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Federal Tax Updates May 2023

Beneficial ownership reporting guidance issued by FinCen

On March 24, 2023, the Financial Crimes Enforcement Network (FinCEN) published its first set of guidance materials for the upcoming beneficial ownership information (BOI) reporting requirements.

The new regulations require many corporations, limited liability companies, and other entities created in or registered to do business in the United States to provide information about their beneficial owners to FinCEN. Both domestic and foreign companies (defined below) are subject to the reporting requirements. FinCEN has released FAQ’s and Key Questions to help the public to understand their reporting obligations.

A domestic reporting company is a corporation, limited liability company or any other entity which was created by filing a document with a secretary of state or any similar office under the law of a state or Indian tribe. A foreign reporting company is a corporation, limited liability company, or other entity formed under the law of a foreign country that has registered to do business in any U.S. state or tribal jurisdiction by the filing of a document with a secretary of state or any similar office under the law of a U.S. state or Indian tribe. The guidance also provides a list of the entities which are exempt from the reporting requirements including certain type of banks, credit unions and tax-exempt entities.

A beneficial owner is defined as any individual who directly or indirectly owns or controls at least 25 percent of the “ownership interests” of the reporting company OR who directly or indirectly exercises “substantial control” over the reporting company. The materials provide several examples of individuals who would, and would not, be considered a beneficial owner.

A reporting company created or registered to do business before January 1, 2024, will have until January 1, 2025 to file its initial beneficial ownership information report. A reporting company created or registered on or after January 1, 2024, will have 30 days from the date of creation or registration to file its initial information report.

Proposed regulations on the new clean vehicle credit

On March, 31, 2023 the IRS issued proposed regulations that provides guidance regarding the Federal income tax credit under the Inflation Reduction Act of 2022 for the purchase of qualifying new clean vehicles, including new plug-in electric vehicles powered by an electric battery meeting certain requirements and by new qualified fuel cell vehicles. These proposed regulations would affect eligible taxpayers who purchase new vehicles in 2023 or later.

For vehicles placed in service January 1 to April 17, 2023 – The minimum credit will be $3,751 for a vehicle with the minimum 7-kilowatt hours of battery capacity and the maximum credit would be $7,500.

New Requirements Effective April 18, 2023:

For vehicles placed in service on or after April 18, 2023 – They have to meet all of the same criteria listed above plus meet the new critical mineral and battery component requirements for a maximum credit up to $7,500. The credit is $3,750 if the vehicle meets the requirements relating to critical minerals and $3,750 if the vehicle meets the requirements relating to battery components and the full credit of $7,500 if the vehicle meets both the requirements.

Note: The amount of the credit depends on when the vehicle was placed in service (took delivery), regardless of the purchase date. The credit is nonrefundable, so the credit cannot be more than the taxes owed. Any excess credit can be applied to future tax years.

IRS issues FAQ’s on medical expenses

On March, 17, 2023, the IRS issued FAQ’s that address whether certain costs related to nutrition, wellness, and general health are medical expenses under IRC code section 213 that may be paid or reimbursed under a health savings account (HSA), health flexible spending arrangement (FSA), Archer medical savings account (Archer MSA), or health reimbursement arrangement (HRA).

Generally, IRC section 213 allows a deduction for expenses paid during the taxable year for medical care if certain requirements are met. These expenses are also eligible to be paid or reimbursed under an HSA, FSA, Archer MSA, or HRA. However, if they are paid or reimbursed under an HSA, FSA, Archer MSA, or HRA, a taxpayer cannot deduct the amount as a medical expense on schedule A of the taxpayer’s federal income tax return.

Electronic Filing Regulations for Tax-Exempt & Government Entities

Recently, the Department of the Treasury published final regulations, “Electronic-Filing Requirements for Specified Returns and Other Documents,” implementing the reduced electronic threshold under Section 2301 of the Taxpayer First Act of 2019 (TFA).

Under the regulations found in T.D. 9972 (PDF), taxpayers who are required to file at least 10 returns of any type during the calendar year must file electronically. Generally, the regulation applies after 2023.

Section 3101 of the TFA sets forth “mandatory e-filing by exempt organizations,” applicable to the following forms:

Reminder to Tax-Exempt Organizations: May 15 Filing Deadline

The Internal Revenue Service reminds tax-exempt organizations operating on a calendar-year that they have a filing deadline of May 15, 2023, for the following informational and tax returns:

State Tax Updates May 2023

Maryland – Child and dependent care credit only available for residents

On April, 11, 2023, the Maryland Governor approved Senate Bill 243 which restricts the ability to claim the child and dependent care credit on a Maryland return. Going forward, this credit is available only to residents.

Previously, a taxpayer who claimed the federal child and dependent care credit could also claim the state child and dependent care credit if the taxpayer’s federal adjusted gross income (FAGI) does not exceed a specified maximum income threshold. Before the signing of this new Bill, unlike the state’s earned income credit, eligibility for the child and dependent care credit was not limited to resident taxpayers. If all criteria were met, the credit could be claimed on a nonresident return.

This Bill takes effect July 1, 2023, and is applicable to all tax years beginning after December 31, 2022.

Maryland – Instructions on PTE election

On April 11, 2023, the Comptroller of Maryland issued a tax alert which addresses a “process change: Instructions for Electing and Nonelecting Pass-Through Entities for Tax Years Beginning after December 31, 2022”.

A PTE must make the election to (1) pay at the entity level on all members’ shares of income or (b) pay the mandatory tax on behalf of nonresident members only.

For tax years beginning after December 31, 2022, a PTE must decide to elect or not to elect with the first filing or payment of the tax year.

The election or nonelection made with the first payment or filing is irrevocable for the tax year in which it is made.