On May 4, 2023, the Internal Revenue Service (IRS) published a letter to encourage taxpayers to maximize their benefits from energy efficient home updates. The expanded benefits were authorized by the Inflation Reduction Act of 2022.
Most of the new benefits are under the Energy Efficient Home Improvement Credit (EEHIC) or the Residential Clean Energy Credit (RCEC). Homeowners or renters may benefit from these credits if qualified improvements are made to the residence. Landlords are not qualified to claim the credit. The specific qualifications are explained at IRS.gov/HomeEnergy
1. Energy Efficient Home Improvement Credit
The EEHIC may produce up to $3,200 in benefits per year. It became effective on January 1, 2023 and is scheduled to last for the next decade. The credit is 30% of qualified energy efficiency improvements, up to $1,200 for home improvements, with certain limits that may include $250 per door ($500 total), a total of $600 for efficient windows and $150 for a qualified home energy audit. There is an enhanced credit of up to $2,000 for qualified heat pumps, biomass stoves or biomass boilers.
2. Residential Clean Energy Credit
The RCEC is intended to encourage energy production improvements in a main home. These could include solar photovoltaic panels, solar water heaters, a wind turbine, a geothermal heat pump or battery storage technology. The solar water heater must be certified by the Solar Rating Certification Corporation. A geothermal heat pump must meet the Energy Star requirements. A storage battery must have capacity of three kilowatt hours or more. There is no annual or a lifetime dollar limit on these energy production improvements. The tax credit is scheduled to be 30% each year until 2033.
Both credits are nonrefundable, which means that the credit amount will not be refunded if it exceeds the tax payable. While the EEHIC may not be carried forward, the RCEC may be carried forward and applied to reduce taxes in future years.
IRS Highlights Benefits of Starting a Business
The week of April 30, 2023 was National Small Business Week. The Internal Revenue Service (IRS) has published multiple resources to assist individuals who are interested in starting a business.
The IRS noted, "National Small Business Week is an annual effort led by the Small Business Administration to recognize the hard work, ingenuity and dedication of America's small businesses and to celebrate their contributions to the economy." To celebrate the important week for small businesses, the IRS highlighted the many resources available to individuals who choose to start a business.
Some of the tips and resources offered by the IRS include:
- Employer Identification Number — A business will likely need an Employer Identification Number (EIN). This is a permanent number that will enable the business to open bank accounts and file tax returns. Business owners should apply for an EIN online at IRS.gov.
- Business Structure — There are at least five different types of business entities. Taxpayers should conduct research and obtain advice on the best entity form for the particular type of business. An individual may operate a sole proprietorship. Two or more individuals may join in a partnership. It is possible to form a "C" Corporation similar to large companies. Other forms such as a Subchapter S Corporation will operate to pass through income, losses, deductions and credits to shareholders. One final entity type is a Limited Liability Company (LLC), which is commonly treated as a partnership for tax purposes.
- Business Taxes — Taxes will be due on earned income. Many small business owners or self-employed individuals make quarterly estimated tax payments based on their business income. The type of business also may affect taxes due. Businesses generally pay income tax, self-employment tax (which is the Social Security and Medicare tax for individuals who work for themselves), employment tax (Social Security and Medicare tax paid on business employees) and excise tax on various goods and services.
- Good Recordkeeping — New business owners may find that using software to track all of their financial records is a good option. The software may be capable of preparing financial statements, tracking profit and loss, creating a balance sheet and monitoring deductible expenses and other financial information. Taxpayers should plan to retain financial records for at least three years. However, many software programs will allow retention of financial records for all of the operating years of the business.
- Business Year Options — Most small businesses operate on a calendar year basis. The business income from January 1 through December 31 each year is passed through to the owners or the Subchapter S shareholders. Larger businesses, particularly those that are C Corporations, may choose a fiscal year that ends on the last day of any month during the year.
- IRS Business Guides — The IRS offers multiple resource guides on IRS.gov for business owners, including pages on Starting a Business, Selecting the Business Structure, Operating a Business and Closing a Business. These pages provide basic information and guidance to help start and operate a business.
- IRS Helps for Business Owners — There are multiple online education services on IRS.gov. These include the IRS Video Portal with many presentations on tax topics, IRS Webinars for Small Businesses which explain principles such as business income and expenses and various IRS workshops and seminars. All of these are helpful for individuals starting or operating a business. There also is an email service that has the latest news and tips for operating small businesses. Interested taxpayers may sign up for a subscription to "News for Small Businesses" on IRS.gov.
Senators Warn IRS About AI Tax Scams
On May 1, 2023, Senators Margaret Wood Hassan (D-NH), Charles Grassley (R-IA), Ron Wyden (D-OR) and James Lankford (R-OK) sent a letter to IRS Commissioner Daniel Werfel. The Senators were concerned that cybercriminals will harness artificial intelligence (AI) tools to generate new and effective tax scams. American taxpayers may be even more vulnerable to the new tax scams created with AI tools such as OpenAI's ChatGPT.
Previous tax scams have frequently been easy to identify because they included spelling mistakes, grammatical errors or improper tax references. However, the tax scams produced by current AI technology have a much higher quality and the increased professionalism of the scams may "trick vulnerable taxpayers." This new capability of tax fraudsters using AI may increase the vulnerability of families, older Americans and small businesses.
Cybersecurity experts have recently demonstrated ChatGPT's ability to generate high quality scam messages. One scam involved a fake email claiming to be from the IRS. The fake email stated that if an individual wanted to receive a tax refund of $1,450, he or she was required to produce personal financial information.
Another scam involved the use of ChatGPT to create a transcript for a scammer claiming to be an IRS agent. The transcript helped the scammer be more effective in targeting the victim.
Finally, a third strategy was a scam generated by ChatGPT that targeted a business owner under the inducement of claiming the Employee Retention Tax Credit. The scam encouraged the business owner to provide the Employer Identification Number (EIN), his or her payroll information and a list of employee Social Security Numbers.
The Senators requested answers to four questions by May 31, 2023.
- IRS Preparation — How is the IRS preparing for AI-generated tax scams?
- Taxpayer Education — Is the IRS prepared to educate taxpayers and tax professionals about AI-generated tax scams?
- Future AI Scams — What does the IRS believe the evolution of AI-generated tax scams will develop into over the short and medium-term?
- Current AI Scam Cost — Does the IRS have reports of current AI-generated scams and can the IRS estimate the total dollar cost of the scams?
The advent of AI tools such as ChatGPT will have a major impact on many areas of our society. ChatGPT is now widely used in education, philanthropy, law and medicine. It has powerful learning capabilities that allow it to provide useful information in many fields. The leaders who are developing AI caution that AI could be used for both highly beneficial and quite harmful purposes. While the developers of AI have attempted to limit the harmful uses, the sheer level of capability will enable skilled fraudsters to use the AI tool. All Americans should become reasonably knowledgeable about AI to protect themselves and their families.
Applicable Federal Rate of 4.4% for May -- Rev. Rul. 2023-9; 2023-19 IRB 1 (15 April 2023)
The IRS has announced the Applicable Federal Rate (AFR) for May of 2023. The AFR under Sec. 7520 for the month of May is 4.4%. The rates for April of 5.0% or March of 4.4% also may be used. The highest AFR is beneficial for charitable deductions of remainder interests. The lowest AFR is best for lead trusts and life estate reserved agreements. With a gift annuity, if the annuitant desires greater tax-free payments the lowest AFR is preferable. During 2023, pooled income funds in existence less than three tax years must use a 2.2% deemed rate of return.