCaddy.

TaxCaddy makes it easier for you to gather and submit your 1040 tax documents securely, communicate with your tax professional, answer your electronic questionnaire, and electronically sign documents such as your e-file authorization.

Here’s what you can expect (starting now):

• Electronic submission of tax documents by taking pictures with the TaxCaddy mobile app, uploading files, or manually entering information.
• Linking of your financial institution’s tax documents for automatic upload to your Tax Caddy account (optional)
• Organization of tax documents. Your account will list everything that you provided in your prior-year return so you can keep track of what you still need to submit.
• One place that houses all your tax returns and associated documents for years to come.
• Direct contact with your BKM Sowan Horan tax professional through TaxCaddy’s messaging features.

Here’s How to Get Started

1. Connect – You have already received an invitation to create your TaxCaddy account. Log in to your TaxCaddy account, navigate to the Overview screen, and click the Accept Connection button to establish a connection with BKM Sowan Horan.

2. Add Authorized Users – To provide access to your spouse or others, click your name in the top right corner and then Settings. Click Additional User Account and enter their information. They will receive an invitation email to create a linked account with the same steps you have already completed.

3. Download & Use the TaxCaddy Mobile App – The TaxCaddy mobile app can be downloaded from the iTunes App Store or Google Play. It provides a convenient way to access your information and communicate with us directly from your mobile phone.

4. Provide Your Tax Information – In your TaxCaddy account you’ll find a Tax Questionnaire and a Document Request List. PROVIDE DOCUMENTS BY:

• Setting up “Smart Links” with your financial institutions to automatically retrieve tax documents. As documents become available, they will be automatically retrieved and placed in your TaxCaddy account.
• Photo scanning the document with the TaxCaddy mobile app.
• Uploading files.
• Manually entering form information.

5. Complete the Questionnaire – Provide answers to the Questionnaire by navigating to the TaxCaddy Questionnaire.

6. Request Support – If you have questions about TaxCaddy, call your BKM Sowan Horan tax professional. If you have technical questions about your TaxCaddy account or you’re experiencing trouble accessing your account (e.g., if you forgot your password), the TaxCaddy support team is just an email away.

Hope you’re having a great Wednesday! We’ve received some good news over the last couple of days. First, President Biden signed an extension for the deadline to file for the Paycheck Protection Program. The deadline to apply for a loan under the program was set to expire today, March 31, but the new law extends the application deadline to May 31. It gives the Small Business Administration (SBA) until June 30 to process the applications.

In addition, the SBA announced on Tuesday that restaurants applying for grants under the Restaurant Revitalization Fund (RRF) do not need to register for a DUNS number, nor do they need to register on SAM.gov, the System for Award Management process that is normally required to apply for federal grants. This should make applying for an RRF grant more efficient and eliminate a layer of red tape.

Please contact George Stephens at BKM Sowan Horan or other team members with any questions.

The SBA expects an early April roll-out

The Food & Beverage industry had to make a sharp pivot to try and stay in business during the pandemic. In addition to the shelter-in-place orders, the necessary accommodations these business owners had to make were unexpected (burdensome) expenses. Last year, the National Restaurant Association pushed Congress to create a specific recovery fund due to the unique challenges restaurants faced. As a result, The American Rescue Plan Act of 2021 (ARPA) established a $28.6B Restaurant Revitalization Fund (RRF), and $5B is reserved for businesses with gross receipts of $500,000 or less in 2019.

Are you eligible?

The RRF is intended for these entities:

This includes all airport locations. In addition, licensed facilities or premises of a beverage alcohol producer are eligible (where the public may taste, sample, or purchase products or other similar places of business in which the public or patrons assemble for the primary purpose of being served food or drink). Application for the Grant must include certifications that 1) uncertainty of current economic conditions makes necessary the grant request to support ongoing operations, and 2) the applicant has not applied for nor received a Shuttered Venues Operations Grant (SVOG). Publicly traded companies are ineligible.

How much is the Grant?

Assuming the business was in operation in all of 2020 and 2019, you would calculate the eligible Grant by deducting the 2020 gross receipts from 2019 gross receipts subtracting any amounts received under a first or second draw PPP loan. If the business started in 2019 or 2020, there are formulas for calculating the amount of Grant eligible. The Grant is limited to $5 million per location or $10 million in total, including affiliated businesses.

What can I use the Grant for?

The funds can be applied toward:

How do I apply?

During the initial 21-day period, the SBA will prioritize grants to entities owned and controlled by women, veterans, or socially or economically disadvantaged small business concerns. Applicants should ensure they have a DUNS number and register with the System for Award Management (SAM), as these will be required to apply for the Grant. The SBA recently said the grant application period would open in early April. It is required to open within 60 days of the ARPA becoming law, therefore by May 9th at the latest. While not yet clear, we expect that expenses used in PPP loan forgiveness and Employee Retention Credit, and other credits will not be eligible for grant purposes.

Are there any strings attached?

The grants are non-taxable. Federal grants of more than $750,000 typically come with a Single Audit Act audit requirement. We recommend that Grant recipients establish an internal controls environment to track RRF grant expenditures in anticipation of an audit.

Please contact George Stephens at BKM Sowan Horan or other team members with any questions.