Study Unit Eight: Credits, Losses, and Additional Taxes PDF

1 STUDY UNIT EIGHT CREDITS, LOSSES, AND ADDITIONAL TAXES 8.1 General Business Credit (Sec. 38)......................................... 1 8.2 Net Operating Loss (NOL)........................

1 STUDY UNIT EIGHT CREDITS, LOSSES, AND ADDITIONAL TAXES 8.1 General Business Credit (Sec. 38)......................................... 1 8.2 Net Operating Loss (NOL)............................................... 8 8.3 Casualty and Theft Losses............................................... 10 8.4 Additional Taxes....................................................... 12 This is the final study unit to discuss reductions in tax liability that apply to all business entities. Business-specific credits may reduce an entity’s tax due amount, while losses may reduce an entity’s taxable income. Losses come from operations, casualty, and theft. This study unit concludes with a brief explanation of additional business-related taxes for heavy vehicle use, farmers, and employer shared responsibility payments. 8.1 GENERAL BUSINESS CREDIT (SEC. 38) Tax credits are used to achieve policy objectives, such as encouraging energy conservation. A $1 credit reduces gross tax liability by $1. 1. The General Business Credit (GBC) is a set of more than 20 credits commonly available to businesses. The GBC is taken on Form 3800. a. The GBC includes, among others, credits for investment, research, work opportunity, disabled access, pension plan start-up, and childcare facilities. 2. Most credits are nonrefundable, meaning that once tax liability reaches zero, no more credits can be taken to produce refunds. Overall Limit [Sec. 38(c)] 3. For individuals, the GBC is limited to net income tax minus the greater of (a) the tentative alternative minimum tax or (b) 25% of net regular tax liability over $25,000. For corporations, the GBC is limited to net income tax minus 25% of the net income tax in excess of $25,000. EXAMPLE 8-1 General Business Credit Taxpayer has a regular tax of $60,000 and a tentative alternative minimum tax of $57,000. The taxpayer also has $10,000 of potential general business credits. Since the regular tax exceeds the tentative minimum tax, there is no alternative minimum tax. The taxpayer is allowed a General Business Credit computed as follows: $60,000 Regular tax (0) Alternative minimum tax $60,000 Income tax (0) Nonrefundable credits other than General Business Credit $60,000 Net income tax (57,000) Greater of tentative alternative minimum tax or 25% of net regular tax over $25,000 $ 3,000 General Business Credit a. Net income tax is the sum of regular income tax and alternative minimum tax liability, reduced by nonrefundable credits other than those that comprise the General Business Credit. Copyright © 2024 Gleim Publications, Inc. All rights reserved. Duplication prohibited. Reward for information exposing violators. Contact [email protected]. 2 SU 8: Credits, Losses, and Additional Taxes b. Net regular tax is the taxpayer’s regular income tax liability (i.e., without alternative minimum tax) reduced by nonrefundable credits. c. Excess over the limit may be allowable as a current deduction to the extent it is attributable to the Work Opportunity Credit, among other credits. d. Any excess of the combined GBC over the limit (and not allowed as a current deduction) may be carried back 1 year and forward 20 years as a credit. It is carried to the earliest year to which it could be used, then to the next, and so on. Small Employer Insurance Credit (Sec. 45R) NOTE: Throughout this course, “PPACA” instead of “ACA” is used to identify significant topics from the Patient Protection and Affordable Care Act in order to avoid confusion with the Applicable Credit Amount for gift and estate taxes. 4. As part of PPACA, the Small Employer Health Insurance Tax Credit provides a 50% credit for the cost of premiums paid toward health insurance coverage. a. The small employer must contribute at least 50% of the premium cost. b. The credit is available to small employers with 25 or fewer employees and average annual wages of less than $61,400 (2023). c. A sole proprietor, a partner, a shareholder owning more than 2% of an S corporation, and any owner of more than 5% of other businesses are not employees for purposes of the credit. Family members of any business are generally excluded. 1) Seasonal employees who work for 120 days or fewer for the business in a year are excluded. d. The credit is limited to 2 consecutive years. e. The credit reduces the deduction for health insurance premiums. Disabled Access Credit (Sec. 44) 5. A credit for a portion of qualifying expenditures to provide access to disabled persons is available as a General Business Credit. a. Eligible persons are small businesses, including partnerships and S corporations, that, during the preceding tax year, did not have either more than 30 full-time employees or more than $1 million in gross receipts. b. Examples of qualifying access expenditures are payments to remove physical barriers, to modify equipment, and to install access ramps. c. Eligible access expenditures do not include expenditures related to a building that was first placed in service by the taxpayer. d. The credit is equal to 50% of qualifying expenditures that fall between a $250 threshold and a $10,250 cap. e. The credit is limited to $5,000 [($10,250 – $250) × 50%] for the tax year. f. The credit is not allowed for new buildings. g. The credit is computed on Form 8826, Disabled Access Credit. Copyright © 2024 Gleim Publications, Inc. All rights reserved. Duplication prohibited. Reward for information exposing violators. Contact [email protected].  SU 8: Credits, Losses, and Additional Taxes 3 Work Opportunity Tax Credit (WOTC) (Sec. 51) 6. Employers may claim a credit for wages paid to individuals from certain targeted group(s) during their first year of employment. The credit is taken on Form 5884. a. The employees must work at least 120 hours in a calendar year to be eligible for the credit. 1) An employee who works at least 400 hours is eligible for the full 40% credit. An employee who works between 120 and 400 hours has a reduced credit of 25%. b. The maximum credit by qualifying class is shown below. Targeted Group(s) Applicable Wages Maximum Credit Calculation Qualified summer youth employee $3,000 $1,200 $3,000 × 40% Long-term family assistance $10,000 $4,000 $10,000 × 40% (first year) Long-term family assistance $10,000 $5,000 $10,000 × 50% (second year) Qualified veterans up to $24,000 $9,600 $24,000 × 40% All other targeted groups $6,000 $2,400 $6,000 × 40% c. Targeted groups include 1) Qualified IV-A recipients of temporary assistance to needy families 2) Qualified veterans 3) Qualified ex-felons 4) Designated community residents 5) Vocational rehabilitation referrals 6) Qualified supplemental nutrition assistance program (SNAP) benefits recipients 7) Qualified SSI recipients 8) Long-term family assistance recipients 9) Qualified summer youth employees 10) Qualified long-term unemployment recipients d. Qualified wages include 1) Remuneration for employment 2) Amount received under accident and health plans 3) Contributions by employers to accident and health plans 4) Educational assistance 5) Dependent care expenses e. Any business deduction for the wages must be reduced by the amount of the credit. Copyright © 2024 Gleim Publications, Inc. All rights reserved. Duplication prohibited. Reward for information exposing violators. Contact [email protected]. 4 SU 8: Credits, Losses, and Additional Taxes Investment Tax Credit 7. Investment credit property is depreciable or amortizable property as listed below. To be eligible, some or all of the qualified investments must be certified by the Secretary of Treasury. a. The credit is claimed on Form 3468 and consists of the following six parts: 1) (Business) Energy Credit 2) Rehabilitation Credit 3) Qualifying Advanced Coal Project Credit 4) Qualifying Gasification Project Credit 5) Qualifying Advanced Energy Project Credit 6) Advanced Manufacturing Credit (Business) Energy Credit b. The credit is available to businesses that invest in energy-conserving property. 1) The original use of the property must begin with the taxpayer. 2) The credit is equal to the basis of the property placed in service during the year times the credit percentage. 3) Qualified property and their corresponding energy percentages range from 10% to 30%. 4) The property’s basis for depreciation is reduced by 50% of the credit taken. Rehabilitation Credit c. The credit is equal to 20% ratably over 5 years (i.e., 4% per year) for certified historic structures expenditures paid or incurred after 2017. 1) The expenditures must exceed the larger of $5,000 or the structure’s adjusted basis. 2) The structure’s basis for depreciation is reduced by the amount of the credit taken. Qualifying Advanced Coal Project d. The credit is available for investment in qualified property that is used in a qualified advanced coal project. The details of a qualified project are beyond the scope of the EA exam. 1) The original use of the property must begin with the taxpayer. 2) The credit is equal to the basis of the property placed in service during the year times the credit percentage. 3) Qualified property and their corresponding credit percentages are a) Integrated gasification combined cycle, 20% b) Other advanced coal-based projects, 15% c) Advanced coal-based generation technologies, 30% Qualifying Gasification Project e. The credit is available for investments in qualified property used in a qualified gasification project. The credit is 20% of the basis, with an increase to 30% if 75% of carbon dioxide emissions are captured. 1) Credit is disallowed for property if an Advanced Coal Credit is allowed. Copyright © 2024 Gleim Publications, Inc. All rights reserved. Duplication prohibited. Reward for information exposing violators. Contact [email protected].  SU 8: Credits, Losses, and Additional Taxes 5 Qualifying Advanced Energy Project f. The Qualified Advanced Energy Project Credit is available for investment in qualified property used in a qualifying advanced energy project. 1) The credit is 30% of the basis. 2) Credit is disallowed for property available for the Energy Credit, the Advanced Coal Project Credit, or the Gasification Project Credit. Advanced Manufacturing Credit g. The Advanced Manufacturing Credit is available for investment in qualified property used in the manufacturing of semiconductors and related equipment. The credit is 25% of the basis. Research Credit 8. Eligible small businesses ($50 million or less in gross receipts) can claim a tax credit on Form 6765 for expenses relating to increasing research activities in a trade or business. This research must be undertaken for discovering information that is technological in nature, and its application must be intended for use in developing a new or improved business component of the taxpayer. a. The following is a calculation of the credit for research: 20% × (Qualified expenses for the year – Base period expenses) + 20% × (Basic research payments) + 20% × (Amounts paid to an energy research consortium for qualified energy research) = Research Credit claimed 1) Qualified expenses represents all research expenses (not just in-house) for the taxpayer incurred while carrying on any trade or business. a) Wages taken into account in determining the Work Opportunity Credit from qualified research expenses are excluded. 2) Base period expenses are calculated by multiplying the taxpayer’s average gross receipts from the 4 preceding years by the taxpayer’s fixed-base percentage. a) The fixed-base percentage depends on whether the taxpayer is an existing company or a start-up company. b) The maximum fixed-base percentage is 16%, and start-up companies must use a 3% fixed-base percentage. b. Taxpayers may elect an alternative simplified credit equal to 14% of expenses in excess of 50% of the average expense for the preceding 3 years. c. The credit is included as part of the General Business Credit described in Sec. 38 and may be subject to limitation and carryforward and carryback rules. d. The cost of acquiring someone else’s product or process does not qualify for the credit. e. Research must be conducted within the U.S., including Puerto Rico, and U.S. possessions. Copyright © 2024 Gleim Publications, Inc. All rights reserved. Duplication prohibited. Reward for information exposing violators. Contact [email protected]. 6 SU 8: Credits, Losses, and Additional Taxes Pension Plan Start-Up Costs (Including Employer Contributions) 9. A Pension Plan Start-Up Costs Credit is available for small employers (100 or fewer employees) for the first three tax years of the plan’s existence. a. The credit amount equals 100% for employers with 50 or fewer employees and 50% for employers with more than 50 employees of the start-up costs incurred to create or maintain a new employee retirement plan. b. The credit limit is the greater of $500 or the lesser of $250 for each eligible employee who is not a highly compensated employee or $5,000. 10. As of 2023, an additional credit for employer contributions is added to the startup costs credit to arrive at the total credit for small employer pension plan startup costs (including employer contributions). The employer contributions portion allowed is $1,000 of contributions made per employee. There are three qualifiers for this credit amount. a. Employers with 50 or fewer employees have no reduction to the $1,000 per employee amount. Those with 51-100 employees have a 2% reduction per employee in excess of 50. Employers with 65 employees have a 30% ([65 – 50] × 2%) reduction to the allowed credit amount. b. Contributions to employees paid in excess of $100,000 do not qualify for the credit. c. This contribution credit is allowed up to the following applicable percentages: 1st and 2nd year 100% 3rd year 75% 4th year 50% 5th year 25% Employer-Provided Childcare Credit 11. The Employer-Provided Childcare Credit was designed to create an incentive for small and medium-sized businesses to provide childcare for their employees. a. This credit applies to 25% of qualified expenses paid for employee childcare and 10% of qualified expenses paid for childcare resource and referral services. b. This credit is limited to $150,000 each year, and it is filed on Form 8882. c. Costs do not qualify for a Sec. 179 expensing election. FICA Tip Credit 12. A nonrefundable tax credit is allowed for an employer’s portion of FICA taxes paid (incurred) on employee cash tips exceeding the tips satisfying minimum wage requirements. Copyright © 2024 Gleim Publications, Inc. All rights reserved. Duplication prohibited. Reward for information exposing violators. Contact [email protected].  SU 8: Credits, Losses, and Additional Taxes 7 Paid Family and Medical Leave Credit 13. Through 2025, employers who provide paid family and medical leave to their employees may take a credit of 12.5% to 25% of those wages paid. The 12.5% applies to payments of at least 50% of the wages normally paid to the employee, and increases by 0.25% (but not above 25%), for each percentage increase above 50%. The credit is filed on Form 8994. a. The leave can be for any of the following relating to an employee: 1) Birth of a child and care for that child 2) Adoption and foster care placement of a child with the employee 3) Care for spouse, child, or parent with a serious health condition 4) Employee being unable to perform work functions due to health condition 5) Urgent need due to spouse, child, or parent being on active military duty 6) Care for a service member (spouse, child, parent, or next of kin) b. Any of the pay that is required by state or local law does not count towards the 50%. c. The employee’s prior-year compensation must be $90,000 or less to qualify for the credit. d. The employer must provide at least 2 weeks of leave to full-time employees and a prorated amount of leave for part-time employees. e. The employer must have a written policy in place. Foreign Tax Credit 14. The Foreign Tax Credit (FTC) is an alternative to deduction of the tax and equals the lesser of a. Foreign taxes paid/accrued during the tax year or b. The portion of U.S. tax liability (before credits) attributed to all foreign source income. 2 1 Foreign source taxable income 1 Before the FTC FTC = U.S. income tax × 2 Not more than worldwide taxable income Worldwide taxable income 1) If the credit is limited to the amount in b. above, unused foreign tax credits will equal the difference between a. and b. 2) Unused credits can be carried back for 1 year and then carried forward for 10 years. Copyright © 2024 Gleim Publications, Inc. All rights reserved. Duplication prohibited. Reward for information exposing violators. Contact [email protected]. 8 SU 8: Credits, Losses, and Additional Taxes 8.2 NET OPERATING LOSS (NOL) 1. A net operating loss occurs when business expenses exceed business income. 2. The NOL is deductible when carried to a year in which there is taxable income. 3. Applying NOLs as a deduction. The treatment of an NOL in the current year depends on the year in which the NOL originally arose (i.e., the year the loss was incurred). a. NOLs that arise in 2021 and later may be carried forward indefinitely, but no carryback is allowed. The carryover is limited to 80% of the taxable income for the year it is carried to. Any excess continues to carryover to future years until exhausted. b. NOLs for tax years 2018, 2019, and 2020 may be carried back 5 years and carried forward indefinitely. The carryback or carryforward period may offset the taxpayer’s entire taxable income until 2021. c. When utilizing NOLs, the oldest NOL is used first. 4. Although NOLs are typically business deductions, an individual may have an NOL. 5. To calculate NOL, start with taxable income (a negative amount) and adjust as follows: a. Add back NOLs carried forward into the current tax year. b. Add back the Qualified Business Income Deduction (discussed in Study Unit 5, Subunit 9). c. Add back excess of nonbusiness deductions over nonbusiness income. 1) For this purpose, nonbusiness deductions are a) Alimony (for divorce agreements executed before 2019), b) Contributions to self-employed retirement plans, c) Loss from the sale of investment property, and d) Either the standard deduction or all itemized deductions, except for casualty and theft losses, and state income tax on trade or business income. NOTE: Business deductions include all (even personal) casualty losses. 2) Nonbusiness income includes a) Interest, b) Dividends, c) Gain on the sale of investment property, and d) Treasure trove. 3) Rents and wages are business income. EXAMPLE 8-2 NOL For 2023, Sally realized a $30,000 net loss (sales of $200,000 less expenses of $230,000) from operating a sole proprietorship without regard to dispositions of property other than inventory. Other than this, the income tax return showed gross income of $10,000 ($4,500 of wages, $1,000 interest on personal savings, and a $4,500 long-term capital gain on business property). The excess of deductions over income was $33,850 ($10,000 gross income – $30,000 loss from business operations – $13,850 standard deduction). To compute Sally’s NOL, add back the $12,850 excess of nonbusiness deductions over nonbusiness income ($13,850 standard deduction – $1,000 interest). Thus, Sally’s NOL for the current tax year is $21,000 [$(33,850) “negative taxable income” + $12,850]. Copyright © 2024 Gleim Publications, Inc. All rights reserved. Duplication prohibited. Reward for information exposing violators. Contact [email protected].  SU 8: Credits, Losses, and Additional Taxes 9 6. Capital losses. The amount of capital loss (CL) included in the NOL of a noncorporate taxpayer is limited. Before the limit is applied, the CL must be separated into business CL and nonbusiness CL. Capital losses are included in the NOL only as follows: a. Nonbusiness CL is deducted to the extent of nonbusiness capital gain (CG). Any excess nonbusiness CL is not deductible. b. If nonbusiness CG exceeds nonbusiness CL, such excess is applied against any excess of nonbusiness deductions over nonbusiness income. c. If nonbusiness CG exceeds excess nonbusiness deductions, the excess nonbusiness CG may offset business CL. Business CL may also be deducted to the extent of business CG. 7. Threshold for excess business loss. a. Excess business losses of a taxpayer other than a corporation are not allowed. An excess business loss is the excess of aggregate deduction attributable to the taxpayer’s trades or businesses over the sum of the aggregate gross income or gain from all their trades or businesses plus a threshold amount. The threshold amount is adjusted annually for inflation. b. For partnerships and S corporations, the limit on excess business losses is applied at the partner or shareholder level. Each partner’s distributive share or each S corporation shareholder’s pro rata share of items of income, gain, deduction, or loss of the partnership or S corporation is taken into account by the partner or shareholder in applying the excess business loss rules to the partner’s or shareholder’s tax year with or within which the partnership’s or S corporation’s tax year ends. c. Excess business losses above the threshold are carried forward and treated as part of the taxpayer’s NOL carryforward, subject to the 80% of taxable income limitation. d. For 2023, in determining a taxpayer’s excess business loss, the threshold amount is $289,000 ($578,000 for joint returns). 8. A hobby is an activity for which profit is not a primary motive. a. An activity is presumed not to be a hobby if profits result in any 3 of 5 consecutive tax years (in the case of breeding, training, showing, or racing horses, 2 of 7 consecutive years). b. A few factors used to determine whether an activity is carried on for profit are 1) The manner in which the taxpayer carries on the activity; 2) The expertise of the taxpayer or advisors; 3) The time and effort expended by the taxpayer in carrying on the activity; 4) The expectation that assets used in the activity may appreciate in value; 5) The success of the taxpayer in carrying on other similar or dissimilar activities; 6) The taxpayer’s history of income or losses with respect to the activity; 7) The amount of occasional profits, if any, that are earned; 8) The financial status of the taxpayer; and 9) Elements of personal pleasure or recreation. c. Before the TCJA, hobby expenses to the extent of income derived from the activity were deducted as an itemized deduction on Schedule A (Form 1040), Itemized Deductions, subject to the 2% floor on miscellaneous deductions. d. The TCJA suspended the deductions subject to the 2% floor on miscellaneous deductions for tax years beginning after December 31, 2017, and before January 1, 2026. 1) For 2023, hobby expenses to the extent of income derived from the activity are not deductible. Copyright © 2024 Gleim Publications, Inc. All rights reserved. Duplication prohibited. Reward for information exposing violators. Contact [email protected]. 10 SU 8: Credits, Losses, and Additional Taxes 8.3 CASUALTY AND THEFT LOSSES The IRC allows deductions for losses caused by theft or casualties, whether business or personal. However, as of 2018, personal casualty and theft losses only apply to federally declared disasters and losses to the extent of casualty gains. Casualty 1. Casualty loss arises from a sudden, unexpected, or unusual event caused by an external force, such as fire, storm, shipwreck, earthquake, sonic boom, etc. a. Losses resulting from ordinary accidents, e.g., dropping a vase, or from progressive deterioration, e.g., rust or insect damage, are not deductible. b. The cost of protecting property against a casualty or theft is not part of a casualty or theft loss. Theft 2. Theft includes robbery, larceny, and the like. It also may include loss from extortion, blackmail, etc. Not generally included in the definition of theft is misplacing or losing items or having them confiscated by a foreign government. a. In general, the loss amount is the lesser of the decline in FMV or the AB minus insurance reimbursements. However, if business or investment property is completely lost or stolen, FMV is disregarded and AB is used to compute the loss. EXAMPLE 8-3 Casualty Losses Kaitlyn is a veterinarian. She had business equipment with a FMV of $15,000 and adjusted basis of $20,000 and had a business computer with a FMV of $1,000 and adjusted basis of $500. Both the equipment and computer were completely destroyed by a storm. She did not have insurance on these assets. Kaitlyn is able to deduct a loss of the combined adjusted bases since the assets are business assets equal to $20,500 ($20,000 + $500). If the same assets were personal-use assets and not business assets, and the storm was a federally declared disaster, the loss would be the lower of the adjusted basis or decline in fair market value (subject to a per-event and AGI floor). Since there was one event, look at the items’ combined value. If it was not a federally declared disaster, there would be no loss deduction for personal-use assets. b. Reimbursement 1) Only the amount of loss not compensated by insurance is deductible. 2) Any excess recovered over the amount of property basis is gain. c. Timing 1) A casualty loss is deductible in the tax year in which it occurs. 2) A theft loss is deductible when it is discovered. Copyright © 2024 Gleim Publications, Inc. All rights reserved. Duplication prohibited. Reward for information exposing violators. Contact [email protected].  SU 8: Credits, Losses, and Additional Taxes 11 Loss of Inventory 3. There are two ways a taxpayer can deduct a casualty or theft loss of inventory, including items held for sale to customers. a. Deduct the loss through the increase in the cost of goods sold by properly reporting opening and closing inventories. When using this method, do not claim this loss again as a casualty or theft loss. Any insurance or other reimbursement received for the loss is included in gross income in the year received. b. Eliminate the affected inventory items from cost of goods sold by making a downward adjustment to opening inventory or purchases. The amount of the loss is reduced by the reimbursement received. The reimbursement is not included in gross income. If the taxpayer does not receive the reimbursement by the end of the year, the taxpayer may not claim a loss to the extent a reasonable prospect of recovery exists. Business or Income-Producing Property Adjusted basis 4. If a taxpayer has business or income-producing property, – Salvage value such as rental property, and it is stolen or completely – Insurance reimbursement destroyed, the decrease in FMV is not considered. The loss is calculated as shown to the right: = Deductible loss a. When business property is partially destroyed, the deductible amount is the lesser of the decline in FMV or the property’s adjusted basis (prior to the loss). Federally Declared Disaster Election 5. A taxpayer is subject to a special rule if (s)he sustains a loss from a federally (synonymous with presidentially) declared disaster. Disaster loss treatment is available when property is rendered unsafe due to the disaster in the area and is ordered to be relocated or demolished by the state or local government. a. The taxpayer has the option of deducting the loss on 1) The return for the year in which the loss actually occurred or 2) The preceding year’s return (by filing an amended return). a) Revocation of the election may be made before expiration of time for filing the return for the year of loss. b) A disaster loss deduction is computed the same as a casualty loss. b. The IRS grants administrative relief to taxpayers who are affected by a federally declared disaster area by suspending examination and collection actions. 1) Examination and collection actions that can be precluded or suspended include tax return audits, mailings of notices, and other actions involving the collection of overdue taxes. 2) The IRS may abate the interest on the underpaid income tax for the length of any extension period granted for filing income tax returns. However, abatement of interest by the IRS is not mandatory. Copyright © 2024 Gleim Publications, Inc. All rights reserved. Duplication prohibited. Reward for information exposing violators. Contact [email protected]. 12 SU 8: Credits, Losses, and Additional Taxes 8.4 ADDITIONAL TAXES Heavy Vehicle Use Tax 1. Taxpayers operating qualified vehicles are subject to an excise tax for highway use based on weight. a. A person is subject to this tax if his or her vehicle meets all of the following tests: 1) It is a highway motor vehicle. 2) It is registered for highway use. 3) It is used on public highways. 4) It has a taxable gross weight of at least 55,000 pounds. b. The taxable gross weight of a vehicle (other than a bus) is the total of 1) The actual unloaded weight of the vehicle fully equipped for service, 2) The actual unloaded weight of any trailers or semitrailers fully equipped for service customarily used in combination with the vehicle, and 3) The weight of the maximum load customarily carried on the vehicle and on any trailers or semitrailers customarily used in combination with the vehicle. c. Filing requirements. Every person with a qualified vehicle registered in his or her name at the time of its first taxable use must file Form 2290, Heavy Highway Vehicle Use Tax Return. The tax period is from July 1 of the current year through June 30 of the next year. 1) Form 2290 is due the last day of the month following the month that the vehicle is first used on the public highways. There is an exception if the last day of the month falls on a weekend or legal holiday. 2) A taxpayer is eligible for credit or refund for the tax if the vehicle is destroyed, stolen, or meets the low mileage limit requirement during the tax period. d. If a vehicle is purchased from another registered vehicle owner who had used the vehicle during the tax period, the original owner owes the tax for the whole tax period. 1) If the tax is not paid and the new owner uses the vehicle, the new owner is liable for the tax. e. If a vehicle is expected to be used on public highways for 5,000 miles or less (7,500 miles or less for agricultural vehicles) during a certain period, the liability for the heavy vehicle use tax can be suspended for that period. Farmers’ Other Taxes 2. Farmers are subject to unique tax laws for fuel tax credits and employment taxes. a. A farmer may claim a credit or refund of excise taxes included in the price of fuel used on a farm for farming purposes if (s)he is the owner, tenant, or operator of a farm. 1) The credit is available for excise taxes on gasoline, special motor fuel, compressed natural gas, and aviation fuel used on a farm for farming purposes. 2) A credit cannot be claimed for a tax on diesel fuel. b. Employment taxes. Farmers who have employees may have to pay employer taxes, withhold employee Social Security and Medicare taxes, and withhold income tax. 1) A farmer-employer may have to pay Social Security and Medicare taxes if (s)he has one or more agricultural employees, including parents, children 18 years of age or older, or a spouse, and the farmer meets either of the following tests: a) Paid the employee $150 or more in cash wages during the year b) Paid wages of $2,500 or more during the year to all employees Copyright © 2024 Gleim Publications, Inc. All rights reserved. Duplication prohibited. Reward for information exposing violators. Contact [email protected].  SU 8: Credits, Losses, and Additional Taxes 13 c. A farmer must pay federal unemployment tax if either cash wages of $20,000 or more are paid to farm workers in any calendar quarter during the current or preceding year or 10 or more farm workers are employed for at least 1 day during each of 20 different calendar weeks during the current or preceding calendar year. Employer Shared Responsibility 3. Under PPACA, applicable large employers (ALEs) must either (a) offer minimum essential coverage to 95% of full-time employees that is (1) affordable and (2) provides minimum value to all full-time employees and their dependents or (b) make an employer shared responsibility payment (i.e., employer mandate or “pay-or-play provision”). There are two types of responsibility payments based on these qualifications, but an employer is only liable for one payment, not both. a. ALEs average 50 full-time employees (including full-time-equivalent employees) during the preceding year. For purposes of the employer shared responsibility provisions, a full-time employee is, for a calendar month, an employee employed on average at least 30 hours of service per week or 120 hours of service per calendar month. 1) All types of employers can be ALEs, including tax-exempt organizations and government entities. 2) Generally, entities with a common owner or that are otherwise related are combined and treated as a single employer for determining ALE status. EXAMPLE 8-4 Applicable Large Employers with Subsidiaries Company A owns 100% of all classes of stock of Company B and Company C. Company A has no employees at any time in 2022. For every calendar month in 2022, Company B has 40 full-time employees and Company C has 60 full-time employees. Companies A, B, and C are considered a controlled group. Because Companies A, B, and C have a combined total of 100 full-time employees, they are an ALE for 2023. NOTE: Although entities with a common owner or that are otherwise related are combined and treated as a single employer for determining ALE status, potential liability under the employer shared responsibility provisions is determined separately for each ALE member. Therefore, in Example 8-4, only Companies B and C will be required to make liability payments because Company A does not have any employees. b. An ALE member will owe the first type of employer shared responsibility payment if it does not offer minimum essential coverage to at least 95% of its full-time employees (and their dependents) and at least one full-time employee receives the premium tax credit for purchasing coverage through the Health Insurance Marketplace. 1) This responsibility payment is $2,880 for each full-time employee except for the first 30 full-time employees. c. Even if an ALE member offers minimum essential coverage to at least 95% of its full- time employees (and their dependents), it may owe the second type of employer shared responsibility payment for each full-time employee who receives the premium tax credit for purchasing coverage through the Marketplace. 1) This responsibility payment is $4,320 for each full-time employee who received the premium tax credit. Copyright © 2024 Gleim Publications, Inc. All rights reserved. Duplication prohibited. Reward for information exposing violators. Contact [email protected].